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As expected, uCloudlink (NASDAQ:UCL) finally returned to revenue growth this quarter and expects growth again in Q4 2021. Revenues came in at the low end of its guidance range in Q3 2021 at $19.3 million, and the company gave guidance of $17.5 to $18.0 million for Q4 2021. At midpoint, this would be revenue growth of 4.3% year over year, but down sequentially from Q2 2021. Still it is growth after five quarters of year over year revenue declines. We expect the Q4 problems lie in product sales, which include sourcing product and components for hardware and the uptake of 5G devices. To be honest, we doubt most would have thought we would still be in global shutdowns at the end of 2021 with limited improvement in sight, although international travel seems to be picking up with two steps forward, one step back. Once international travel returns, uCloudlink is well positioned to capitalize on providing ubiquitous global connectivity. The company has cash on hand for the next year and a half at its current burn rate, which will be reduced going forward due to the settlement of its lawsuit with SIMO after spending three years and $15 million on the effort. Next year uCloudlink will see a cost savings of $4 million next year from that event alone. In Q3 uCloudlink saw only 4% of its sales from China, which used to be its biggest market. Despite that, it is still a Chinese company operating under a VIE structure which is under further scrutiny by Chinese regulators and investors should be cognizant that regulatory changes could occur in the future. With an enterprise value of only one time 2021 estimates sales, uCloudlink trades well below its peers due to losses and being a VIE. Hopefully at least the losses will abate in 2022 when and if the world returns to normal travel levels.
uCloudlink stock trades at an enterprise value to 2021 estimated sales of 1.0xs versus comparable companies that trade at 9.6 times. When uCloudlink shows sustainable year over year growth and gets to cash breakeven, we believe this valuation differential could somewhat dissipate.
Q3 2021 Earnings
For the quarter ending September 30, 2021, UCL grew revenues reporting $19.3 million in revenues, up 7.4% compared with the $18.0 million in Q3 2020. Total gross margin was 28.3% versus 33.3% in Q2 2020 as lower margins in products dragged down the average. Gross margin dollars were down 3.0%.
Japanese revenues were down 10% year over year and China declined 14%. The rest of the world revenues grew 35% and surpassed revenues from Japan. As it is now the largest part of the revenue breakdown, and is growing the fastest, revenue growth could accelerate from here.
Product sales grew 9% this quarter to $8.9 million versus $8.2 million in Q3 2020, but at much lower margins than last year. Gross margin declined in this segment to 10% from 25% in Q3 2020. The company is being hit with both the inability to source product due to supply chain issues, as well as a rise in the cost of components.
Services revenues increased year over year to $10.5 million from $9.8 million (6%) and were up sequentially. International business fueled the growth as local revenues declined. This was mostly due to a customer switching from generating local revenues to a PaaS/SaaS solution. The quarter’s services gross margin was 43.5% compared to 36.6% in Q3 2020 and 45.4% in Q2 2021.
Operating expense decreased to $12.4 million from $15.2 million a year ago and $13.6 million in Q2 2021. The difference was in stock-based compensation, which was $845,000 this quarter, the lowest ever since public, compared to last year that had $7.9 million and Q2 2021 that had $37 million. Without stock-based comp, operating expenses would have been $11.6 million this year compared to $7.3 million last year. Sequentially operating costs were down almost a million $2.8 million and we expect the company to continue to take measure to reduce costs reducing cash burn. Settling its lawsuit with SIMO is helping enable that.
The pretax loss was $7.0 million compared to a loss of $9.6 million in Q3 2020. Net loss to ordinary shareholders was $7.0 million versus a loss of $9.7 million in Q3 2020. On a non-GAAP basis the loss would have been $6.0 million compared to $5.7 million last year.
GAAP loss per ADS was $0.25 versus a loss of $0.34 per share a year ago. On a non-GAAP basis, taking out stock-based compensation, the loss was $0.21 per share versus $0.20 in Q3 2020. In Q3 2021 the average share count was virtually flat with last year at 28.4 million primary ADS.
UCL ended September 30, 2021 with $14.3 million in cash, no restricted cash and $6.3 million in debt. The cash balance declined $5.6 million and the debt decreased $1.5 million. Its working capital was $13.5 million at quarter end and its quick ratio 1.1 times.
In addition, the company has $33.3 million in other investments, $18.2 million in current and $15.0 million in non-current. If needed the company can sell some of its $18.2 million investment portfolio giving it a total available of $32.6 million. Its free cash flow in the first six months of 2021 was $2 million a month, but as expenses come down (for one legal costs should be reduced $4 million next year) and revenues ramp, that should decline. At its current burn rate that gives it runway of a year and a half.
As of September 30, 2021, uCloudlink had 2,196 business partners across 52 countries and regions. It also had 172 patents with 79 approved and 93 pending approval, and its SIM card pool included SIM cards from 258 MNOs globally.
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