uCloudlink Group Inc. (UCL) Q3 2021 Earnings Call Transcript

uCloudlink Group Inc. (UCL -4.86%)
Q3 2021 Earnings Call
Nov 30, 2021, 8:30 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 to the uCloudlink Group Incorporated third 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.

[Operator instructions] 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 on our third 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 NASDAQ UCL team. Zhiping Peng is our co-founder and the chairman of board of directors; Chaohui Chen is our co-founder, director, and the 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 entirety 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

Yeah, good evening. Yes, there are similar contents as the earning presentation of the second quarter of year 2021. And during this call, we will outline the major recent development and highlights. Let's move to the Page 13.

uCloudlink 1.0 is international data connectivity services and had a strong track record of high gross margins and profitability with ongoing growth potential. In the long term, as international travel restriction continue to abate over time and gradual recovery of international travel benefit our international data connectivity business. Even for the new challenges of the COVID-19 pandemic recently, we still have confidence in the positive trend of international travel because of more and more medicine and vaccine come into use. With the gradual recovery of international tourism, we saw increase of 1.0 business revenue in the third quarter of the year 2021 year over year and  quarter over quarter with continuous users demand in various markets.

For example, our U.S. market has a year-on-year increase of order demand of 1.0 business during the third quarter of the year 2021. We expect our 1.0 business will not just be a simple recovery, but grow with new develop -- with innovative technology and products. We saw positive development of our 1.0 business from our daily active terminals as international travel users increased quickly in various markets.

We intelligently repackaged to minimize data traffic unit cost. Data package cost of single operator all across mobile network operators, mobile virtual operators have large price difference and we repackaged it from wholesale to retail. We have the largest SIM card pool and we acquire data packages at wholesale local price from operators to partners. Further, we provide high-quality data connection services and elevate user experience of users and business partners through multi-networks, 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 a reseller or provide commission services to our business partners. We allowed our business partners share data traffic pool through our PaaS and SaaS platform and charge commission fee. We believe the COVID-19 pandemic has negatively impacted our 1.0 business.

It has created opportunities for potential growth, including increasing demand for our mobile data such as traveling, tracking, vaccination digital passports, and the COVID-19 test reports. Also, we see fewer competitors in the market after COVID-19 pandemic. Let's move to the Page 14. uCloudlink 2.0 business is local data connectivity services and becomes a new driver of growth during year 2020.

Our new HyperConn technology contributes to the further development and growth of our uCloudlink 2.0 business and we expand the business scope of our local data connectivity services. Our Hyperconn technology is widely accepted by mobile network operators, business partners in various industries with growth potential, such as with local partner in China, U.S., and Japan. Our 2.0 business shows 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 a massive potential local user base.

We have operators inclusive with this installed data connections program through our partner in the SaaS platform, SaaS alliance with more mobile network operators and mobile handset manufacturers, which will be able to impact more GlocalMe Inside GMI in smartphones, such as 5G smartphone. We would accelerate the arrival of 5G cloud era in the applications such as AR, VR, cloud computing, and the autopilot, etc. The high quality of 5G application data connection will also bring users high requirement and awareness of data connectivity quality. Further, we make progress through hyper connectivity solution with mobile and fixed broadband business, both MBB and FBB under various application scenario such as home broadband, especially our mobile and fixed broadband business cooporation with one of the major mobile network operator in China has been successful and expand to more provinces.

The increase in total revenues is a strong indication that uCloudlink is [Inaudible] to growth in the short term due to our continued efforts in expanding our platform services business, and in the long term, as we believe that international travel restrictions will be lifted in the future. We had increased in revenue from our 1.0 and 2.0 businesses in the third quarter of year 2021 compared to the second quarter of year 2021. And we saw faster business development through online and offline channels in our U.S. market.

We launched a new branded technology HyperConn, which allows for us to target IoT opportunities by leveraging 5G mobility to ensure superior network connectivity. Our strategy is to use this technology to introduce innovative product and services into the market. Such new product will help accelerate the further development of our 2.0 business. Our new tablets equipped with Hyperconn and cloud SIM technology have been promoted in new industries such as education.

Our strategy to expand our network and strengthen our cooperation with a local partner allowed our new 5G HyperConn product to enter a barrier of a new industry, which require reliable high-quality data connections, including education, emergency services, live broadcasting, e-commercials, Walkie and Talkie, and other IoT applications. Our HyperConn related products and services have been distributed by our offline retail channel and e-commercial platform. And our product have received positive feedback and are well-recognized and valued by increasing number of users and business partners across a wide spectrum of industries. Let's move to the Page 15.

Based on our innovative cloud SIM and HyperConn technology, we continued to develop and broaden our scope with new products and services, such as our SaaS developed terminals and third-party device. For example, after we unveiled our new HyperConn technology and product in June year 2021, we launched our HyperConn technology solution and products to the market in the third quarter of the year 2021, such as Numen, the world's first HyperConn 5G Wi-Fi device; and the Genie, a tablet device. We have positive feedback for our Numen and Genie, and we continue to cooperate with more business partners. Our IP camera, IPC, has completed testing and expected to launch for commercial in the near future.

Going forward, we will launch more and more innovative products and services with our HyperConn solutions. Through embedding our GlocalMe Inside, GMI, we continue to further expand our PaaS and SaaS ecosystem with users and business partners globally. Our HyperConn technology solution is highly compatible with various application scenarios and smart hardware such as 5G mobile phone, tablet, CPE, etc. Our HyperConn technology solution also facilitates us to enter new industries, requiring high quality and reliable data connection, such as online education, emergency response, electric power industry, etc.

We believe our PaaS and SaaS ecosystem will continue to expand as we keep investing in R&D and launching innovative products and services to market and elevate data connectivity services such as data connection for Internet of Everything. I will now turn it over to our CFO, Yimeng Shi, who will go through the business and financial highlights in a second.

Yimeng Shi -- Chief Financial Officer

Thank you, Mr. Chen. Hello, everyone. Let's turn to Page 17.

The data for the third quarter of 2021 shows that impacts from COVID-19 is becoming stable. The left-hand side of the slide shows Daily Active Terminals, DATs, as of September 30, 2021. Average daily active terminals in the third quarter were 256,124, representing an increase of 1.5% from 252,265 in third quarter of 2020. Our uCloudlink 2.0 service accounted for around 67% of total DAT during the third quarter of 2021.

Average daily data usage per terminal was 1.85 gigabyte in September 2021. Please turn to Page 18, which shows global diversification of our business. We had 96% of the total revenue from outside mainland China. During third quarter of 2021, Japan contributed to 47% of the total revenue and it continue to be the single largest market for our business.

For other country's revenue, the U.S. market had the largest contribution to our business for the further development of our U.S. business and we will continue to expand other markets, such as Japan, China, Europe, and Southeast Asian, etc. During third quarter of 2020, we had 5% of total revenue coming from mainland China, 76% of total revenue coming from Japan, and 39% of total revenue coming from other countries and regions.

Let us turn to Page 20. I will go through our financial highlights of the third quarter of 2021. Service-related revenue as a percentage of total revenue was 54.2% during the third quarter of 2021, compared with 48.5% during second quarter of 2021. Revenue from PaaS and the SaaS service increased 81.6% from USD 1.5 million in the third quarter of 2020 to USD 2.7 million in the third quarter of 2021.

This increase was primarily due to the expansion in the number of our business partner that use our PaaS and SaaS service to provide local data connectivity service. Revenue from PaaS and SaaS as a percentage of total revenue also increased to 13.8% during third quarter of 2021, compared with 8.1% during the third quarter of 2020. Let us move to Page 21, which shows the revenue breakdown of our two business segments, namely revenue from service and the sales of products. Our total revenue increased by 7.4% from USD 18 million in third quarter of 2020 to USD 19.3 million in the third quarter of 2021.

Revenue from service were USD 10.5 million, representing an increase of 6.4% from USD 9.8 million for the same period in 2020. This increase was primarily due to higher revenue from PaaS/SaaS service, partially offset by a decrease in revenue from data connectivity service. Let us turn to Page 22 for gross margins of our business. Our service gross margin increased to 43.5% and our overall gross margin decreased to 28.3% in the third quarter of 2021, compared to 36.6% and 31.3% during the third quarter of 2020, respectively.

The decrease of overall gross margin is mainly because of product mix, the rising material cost due to global supply chain concerns during this third quarter of 2021. The increase of service gross margin during the third quarter of '21 is primarily due to increase of our PaaS/SaaS revenue, which has the highest gross margin over other benefit -- revenue. Let us move to Page 23, which shows the breakdown of our operating expenses, excluding share bases compensation and others.Excluding share-based compensation, operating expenses as a percentage of total revenue maintaining 61% in the third quarter of 2021, compared with 65% during the third quarter of 2020. And we will continue to improve our operation efficiency of our business in the future.

Let us turn to Page 24. Our capex was zero USD 0.3 million during the third quarter of 2021, compared to USD 0.14 million during the third quarter of 2020. Capex as a percentage of total revenue increased from 0.8% during third quarter of 2020 to 1.4% during the third quarter of 2021. Let us move to Page 25.

Net loss during the third quarter of 2021 was USD 7 million, compared to USD 9.7 million during the third quarter of 2020. Adjusted EBITDA was negative USD 5.4 million during third quarter of 2021, compared to a negative USD 5 million during third quarter of 2020. With that, let me conclude today's presentations. Thank you, and we start our Q&A session.

Questions & Answers:

Operator

[Operator instructions] And the first question will come from Vivian Zhang with Diamond Equity. Please go ahead.

Vivian Zhang -- Diamond Equity Research -- Analyst

Hello. Good evening. This is Vivian from Diamond Equity Research. First the congratulations on the results.

I have two questions. So first thing is that we know your new technology HyperConn and its related products, including the tablets, were launched like several months ago. So my question is how does that impact the revenue? Can you provide any data related to the sales of this part? My second question is regarding the PaaS and SaaS services. We see the revenue increased a lot this quarter, so can you provide color on how you develop new business partners and keep expanding in this area? Thanks.

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

So I went -- so I'm Chen. So let me answer the first question for tablet. So tablet, so we launched the tablet in the third quarter. So HyperConn, we launched the product in September.

So actually I think that around that actual number is -- with delivery, around -- totally in the third quarter, how many devices? [Foreign language]

Unknown speaker

[Foreign language]

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

Yeah, with delivery since September, with delivery, 18,000 devices for tablets. So -- and we continue to have more order in the fourth quarter for tablets, mainly are used in Japan and the United States. So for second question, Yimeng, can you answer for the PaaS and SaaS revenue?

Yimeng Shi -- Chief Financial Officer

Yes, regarding this PaaS and the SaaS revenues, the weight of the SaaS revenue has been improving and since -- compared with last year. This relates to our platform-centric strategies in uCloudlink's local connected service. So when we deliver some more, more terminals, device, to our business partner and worldwide, they may -- procures better package from local carriers, they still need to rely on our platform system, PaaS/SaaS platform to provide HyperConn and the cloud theme solution and service to their users. So this PaaS/SaaS service is our core strategies for our business in the past and also in the future as well.

We expect that the weight of PaaS/SaaS service will be increasing when we deliver more terminal to our business partner. And the more and more daily active terminal, active and then used by our users as well. So that's very important for our business, so SaaS service has higher gross margins. And the more SaaS revenue come into account, we will have a lot to improve our profitability overall and also have a lot on the performance on cash flow as well.

Thank you.

Bob Shen -- Deputy Investor Relations Director

Hi, Vivian. This is Bob. I want to add some points for our new tablet Yeah, as you know that our new tablet comes equipped it with our innovative technology enable it to seamlessly connect to that available network like mobile broadband MBB plus fixed broadband FBB networks at all times. For example in the Japanese market, our new tablet facilitate us to enter and to cooperate with our business partners in the education industry such as the online education.

OK. This is just one example of our recent development of our HyperConn technology solution and new products. And as we always mention that our new technologies such as HyperConn technology solution paved the way for our further and quick development of our 1.0 and 2.0 business.

Vivian Zhang -- Diamond Equity Research -- Analyst

That makes sense. Thank you, Bob. Thank you. Chen and Shi.

Operator

[Operator instructions] Our next question will come from Lisa Thompson with Zacks Investment Research. Please go ahead.

Lisa Thompson -- Zacks Investment Research -- Analyst

Hello and congratulations on returning to revenue growth. It's great to see. My first question goes to the last sentence of the press release only because we had this conversation and you said there is no way you would settle with SIMO. So now that you've settled with SIMO, how much money do you think that will save you next year as far as expenses of not having any more litigation?

Yimeng Shi -- Chief Financial Officer

Yeah, this is Yimeng. I will answer your questions. Ye, we are -- we disclosed a settlement agreement we have with SIMO, which is related to litigation. And that's -- yeah, from this settlement we have -- we see that a dramatic reductions of litigation expenses in third quarter of 2021 and we see that this saving on litigation expenses would be quite significant.

You may know in the past couple of years since 2018 we rolled this long litigation process, which is SIMO. That consumes very significant litigation expenses more than USD 15 million in the past three years -- more than three years. So that's -- I think we -- that's will be -- we don't think we will have this kind of significant expenditure in this -- in litigation in the future. So that's -- I think that's a big improvement in terms of expenditure control in the future as we see.

This will be reflected into our performance in the following periods, this year and next year. So thank you.

Lisa Thompson -- Zacks Investment Research -- Analyst

So this is my question. So how much less would you have to spend next year than you spent this year? Just so I can have it in my models somehow.

Yimeng Shi -- Chief Financial Officer

For comparable basis, we can discuss the specific projection for this special category, expense after this call. Yeah, we will have this additional discussion on this figure. Is that OK?

Vivian Zhang -- Diamond Equity Research -- Analyst

So -- but is it in the millions of dollars for this year?

Yimeng Shi -- Chief Financial Officer

Yes. Yes. This year is more than -- we spend litigation expenses for more than millions -- it's a couple of millions, U.S. dollars, related to litigation expenses.

Lisa Thompson -- Zacks Investment Research -- Analyst

OK. And then out of curiosity, did any money change hands in your settlement agreement?

Yimeng Shi -- Chief Financial Officer

Just with first-party withdrawal or just as cash, no. So [Inaudible] expenses in cash related to the withdrawal of cash.

Lisa Thompson -- Zacks Investment Research -- Analyst

So they didn't pay you anything and you didn't pay them anything?

Yimeng Shi -- Chief Financial Officer

No, no, no. Settlements, settlements that's a withdrawal all the cash.

Lisa Thompson -- Zacks Investment Research -- Analyst

OK. All right. Good. And then in your guidance that you gave, you're guiding to be sequentially down in revenue from this quarter to next quarter.

Where is that coming from? What do you think will be less next quarter -- this quarter?

Yimeng Shi -- Chief Financial Officer

We disclosed that guidance for our fourth quarter 17.5 millions to 18 million. That's up from the reason those expectations in the assumptions the supply chain -- global supply chain constraint is still carry on. And we need to prepare this to deliver the orders in this [Inaudible] global supply chain constraints. So we disclosed that guidance.

We'll achieve that -- we'll try to achieve that guidance. And so -- but we believe that orders is still coming in for the next years but we need to manage this risk to supply chains and constraints. Yeah, so [Inaudible]

Lisa Thompson -- Zacks Investment Research -- Analyst

So within products?

Yimeng Shi -- Chief Financial Officer

Yeah, for the life of the product, yes.

Lisa Thompson -- Zacks Investment Research -- Analyst

So products will go down and the rest of the business will still grow?

Yimeng Shi -- Chief Financial Officer

That's what we -- the expectation, yes. Chen, do you have some other comment on that?

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

Yes. I have two comments is, one, for our litigation, so we are in a good position. We don't see it as valuable for us to waste money in litigation. That's the major consideration.

So that's for first question. Second, so because of the constraint of the supply chain, so we have more order of volume than we can deliver it. So that's delivery challenge for us in the next quarter.

Lisa Thompson -- Zacks Investment Research -- Analyst

And is that for all the products or any particular ones?

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

I think it's all our product. So because of major, you can see order supply chain, including the chipset even though the TCP, everything is in the worry tight supply chain.

Lisa Thompson -- Zacks Investment Research -- Analyst

OK. And so are you now thinking in 2022 that, say, your tablet delivery is going to be lower than you thought because of this?

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

I don't think so because table is going up in -- I think going up. It depends on COVID-19. So if we COVID-19 is serious and -- I think the tablet is going up. Because we have more product launch we have in HyperConn, we have more 5G product, you have a zero and we have more product come up.

So including high end and the middle end. Also you can [Inaudible]. We have more GlocalMe Inside joint brands products such as [Inaudible], also IPC, IP -- with IP camera. We have more products.

I think this year, we will launch more product and we are putting more order.

Lisa Thompson -- Zacks Investment Research -- Analyst

All right. And that reminds me of the other question. Could you talk a little bit about the IP camera? I don't think that's been mentioned. Are you going to be working with partners to sell that? Who are you selling it to and what countries?

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

Because our HyperConn solution was -- is more accepted by the [Inaudible] IP camera companies, we have a news release months ago. We have -- are working with one big OEM IP camera company [Inaudible], who has a big amount of share in China and worldwide. So this company really like our solution because --

Unknown speaker

[Inaudible]

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

Yeah, because we embed our software into their camera, for the outdoor camera. So this outdoor camera don't need to embed sim card. When the signal change, the user  don't need to come up to the wall and change the sim card. That's very challenging for the users, so for -- and we can get the best of carriage and the best -- and avoid a choppy jam for the data.

That's why we have more -- more and more cooperation for this IoT company, like IP camera, People's Support and also electricity power, Smart monetary company.

Lisa Thompson -- Zacks Investment Research -- Analyst

OK. So you're just going to be selling them software? They're just going to put it in their cameras with their name on it?

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

Yeah. Yeah. I think if -- and they sell this solution in many many brands. So we will bring in a joint plan to sell IPC.

That's one of the choice. We will bring these joint branding in our own offline shop but also we'll embed our software into the camera to other partners and we can get more revenue and revenue share and share and I think that's profit and provide better connection for users.

Lisa Thompson -- Zacks Investment Research -- Analyst

So would revenues show up in product sales or in PaaS/SaaS or other? How does that work?

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

Both, for the joint -- yeah, if joint branding, we sell camera then we get hardware and data revenue. But if just partner, all layered customer in the layout brand, we only get the revenue for data and PaaS/SaaS servicing.

Lisa Thompson -- Zacks Investment Research -- Analyst

All right. Great. That sounds good. The interest is there.

Are you going to release a product anytime soon with a press release?

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

Yeah, I think [Inaudible]. Next quarter will be -- because our third quarter is finished testing, first quarter will be available and launching.

Lisa Thompson -- Zacks Investment Research -- Analyst

OK. Great. Look forward to seeing it. Thank you.

That's all my questions.

Operator

[Operator instructions] As there are no further questions, I would like to turn the conference back over to the management team for any closing remarks. Please go ahead.

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 Equity Group investor relations.

Operator

[Operator signoff]

Duration: 42 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

Unknown speaker

Lisa Thompson -- Zacks Investment Research -- Analyst

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