uCloudlink Group Inc. (UCL) Q2 2021 Earnings Call Transcript

uCloudlink Group Inc. (UCL 5.11%)
Q2 2021 Earnings Call
Aug 25, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome uCloudlink Group Inc. second-quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode.

After prepared remarks by the management team, there will be a question-and-answer session. Today's conference call is being recorded. I would now like to turn the conference over to your host today, Mr. Bob Shen, deputy investor relations director of the company.

Please go ahead.

Bob Shen -- Deputy Investor Relations Director

Thanks, everyone, for joining us for our second-quarter 2021 earnings call today. The earnings release is now available on our IR website at ir.ucloudlink.com, as well as via newswire services. I will give a brief introduction to our uCloudlink's team. Zhiping Peng is our co-founder and chairman of board of directors.

Chaohui Chen is our co-founder, director, and chief executive officer. Yimeng Shi is our chief financial officer. Zhu Tan is our vice president of marketing and sales. Our CEO will begin with an overview of our company and business highlights, which will cover Section 1 of the earnings presentation posted on our IR website.

Our CFO, Yimeng Shi, will then discuss our operational highlights and the financial results as presented in Section 2 and Section 3. Before we proceed, please note that this call may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties, and other factors not under the company's control, which may cause actual results, performance, or achievements of the company to be materially different from the results, performance, or expectations implied by these forward-looking statements. All forward-looking statements are expressly qualified in their entity by the cautionary statements, risk factors, and the details of the company's filing with the SEC.

The company does not assume any obligation to revise or update any forward-looking statements as a result of new information, future events, changes in market conditions, or otherwise except as required by law. Please also note that uCloudlink's earnings press release and this conference call include discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. uCloudlink's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to our co-founder and CEO, Mr.

Chaohui Chen. Please go ahead.

Chaohui Chen -- Co-Founder, Director, and Chief Executive Officer

Thank you, Bob. For the company's overview perception, there are similar contents as the earnings presentation of the first quarter of year 2021. I will focus on our technology update and recent development. Let's move to the Page 6, which shows the coverage and consistent -- our two major challenges of wireless network face.

On the left-hand side, the white coverage circles on the left-hand-side chart are reliable data connection areas, and the shadow areas, that weak signal, are unreliable data connection. Even for good coverage, it is easy to have network congestion during peak times. On the right-hand side, you can see WiFi and mobile signals are severely weakened when penetrating walls. This is often the cause of indoor poor coverage.

Operators cannot guarantee good indoor coverage while users have strong demand of high-quality indoor data connection. To improve unbalanced indoor and outdoor coverage for WiFi and mobile data connection, operators need very high capex and cannot solve all data connection problems. Through our technology, we can help operators solve the two major challenges which bring us great opportunities. Let's now move to the Page 7, which shows our solution for such problems.

Via our cloud SIM technology through our PaaS and SaaS platform under HyperConn solution, we can help change unreliable data connection to more reliable data connection. Similar to installing Navigation + Electronic Toll Pass for traffic, Navigation can automatically identify network congestion and actively choose a better route and Electronic Toll Pass allows users to avoid long queues when switching between mobile networks, intelligently elevating data connectivity user experience. We are able to provide seamless coverage for end users, solves pain points such as roaming, coverage, and congestion. We improved overall network efficiency and access to all available networks worldwide.

By bringing reliable connections to formerly unreliable connection areas, we help operators elevate users' mobile broadband and fixed broadband such as home broadband data connectivity experience, lowering churn rate and improving overall network efficiency. Let's now move to the Page 9. Our Cloud SIM technology has been developed to the HyperConn stage. The definition of hyperconnectivity basically includes Level 1, which is the evaluation of connection quality of various wireless-access networks including WiFi and all mobile operators; Level 2, which is network selection and optimization based on cloud SIM technology; and Level 3, which is optimizing and acceleration of application routing.

After one year development, HyperConn Products are highly compatible with fast development of 2.0 business, GMI, MBB+FBB, Education, Autopilot, etc. Our hyperconnectivity solution would redefine the mobile network and WiFi user experience and facilitate data traffic marketplace. Users' data connectivity experience is affected by various factors such as signal, interference and routing, bandwidth and delay, and server location. uCloudlink's hyperconnectivity would aim to connect cross networks and technical systems, various SIM form factors such as e-SIM and soft-SIM, cross various physical boundaries such as WiFi and various radio technologies, etc., by countries and regions.

We plan to achieve the goal by identification, monitoring, and optimization to further elevate user experience in the data connectivity market. In June year 2021, we unveiled our new HyperConn technology and products, such as Numen, the world's first HyperConn 5G mobile WiFi; and Genie, a tablet -- a HyperConn table device in an official virtual product conference during Mobile World Congress Barcelona, MWC of Barcelona. Going forward, we will launch more innovative products and services. Let us move to Page 10.

uCloudlink 1.0 had a strong track record of high gross margins and profitability with ongoing growth potential. According to the publication of the World Tourism Organization UNWTO in March year 2021, international tourism is expected to recover gradually during 2021 compared with 2020. We expect that the recovery of international tourism will benefit our 1.0 business. We intelligently repackage to minimize data traffic unit cost.

Data packages of single operator or cross mobile network operators. Mobile virtual operators have large price difference, and we repackage from wholesale to retail. We have the largest SIM card pool, and we acquire data packages at wholesales local price from operators to partners. Further, we provide high-quality data connection services and elevate user experience of users and business partners through multinetworks reselection and combination, which shows our difference.

uCloudlink 1.0 business monetization model includes retailing to C rental or selling to end-user, wholesale to B, for business partner, and our PaaS and SaaS services such as CRM, billing management, devices selling and rental management, etc. For wholesale to B, we can be reseller or provide commission services to our business partners. We allow our business partners share data traffic pool through our PaaS and SaaS platform and charge commission fee. We believe, while the COVID-19 pandemic has negatively impacted our 1.0 business, it has also created opportunities for potential growth, including increased demand for mobile data such as traveling, tracking, vaccination digital passports, and COVID test reports.

Also, we see fewer competitors in the market after the COVID-19 pandemic. We expect recovery of international travel will benefit to our 1.0 business, such as the U.S. Market during the second quarter of 2021. We expect our 1.0 business will not just be a simple recovery but grow with new development with innovative technology and products.

Let us move to Page 14. uCloudlink 2.0 business became a new driver of growth during 2020. Our 2.0 business showed greater resilience with proven high demand and growth potential during the pandemic and experienced less negative impact overall. uCloudlink 2.0 business monetization model is similar to that of uCloudlink 1.0 business with massively potential local user base.

We help operators improve service and solve data connection problems through our PaaS and SaaS platform. During the COVID-19 pandemic, for example, remote work and learning also requires high-quality, reliable data connection services. By alliances with more MNOs and mobile handset manufactures, we should be able to embed more GlocalMe Inside, GMI, in smartphones such as 5G smartphones. 5G also brings us great opportunities.

We would accelerate the arrival of the 5G cloud era and the applications such as AR/VR, cloud computing, and autopilot, etc. The high quality of 5G applications data connection will also bring users' high requirement and awareness of data connectivity quality. Further, we made progress through hyperconnectivity solution with mobile and fixed broadband businesses under various application scenarios such as home broadband. We also intend to proactively explore opportunities in new industries and various IoT application scenarios.

Despite the continued impact of the COVID-19 pandemic over the global economy, we demonstrated commercial resilience and business vitality in the second quarter of 2021, generating revenue of $19.2 million, above the top end of our guidance range, with revenues mainly coming from the Japan, U.S., and mainland China markets. In the Japanese market, we successfully launched and started to ship a new tablet targeted at the education industry. The new tablet comes equipped with cloud SIM technology, enabling it to seamlessly connect to better available mobile broadband and fixed broadband network at all times. In the U.S.

market, we continued to extend and deepen cooperation with online and offline distributors and recorded a new 12-month high for sales via Amazon in the quarter. We also saw a significant year-over-year increase in order demand for international data connectivity services in the U.S. market compared with the second quarter of 2020. In the Chinese market, we steadily increased our numbers of mobile broadband and fixed broadband-related product installations, through cooperation with a major mobile network operator in Shenzhen.

These installations served to elevate user experience and scale up our potential user base in areas such as home broadband services, giving us a good reference case for further business development with mobile network operators across other cities in China. Thanks, everyone. Let us turn to Page 4 of the earnings presentation, which shows our vision and mission. We have redefined the mobile data connectivity experience, allowing users to gain access to mobile data traffic allowance shared by network operators on our marketplace.

Our technology facilitates carriers and uses single operator entry point to access all available local and global networks and would enable people to use mobile data traffic freely anytime, anywhere like breathing the air. We expect to eventually cover all available networks from operators globally with the recovery of COVID-19 pandemic and development of 2.0 business and eventually build a fully global marketplace of mobile data traffic. We believe that from connected to better connection is the trend of information era, and we would enable all business partners and users to have better data connectivity. Our innovative technology facilitates us to establish the leading technological position of our PaaS and SaaS platform in the early stage of 5G, and we are dedicated to promoting better connection to everyone.

I will now turn it over to our CFO, Yimeng Shi, who will go through the business and financial highlights sections.

Yimeng Shi -- Chief Financial Officer

Thank you, Mr. Chen. Hello, everyone. Let us turn to Page 16 for our business highlights.

The data for the second quarter of 2021 shows that the impact from COVID-19 is becoming stable. The left-hand side of the slide shows Daily Active Terminals as of June 30, 2021. Our uCloudlink 2.0 service accounted for around 68% of total DAT during the second quarter of 2021. Average daily data usage per terminal was 1.90 gigabyte in June 2021.

Let us turn to Page 17, which shows global diversification of our business. Mainland China's revenue as a percentage of total revenue increased to 8% during the second quarter of 2021, compared to 6% during the first quarter of 2021, and we had 92% of total revenue from outside Mainland China. During the second-quarter 2021, Japan contributed to 53% of total revenue and continued to be the single largest market for our business. For other countries' revenue, the U.S.

market had the largest contribution to our business. During the second quarter of 2020, we had 8% of total revenue coming from Mainland China, 56% of total revenue coming from Japan and 36% of total revenue coming from other countries and regions. Let us turn to Page 19. I will go through our financial highlights of the second quarter of 2021.

Service-related revenue as a percentage of total revenue increased from 46.9% in the second quarter of 2020 to 48.5% during the second quarter of 2021. Revenues from PaaS and SaaS services increased 589.5% from $0.5 million in the second quarter of 2020 to $3.2 million in the second quarter of 2021. This increase was primarily due to the increase of our business partners that use our PaaS and SaaS services to provide local data connectivity services. Revenues from PaaS and SaaS as a percentage of total revenue also increased to 16.4% during the second quarter of 2021 compared with 12.9% during the first quarter of 2021.

Let us move to Page 20, which shows the revenue breakdown of our two business segments, namely revenue from services and sales of products. During the second quarter of 2021, revenue from services and sales of products accounted for 48.5% and 51.5% of total revenue, respectively. Our total revenue decreased by 8.5% from $21.0 million in the second quarter of 2020 to $19.2 million in the second quarter of 2021. Revenue from services were $9.3 million, representing a decrease of 5.5% from $9.9 million for the same period of 2020.

This decrease was primarily due to lower revenues from international and local data connectivity services partially offset by an increase in revenues from PaaS and SaaS services. Our total revenue increased 8.7%, compared to $17.7 million in the first quarter of 2021. Let us turn to Page 21 for gross margin of our business. Our services gross margin increased to 45.4%, and our overall gross margin increased to 28.1% in the second quarter of 2021, compared to 35.4% and 26.2% during the second quarter of 2020, respectively.

The increase of our services gross margin during the second quarter of 2021 is primarily due to the increase of our PaaS and SaaS revenue which has a higher gross margin over other business revenue. Let us move to Page 22, which shows the breakdown of our operating expense, excluding share-based compensation and others. Excluding share-based compensation, operating expense as a percentage of total revenue decreased from 71% during the first quarter of 2021 to 61% during the second quarter of 2021, and we will continue to improve our operation efficiency of our business. Let us turn to Page 23.

Operating cash flow was negative $6.1 million during the second quarter of 2021, compared to negative $2.8 million during the second quarter of 2020. Our cash flow was normal with sufficient cash and cash equivalents as at June 30 2021. Our capex was $0.3 million during the second quarter of 2021, compared to $0.2 million during the second quarter of 2020. Capex as a percentage of total revenue increased from 1% during the second quarter of 2020 to 1.3% during the second quarter of 2021.

Let us move to Page 24. Net income during the second quarter of 2021 was negative $8.2 million, compared to negative $41.6 million during the second quarter of 2020. Adjusted EBITDA was negative $5.5 million during the second quarter of 2021, compared to negative $3.1 million during the second quarter of 2020. With that, let me conclude today's presentation.

Thank you, and we start our Q&A session.

Questions & Answers:

Operator

We will now begin the question-and-answer session. [Operator instructions] The first question comes from Vivian Zhang with Diamond Equity. Please go ahead.

Vivian Zhang -- Diamond Equity Research -- Analyst

Good evening. This is Vivian from Diamond Equity Research. Thanks for taking my question. So we see the company just launched new HyperConn enabled tablet in Japan.

So can you update more information about this product and its market positions? Are there any competitors do you believe for this product in the market? And my second question is regarding your overseas expansion. Can you provide more colors on the recent partnership you're getting in the second quarter? Thank you.

Chaohui Chen -- Co-Founder, Director, and Chief Executive Officer

This is Chen speaking here. We have launched our product with HyperConn feature in Japan and also some other countries. And we have two products, one product is tablet, and other one is we called Numen. Numen is a 5G mobile WiFi.

And with this, our product is, first one was to have this feature and we do not any competitors in this domain. Because of our HyperConn can connect to any kind of the network in the world like WiFi or any mobile networks, I'm definitely on edge we may have multiple connection. For example, one WiFi connection and [Inaudible] mobile network. And we have switched from one network to another one, and this between the WiFi and mobile network or from one mobile network through the other network.

With this, it is quiet, unique feature and cannot see any competitor here. And the benefit which guide us through our end user is to give more reliable connection and to our consumers. For example, if our consumers use mobile WiFi for remote learning or just like us to have conference call or review conference call, we will have the much better connection than other one even one base station shutdown because of that taken for example. And we have switched [Inaudible] that other network results interruption of the conference.

OK. Is that clear?

Vivian Zhang -- Diamond Equity Research -- Analyst

Yes. So, my second question is regarding your overseas expansion. Can you provide more color on the recent partnership that you get in the quarter?

Chaohui Chen -- Co-Founder, Director, and Chief Executive Officer

We have -- actually, you may notice that our market share in United States, you can see increased. I think, this is one market, right now our market, like our market in Japan, and we believe that next one should be United States. And then for the Asia Pacific and also Europe, we also put more human resource sales in that region. We think that we will get more market share also in those regions.

Vivian Zhang -- Diamond Equity Research -- Analyst

OK. OK, great. Thank you for the additional details. Congratulations on the quarter.

Yimeng Shi -- Chief Financial Officer

This is Yimeng Shi. I think I have some adding points for you. First question regarding the HyperConn solution. So, as you know that we are ready unveil our HyperConn solution and the related products services.

So apart from Japanese market, actually, for other markets, we also made a progress through our hyperconnectivity solution with mobile and a fixed broadband business, which we call a MBB + FBB. In the areas of application scenarios, such as in our Chinese market for a home broadband and we received very positive feedback on our 5G and the 4G millisecond multinetwork reselection technology. And for your second question, yes, as you know that we published this press release regarding some partnership either in Southeast Asia, in Europe and also in the U.S. market.

And as you know that U.S. and Europe, we have continued to develop, and Mainland China is our major market as well. And for the partnership, we actually innovatively cooperate with MNOs plus mobile phone headset manufacturer, which is very innovative business model for us. And we believe that such kind of cooperation will give us more business development potential and also it will help us to scale up our user base through our partnerships and our platform, and we are continually expanding PaaS and SaaS ecosystem globally.

OK. Thank you.

Vivian Zhang -- Diamond Equity Research -- Analyst

OK. Thank you, Bob.

Chaohui Chen -- Co-Founder, Director, and Chief Executive Officer

Yes. I have more comments. So, because first delivery of HyperConn product such as [Inaudible] and Numen, the feedback from the user is very positive. So it's quite good than of the feedback.

And the second -- for your second question I have more comments because, except Japan market, U.S. and China become another two fast-growth market and also are our partner -- business expand to more country now even we are under COVID-19 impact. So another program is for PaaS and SaaS revenue is increased much faster than before. So that's some information.

Vivian Zhang -- Diamond Equity Research -- Analyst

Great. Thank you for the information. Congratulations on the quarter.

Operator

The next question comes from Lisa Thompson with Zacks Investment Research. Please go ahead.

Lisa Thompson -- Zacks Investment Research -- Analyst

Good evening. I have a few questions about your future revenue guidance. I believe that you talked about having some large education contracts for the tablet in Japan. It doesn't look like that's going to happen next quarter.

Could you tell us what happened to that business? Have they canceled the orders? Are they going to do it next year? Or is it just going to be delayed? Can you talk a little bit about what's going on there? Hello?

Chaohui Chen -- Co-Founder, Director, and Chief Executive Officer

Yes, we can see the several impacts. You know, the first is COVID-19 slow down everything like it slow down everything like in Japan. So the business progress, everything's slowed down. So, we believe the requirement is there but need more time.

That's the first. And the second is because of the shortage of chipset, and the supply of chipset become repugnant and price going up, that's sort of second impact. The third is our product a little bit -- delivery of our product a little bit late, about one month late. All these futures impact our Q3 for [Inaudible].

I believe the market is there and we will get the order in the first quarter.

Lisa Thompson -- Zacks Investment Research -- Analyst

So you said first quarter of 2022?

Chaohui Chen -- Co-Founder, Director, and Chief Executive Officer

Yes. Just delay, no decrease or -- its still of the market. We believe the market still -- we'll enlarge market, so definitely, the time -- and also, over time, the supply issue.

Lisa Thompson -- Zacks Investment Research -- Analyst

OK. So it doesn't matter that it's the middle of school year? You didn't miss the whole year.

Chaohui Chen -- Co-Founder, Director, and Chief Executive Officer

We did not miss the whole, we just -- the delay -- this delivery is products and digital restrictions somehow, so the demand -- the demand is still there and the demand is increasing as we need. So, we're coming back, we're coming back in the future.

Lisa Thompson -- Zacks Investment Research -- Analyst

OK. So do you feel them -- that Q4 this year is going to be similar to Q3?

Chaohui Chen -- Co-Founder, Director, and Chief Executive Officer

[Inaudible] Q4 guidance in the next-year call, and yes, we will give colors that time. Now, we give this guidance for the third quarter, and we will give the third-quarter guidance as we have disclosed. So, that's our target that we are focused on.

Lisa Thompson -- Zacks Investment Research -- Analyst

Can you just give a current update on the status of the distribution of your 5G products? Like, where are they being sold now and when do you think they'll be sold in new other geographies?

Chaohui Chen -- Co-Founder, Director, and Chief Executive Officer

So we just launched the 5G product with Numen in August, so about one month delay for our original plan. From the feedback from the user and the partner and also channel partner and mobile network operators is quite positive, but because this is high-end product, it is with strong product. And with the HyperConn solution, it's best 5G and WiFi hotspot and can provide a better connection for the 5G and WiFi. So, the feedback is really good but because it's high-end product, and the price is really high.

I think it's mainly for enterprise and education and industrial internet -- that's for high-end application that's the product in a position. And for the coming, the quarter in the first quarter, we will launch in middle 5G product, we call in the second type of 5G product, we call [Inaudible] well above end of the year. So, more and more 5G products were available, and also, we have cut down the price, and we are more competitive like a 4G. So, we believe 5G, eventually, we will get a bigger month here and get a better quality -- so let's, for our 5G product strategy.

So for Numen, we off course understand it is a higher market and price for education for the industry in a working environment application. And that's our target market.

Lisa Thompson -- Zacks Investment Research -- Analyst

So, if I wanted to buy a Numen, where could I buy one? What countries?

Chaohui Chen -- Co-Founder, Director, and Chief Executive Officer

So you can buy in the Amazon, like in Japan, in Europe, in China, also online or offline. In United States, because it's -- United States radio brand is different, so we couldn't buy in the Amazon, United States for Numen, but we will provide later once the radio frequency ready and will be launch in the United States.

Lisa Thompson -- Zacks Investment Research -- Analyst

OK, great. Thank you. One last one last question. I noticed that the gross margin went down considerably per product.

What's happening there? Is that just because of the start-up costs of the 5G?

Chaohui Chen -- Co-Founder, Director, and Chief Executive Officer

In the second quarter, yes, the gross margin products went down a bit. Yes, the main reasons there's product mix, its product mix, we search from low gross margin products in the second quarter. And for instance, it's low gross margin WiFi dongle into Japanese customers. And there every product, we'll provide opportunities device connected to power source platform.

So you'll find we have offset. We offset by increasing PaaS, SaaS services which give us higher gross margin and service gross margins in the second quarter. And the product savings give us -- we have more opportunity to connect consumers to our PaaS and SaaS platform. So, we maintain our product sales suitable gross margins of quarter.

So, yes, this trend cannot be predictable, and depend -- there is product mix how we savings in the following quarters and the following period.

Yimeng Shi -- Chief Financial Officer

Yes, another impact comes from, you know, chipset price going up a little bit.

Lisa Thompson -- Zacks Investment Research -- Analyst

OK, great. Thank you. That makes sense. That's all my questions.

Operator

[Operator instructions] As there are no further questions now, I'd like to turn the call back over to management for closing remarks.

Bob Shen -- Deputy Investor Relations Director

Thank you once again for joining us today. If you have further questions, please feel free to contact uCloudlink's investor relations through the contact information provided on our website or TPG Investor Relations.

Operator

[Operator signoff]

Duration: 48 minutes

Call participants:

Bob Shen -- Deputy Investor Relations Director

Chaohui Chen -- Co-Founder, Director, and Chief Executive Officer

Yimeng Shi -- Chief Financial Officer

Vivian Zhang -- Diamond Equity Research -- Analyst

Lisa Thompson -- Zacks Investment Research -- Analyst

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