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UCL: Chip Shortages and Delays Cause Educational Tablet Order Fulfillment to Slip into 2022

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By Lisa Thompson

NASDAQ:UCL

READ THE FULL UCL RESEARCH REPORT

UCloudlink (NASDAQ:UCL) exceeded the high end of its revenue guidance for Q2 2021 of between $18-19 million coming in at $19.2 million, but gave Q3 guidance of between $19.3-20.0 million, well below our expectations. The guidance however still puts the company back in growth mode after five quarter of year over year revenue declines. The midpoint of guidance puts year over year growth of 9.2% and even at the low end of the guidance range, the company expects sequential improvement.

The main cause of lower guidance compared to our previous expectations is that shipments against educational tablet orders were delayed into 2022 from and expected start in Q3 2021. In addition to its availability slipping one month, the company is hampered by the industry-wide chip shortage, making fulfillment difficult. This could push an expected $32 million in product and services revenue into 2022 from 2021, making it another down year. One concern is that now the tablets have missed the start of the school year, but uCloudlink assured investors that that is not an issue and the schools will accept orders even at the start of 2022. Because of Q3 guidance and this order slippage, we are reducing our 2021 revenue estimate to $77 million and increasing the loss per share to $1.31. We are also reducing 2022 estimates to revenues of $123 million and a loss of $0.70 per share based on the assumption of $32 million from the education tablet and services move into 2022 and the base business grows 10%. We expect this to be conservative if international travel opens more widely globally and specifically to and from China.

Q2 2021 Earnings

For the quarter ending June 30, 2021, UCL generated $19.2 million in revenues, down 5.5% compared with the $21.0 million in Q2 2020. Total gross margin was 28.1% versus 26.1% in Q2 2020 due to product mix toward higher SaaS/PaaS revenues. So despite a decline in revenues of 5.5%, gross margin dollars were only down 1.5%.

Geographic Distribution

While Japan was flat year over year, China fell off a cliff and the rest of the world had to take up the slack showing the company in making good inroads to other geographies, which we presume is dominated by growth in the US where travel is less restricted. In the US market, uCloudlink expanded distribution during the quarter and even set a new 12-month high for Amazon product sales. This was combined with a significant year-over-year increase in demand for international data connectivity services.

Product sales were down 11% to $9.9 million versus $11.2 million in Q2 2020. Gross margin declined to 12% from 18%. This was due to both product mix, which was skewed to lower gross margin products with the company specifically citing a large shipment of Wi-Fi dongles to a Japanese customer as well as an increase in chipset prices.

Services revenues decreased year over year to $9.3 million from $9.9 million (5%) but were up sequentially. The revenue mix continued to shift to a higher percentage of PaaS/SaaS revenues, which generate higher gross margins. The quarter’s services gross margin was 45.5% compared to 35.1% in Q2 2020 and 35.9% in Q1 2021.

Operating expense decreased to $13.6 million from $47.0 million a year ago and $20.9 million in Q1 2021. The difference was in stock-based compensation, which was $1.2 million this quarter, the lowest ever since public, compared to last year that had $37 million and Q1 2021 that had $5.5 million. Without stock-based comp, operating expenses would have been only $12.5 million this year compared to $10.2 million last year. Sequentially operating costs were down $2.8 million (ex-stock based comp) and we expect the company to continue to take measure to reduce costs reducing cash burn.

The pretax loss was $8.3 million compared to a loss of $41.6 million in Q2 2020. Net loss to ordinary shareholders was $8.2 million versus a loss of $42.2 million in Q2 2020. On a non-GAAP basis the loss would have been $6.1 million to $4.4 million

GAAP loss per ADS was $0.29 versus a loss of $1.73 per share a year ago. On a non-GAAP basis, taking out investment losses and stock-based compensation, the loss was $0.21 per share versus $0.18 in Q2 2020. In Q2 2021 the average share count increased 16.4% to 28.3 million primary ADS.

Balance Sheet

UCL ended June 30, 2021 with $18.4 million in cash, no restricted cash and $4.8 million in debt. The cash balance declined $6.2 million and the debt decreased $113,000. Its working capital was $16.0 million at quarter end and its quick ratio 1.2 times.

In addition, the company has $34.5 million in other investments, $15.0 million in current and $18.5 million in non-current. If needed the company can sell some of its $15.0 million investment portfolio giving it a total available of $33.4 million. We believe its normalized cash burn is still approximately $1.7 million a month, but that should decline throughout the year as revenues ramp. At its current burn rate that gives it runway of over 1-2/3 years.

As of June 30, 2021, uCloudlink owned 77 patents relating to the cloud SIM technology in China, Japan, the United States, and other countries, and had 83 pending patent applications. These patents cover its key technologies, including cloud SIM architecture and supporting terminals, design patents, hardware antenna and hardware configuration.

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