uCloudlink (NASDAQ:UCL) reported slightly higher revenues than expected and a lower loss per share on a non-GAAP basis. It gave guidance for Q2 revenues of between $18 million and $19 million right in line with out current estimate of $18.6 million. The company showed sequential improvement in product sales and its margins. Its new 5G product is in the process of commercial trials and expect to launch in the near future starting in Japan. We have high expectations for new 5G hotspots and service as finding a 5G connection will be a much bigger feat than finding a 4G especially roaming due to spotty availability. By adding 5G mobile to the mix, these connections will often surpass fixed broadband wifi speeds and the ability to optimize and switch connections will be even more valuable. In addition, the 5G devices will be more expensive than the 4G and lower, also helping revenues growth. After Japan we may see them here in the US in Q3. They will appear both on the company’s web site and Amazon and we believe they will be the first, or among the first, 5G devices available that work beyond a walled carrier.
We expect sequential growth to continue in Q2 and for gross margin to increase in the product category as product mix shifts to the higher margin 5G products. After that, the company will be shipping its devices to fill its education orders, which we expect to be at lower than normal margins bringing down overall gross margins in Q3 and Q4.
Rather than reopening, parts of Asia seem to have taken a step backwards short term and we await the world to get back to normal travel. We still believe uCloudlink will be a huge beneficiary when that happens and could gain market share with its superior connectivity solutions. In the mean time its new 5G solutions should spur sales even for the stay-at-home crowd as it delivers faster more stable connectivity both indoors and out. We look for it to announce new 5G applications being used with its services and further ramp of its 5G devices.
The US continues to be a promising market for uCloudlink, and it seems to be more open with more traveling that many other parts of the world. Since its court win, the company had put a renewed push on its marketing efforts here and working to expand distribution. Last week it announced it was merging its GolocalMe and Roaming Man marketing to provide one-stop shopping regardless of whether customers want to rent or buy. In practical terms what this means is that GlocalMe updated its website and with a new rental option exclusively available on its website rather than making customers go to a Roaming Man site to rent a device. For all existing users it is offering the same as well as upgraded services and data plans, and it offers a trade-in program to upgrade to new devices. Over Memorial Day weekend, from May 28th to May 31st, GlocalMe offered up to a 40% discount to GlocalMe and current Roaming Man users for device purchases, and selected data plans and rental services as shown on the screenshot below.
Q1 2021 Earnings
For the quarter ending March 31, 2020, UCL generated $17.7 million, down 47% compared with the $33.5 million in Q1 2020. Total gross margin was 31.3% versus 35.3% in Q1 2020 due to product mix toward lower margin product sales.
Product sales were down 42% to $9.3 million versus $16.1 million in Q1 2020. Gross margin improved to 27% from 18%. Sequentially product sales improved 16.2% and we expect continued increases in Q2.
Services revenues decreased both year over year and sequentially and we are not certain we have hit rock bottom there yet. For the quarter the company reported $8.4 million in revenues versus $17.4 million a year ago and $9.0 million in Q4 2020. The revenue mix is however shifting to a higher percentage of PaaS/SaaS revenues, which generate higher gross margins.
Operating expense increased to $20.9 million from $11.5 million a year ago. The biggest increase was in stock-based compensation, which was $5.5 million this quarter compared to last year that had none. In addition, the company had an unrealized loss of $2.7 million in the investment portfolio. With out those two things the increase in operating expenses would have been only $1.2 million.
The pretax loss was $15.4 million compared to a profit of $280,000 in Q1 2020. Taking out stock-based compensation and the investment loss, that loss would have been $7.1 million. Net loss to ordinary shareholders was $7.1 million versus a loss of $440,000 in Q1 2020.
GAAP loss per ADS was $0.54 versus a loss of $0.02 per share a year ago. On a non-GAAP basis, taking out investment losses and stock-based compensation, the loss was $0.26 per share versus $0.02 in Q1 2020. In Q1 2021 the average share count increased 21.6% to 28.3 million primary ADS.
In January 2021, uCloudlink acquired 31.25% of iQsim S.A., a provider of open virtual SIM platform and VSIM-enabled mobile devices based in France, for EUR200,000 (equivalent to US$243,000).
UCL ended March 31, 2021 with $19.8 million in cash, no restricted cash and $4.9 million in debt. During the quarter ended, the restricted cash, which was in escrow due to a loss in a patent case, was released back to the company due to the overturn of the judgment on appeal. The cash balance declined $6.7 million and the debt increased $1.2 million. Its working capital was $22.9 million at quarter end and its quick ratio 1.4 times.
In addition, the company has $34.5 million in other investments, $16.3 million in current and $18.2 million in non-current. If needed the company can sell some of its $16.3 million in its investment portfolio giving it a total available of $36.1 million. We believe its normalized cash burn is now 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 1-3/4 years.
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