uCloudlink Group Inc. (UCL) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to the uCloudlink Group Inc. First Quarter 2021 Earnings Conference Call. I would like to turn the call over to your host today, Mr. Bob Shen, Deputy Investor Relations Director of the company. Please go ahead.
Bob Shen: Thanks, everyone, for joining us on our first quarter 2021 earnings call today. The earnings release is now available on our IR website at ir.ucloudlink.com, as well as via news wire services. Here, I'll give a brief introduction to our uCloudlink's team.
Chaohui Chen: Yeah. Thank you, Bob. There are similar contents as to the earnings presentation of the fourth quarter of the year 2020. I will focus on Page 8, 9, and our recent developments on Page 14. Let's move to the Page 8. The definition of hyperconnectivity, basically, includes level one, which is the evaluation of connection quality of various wireless access network, including Wi-Fi 3G, 4G, or 5G; level two, which is network selection and optimization based on the Cloud SIM technology; and level three, which is optimizing and acceleration of application routing. Our Hyper-Connectivity solution would redefine the mobile network user experience and facilitate data traffic marketplace. Data connectivity user experience is affected by various factors such as signal interference and routing, bandwidth and delays, and the server location.
Yimeng Shi: Thank you, Mr. Chen. Hello, everyone. Let us turn to Page 16 for our business highlight.
Operator: Yes. Thank you. We will now begin the question-and-answer session as mentioned. And the first question comes of Vivian Zhang with Diamond Equity Research.
Vivian Zhang: Hello, this is Vivian from Diamond Equity Research. Thank you, management, for taking my question. So we have seen COVID-19 third wave hitting globally, especially in India, Japan, and Southeast Asia since April. So my first question is how will this affect your overseas business? Will the company adjust to your international strategy and growth expectations for the second quarter? Do you provide any guidance on revenue or net income? My second question is could you please give us more color about your 5G-related technology and business? And will this -- will -- and how this will contribute to your future growth while overseas traveling is still down with too many restrictions? Thank you.
Yimeng Shi: Thanks, Vivian. The first question regarding the impact of COVID-19. Yes, as we, you know, as only released and the -- we have impacted by the COVID-19 -- we -- so far. And so we expect that the implications of COVID-19 will continue through the years, the remainder of the year. So we think our other look business, we expect more came from the local connectivity service, local mobile broadbands demand. So their growth as a market mainly came from the Japanese market, which is the biggest drivers for growth in the first quarter of this year. And we believe that the main drivers of growth for the second quarter came from the Japanese markets as well. So for the second 5G-related, we have our CEO, Mr. Chen, to answer.
Chaohui Chen: I'm Chen. Let me answer your 5G questions. Because we understand 5G radiofrequency is higher than the 4G. So that means that the same coverage like 4G, 5G need around four times space station number. That's a huge investment. So we understand although coverage maybe it's good. But most challenges indoor coverage because 5G in some places one to build a more viable to replace the fixed broadband. So indoor, how to improve the indoor coverage become a challenge. So that's a bigger question. Our hyper-connectivity technology will improve this part. So for example, like highway. One then is easy to block, and then maybe another carrier in this region to have coverage. So a different carrier may have different coverage. So in one location with a multi-network, we will improve the indoor coverage of plasma Wi-Fi. So Wi-Fi, 5G, 4G, and the available network indoor, we will reselect and evaluate the network. That means we can enable mobile phones, mobile cellular indoors and replace the phase often. That will happen. Let me answer, we will accelerate the 5G coverage and experience, especially in DAT. For the initial stage of the 5G number, the pre-paid number is so many, the coverage is poor. If we can let cross multi-carrier network for 5G coverage, we could improve the whole country, the whole 5G coverage. That means that we can accelerate the 5G to become popular. Currently, I think 5G's most typical application is enabled more by a cloud but the base needs good coverage for this to happen. So that's the first part. And the second part is the 5G roaming globally. So we understand 5G roaming is known to really stuck. For 5G, we haven't -- for 4G roaming, we have solved the problem, and 5G under the phase that's more challenging. So with our technology, we are changing more easily to land a 5G roaming to happen. For example, any device or handset embeds our hyper-connectivity solution processing inside. That means we can let this device use anywhere in the world of the 5G network without, you know, a complicated roaming barring. You just have to acquire a low-cost SIM card and wire our application then use the device -- can use the 5G network device. We create a new way for 5G roaming, simplify the 5G roaming. Another -- also, by the way, we can, you know, improve 5G roaming time latency. So we understand latency is a key point for people with 5G, not only with the people with 4G. The time latency is very important that enables 5G to apply to the cloud and AR/VR. You can imagine when you use the 5G, you know, roaming outside your country and then return to your country then go to the internet, the latency will become longer, and your AR/VR will become a problem again. So in this case, we are, you know, at the one page to have 5G not only in domestic but also for international application, especially for a time latency, we are a unique solution. So fundamentally, we believe that we are the accelerator of the 5G era. That comes early, at least, one year with our technology in the industry. So that's the product and we are really launching our 5G MiFi embed the handset with our hyper-connectivity solution and we will announce our hyper-connectivity solution in a 5G MiFi in the next month. And we have this solution around that we should announce.
Bob Shen: Hi, Vivian. This is Bob Shen. Let me add some color to your second question because as we mentioned we continue to keep investing in our R&D, especially like 5G-related products. As our CEO just mentioned, like a 5G mobile Wi-Fi or like a 5G customer-premises equipment, CPE, and also together with our technology such as 5G millisecond multi-network reselection technology. And I think, we believe, that all these devices and all these innovative technologies will facilitate us to establish our leading technological position of our PaaS and SaaS platform in the early stage of 5G. Thank you.
Operator: Thank you. And the next question comes from Lisa Thompson of Zacks Investment.
Lisa Thompson: Good evening. So I have a number of questions about the quarter. First off, I see that you had a very good improvement in product sales and the gross margin looks like it might have been a record high. What is causing that? Is that the first time you're shipping 5G devices? What happened in the quarter?
Yimeng Shi: The gross margins in the first quarter -- as we -- the overall gross margin we disclosed is stable the past three months. And during the sale of products, we sell these to Japanese market. So that's the pricing and the product sales to Japanese markets are good. And so we have a good, a stable gross margins related to the product selling to Japan. For service gross margin, it's plus 80 with the mixtures of the service category and depending on the proportions and how much sales and service came from the local community service, how much is the service came from the PaaS and SaaS, and etc. The PaaS and SaaS service is higher gross margins turned in seconds. So when the more PaaS and SaaS service looking into an account then this will give us improvements to our gross margins in the future as we expect. And so when this -- when we -- the national service is recovered, when the vaccination progressed across countries, and the national roaming service is the highest gross margin as well. So our service gross margin will be improved when we have more service came from PaaS and Saas or came from investment roaming service. Hello?
Lisa Thompson: Yes. And with that…
Yimeng Shi: Yeah, I think, Lisa…
Lisa Thompson: Go ahead.
Yimeng Shi: Apart from the Japanese market, as our CFO mentioned, we are also enhancing our e-commerce efforts in other strategic key markets with high growth potential such as the United States and Europe. And one example, our CEO just mentioned that we recorded a high sale in the United States and we also optimizing and improving our website, streamlining our sales function in the local markets to improve -- to continuously improve the user experience and overall satisfaction. That's basically what we do.
Lisa Thompson: So the 1.3 million incremental in product, is that U.S. and Japan? Like where did that come from? 5G or where is it?
Yimeng Shi: Yeah. I want to answer your question because 5G is a new product that was just newly launched in this quarter, so the volume is really small. So having to show a bigger contribution to our margin, we believe in the following quarter following the 5G revenue increase, we believe the margin was higher than 4G. Of course, that's the -- because in 5G, no matter the data on the device, it is more expensive than 4G. And we believe in the following quarter, once the 5G revenue share percentage increase, revenue will be better. That's one reason. Another reason is that PaaS and SaaS, we have other reason of the SIM card and the traffic packaging, you know, we have been efficient. So how to more efficiently use the SIM card and not data package for sharing, it's another way we can increase our margin. So we believe our technology is important in 5G and the other reason is we have to increase margin in the future.
Lisa Thompson: That helps. I was wondering if the 5G was brand new this quarter. What's your feeling on services? It was down again sequentially. Is that going to the bottom anytime soon? Are we going to see sequential improvement there?
Yimeng Shi: Sorry, could you repeat your question, please?
Lisa Thompson: Right. Services revenues were down again sequentially. Has that bottomed yet? Do you expect that to improve next quarter or is it going to decrease again?
Yimeng Shi: The service revenue is, yeah, struggling, you know, there's a lingering COVID-19 impact. And part of that -- the positive thing is our PaaS and SaaS source of revenue is increasing, has been increasing. That's a consistent business model in local market. So we provide PaaS and SaaS platfrom to our local business partners who use our platform. But then they are purchasing local data from local carriers, so they don't purchase local data from uCloudlink. We only have some revenue sharing charged to local business partners. That's something times 10% around their service revenues. The gross margins are good. And this -- on the other side, is our service -- our service revenue has not increased so much as our business partners. So we expect that in the following quarters, I think our -- service revenue will a little bit slow to increase, will have to give us more products to our business partners and more partner connects to our PaaS and SaaS platform. So that's -- we believe we are improving our revenue mix in the future.
Lisa Thompson: So do you think in Q2 service revenue will be over 8.4 million or not?
Chaohui Chen: Yeah, something similar. Yeah, something similar that we -- but the driving maybe more came from -- we're selling more product to our business partners.
Lisa Thompson: Okay. And as far as operating expenses, now, for the last two quarters, you've had between $5 and $6 million in stock-based compensation. Should we expect that every quarter?
Chaohui Chen: The second quarter's share-based compensation is -- compensations are not -- I think, is smaller than the first quarter's. Yeah, and is not a big chunk like the first quarter's amount. But we do have upgraded share-based compensation in the following quarters.
Lisa Thompson: So, what should I put in for that? You know, $4 million a quarter, or what do you expect going forward since that's, you know, something under control?
Chaohui Chen: Yeah. I can share this information with you after this conference call. Is that okay?
Lisa Thompson: Sure, okay. All right. I guess my last question is you originally thought this year you could do $107 to $130 million for the year. Are you still comfortable with that? Or should we ignore those numbers?
Chaohui Chen: So far, we -- as we disclosed our guidance for the second quarter is $18 million to $19 million for the second quarter, and we still keep this guidance. For the full year, the range is $107 million to $130 million. We will review that to this -- this projection for the full year on a quarterly basis. So, we will adjust it for you when we have a change in the next quarter or something.
Lisa Thompson: Okay great. Thank you. I just wanted to check on that. Thank you. Those are all my questions.
Chaohui Chen: Sorry, I can't answer your question regarding the SBC for the second quarter. It amounts roughly to $1.8 for the second quarter's SBC.
Lisa Thompson: Okay. And should I throw that in for Q3 and Q4 also, or we don't know?
Chaohui Chen: I will answer you this Q3, Q4. So, we'll get that later on back to you later if okay.
Lisa Thompson: Okay great. Thank you so much.
Operator: Thank you. And the next question comes from Kong Gao with Tigress Financial Partners.
Kong Gao: Good morning. This is Kong Gao from Tigress Financial Partners. I think most of my questions have been answered. So, two additional questions. So, can you give us any updates on the strategic cooperation with China Vehicle? And next question will be like if you can bring more colors on the new strategic alliance with Japan MNOs in the education industry. That's it.
Yimeng Shi: Chinese company of vehicle -- Chinese Vehicle company is just under the financial reorganization process. So, we are waiting the finish of this process and we will start our delivery of our contracts with them. Second question is about the Japanese market, right? What about Japanese -- so, in Japanese market, we have the cooperation with the first Tier 1 telecom operators, and we have a contract with them. And responsibly, we will deliver -- we will have our delivery plan for them starting from Q3 for education-type products.
Chaohui Chen: Yeah, with our focus for hyper-connectivity. And, you know, with also operating with and picking for, you know, for mobile Wi-Fi and handset.
Operator: Thank you. And the next question comes from Hunter Diamond with Diamond Equity Research.
Hunter Diamond: Hi. Good evening. So, I just have one more question. I think a lot of it was answered by the previous analysts and investors. Can you discuss the internet of vehicles and education? Anything you can tell us on what those products might be, who the competitors would be in those sectors, or is it still too early to kind of give any additional guidance on that? Thank you.
Chaohui Chen: Yeah. So, we had a follow-up, you know, because in the way we provide the, you know, high, you know, reliable connectivity with call -- we apply the, you know, hyper-connectivity, you know, solution for IoT industry. So, these are quite unique, you know, because, you know, most are like a vehicle, you know, autonomous -- autopilot like a, you know, in the power monitoring industry. So, they need a, you know, very reliable connection. So, in this industry, and also as I just mentioned for the emergency response situation, so for all this industry, we get a very positive, you know, feedback. And we have more and more, you know, current contract we've signed with them in the near future. So, you know, there's a lot of cooperation with Japan in the recent past, yeah. So, let's call it positive feedback. We believe in that the future, like 5G for industry, 5G for, you know, autopilot is also just a big opportunity for us. Another industry requires, you know, high reliable connectivity, we call it remote working and education because our solution can not only just let the -- make a Wi-Fi more reliable when your Wi-Fi become broken or become, you know, interrupt, so our 4G/5G will automatically backup. And this will -- and also this 5G/4G is close all available network not only just one carrier. So, all, you know, carrier available, we will support, you know, Wi-Fi together, become -- let Wi-Fi become more robust, so we can enable your device such as a tablet, your laptop during remote working, and the education period become more reliable. And that's a huge leap for this industry. We already approached some, you know, tier -- some industry, you know, leading, you know, Silicon provider. So, they like -- they do like R&D solution so we can provide the best connection and data mobile Wi-Fi. This unreliable connection becomes reliable, especially during your router -- your Wi-Fi router and your device, you know, in a sand dune, that becomes hard, and our solution could solve this problem perfectly. So, that's why we sell not just traffic, we sell this guarantee, a quality connection for this industry. So, we've become more and more popular in this industry. So, for this solution, we haven't seen a competitor yet. So, we live in this technology, we will launch this hyper-connectivity, you know, solution in the near future or in -- just in next month or so. So, under this solution, we have both applied in our 5G/4G, and all our solutions. And these are -- we're including the Level 1 in the physical layer, we will charge that device, enable the device with our hyper-connectivity application, where that device, you know, charge all available network with Wi-Fi, 4G/5G and we will select the, you know, the best one, and then the application work in first. And second, we will evaluation the quality of network and reselection -- use our milli-second reselection to choose the best of one or two to support your connection and your application. And finally, we're also improving the loading acceleration, because we understand that -- your tablet application and between your tablet application or your handset application to the server, potentially near, at least. So, we can find the best loading acceleration of the IP loading. For Level 1, Level 2, Level 3, we can make -- you know, your connection becomes, you know, fast, reliable, and become more, you know, robust. So, that's quite a unique solution. We can say from the fourth generation we call, cloud SIM, so that's a -- we can select network, but time needs around 20 to 30 seconds. Then last year, we, you know, you know, launched our millisecond-enabled device switch between different net -- available networks, just milliseconds. And now, in the middle of this year, we will launch our hyper-connectivity solution that not only in the physical layer and second layer, also is the loading layer to make your application, you know, more reliable and more faster, and secured. So, that's a unique solution. So, we created a new kind of, you know, a solution creator.
Hunter Diamond: Great. Thank you very much for the additional details and congratulations on the quarter.
Operator: Thank you. All right. Since there are no questions at the present time, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing comments.
Bob Shen: Thank you once again for joining us today. If you have any further questions, please feel free to contact uCloudlink's Investor Relations through the contact information provided on our website or TPG Investor Relations.
