NASDAQ:UCL
READ THE FULL UCL RESEARCH REPORT
uCloudlink (NASDAQ:UCL) reported Q1 2022 had declining losses and improved margins despite year over year and sequential revenue declines. The company continues to improve its cost structure and the adjusted EBITDA losses have lessened each quarter since their peak in Q4 2020. Also, the gross margin for the company has not been this high since 2019 before the pandemic shutdowns started. If the company continues on this path, and revenues improve sequentially, it should be able to reach EBITDA neutral by year end. The company gave Q2 2022 revenue guidance of $16.5 million to $17.5 million, in line with our forecast. This is sequentially up from $15.6 million in this Q1 period. Previously it guided to 2022 annual revenues of between $85 million to $100 million.
The company was affected by the current shutdowns in China which limited its access to products. It expects that as lockdowns abate, availability will return to normal in Q2 2022. It continues to have great success outside of China and Japan and enjoys having the 5G market almost to itself as it is the only choice for 5G products and services in some markets.
One issue that had overhung the company is its structure as a VIE, a structure that has come under scrutiny by the Chinese and US governments. uCloudlink eliminated that structure in March. It dissolved the VIE contracts and transferred assets into uCloudlink. This should remove one obstacle for investors that have avoided VIEs completely due to regulatory uncertainty. In addition, on May 9, 2022 uCloudlink announced that it has been provisionally identified by the SEC as a Commission-Identified Issuer under the HFCAA. The SEC determined that uCloudlink used a registered public accounting firm whose working paper cannot be inspected or investigated completely by the PCAOB to issue the audit opinion for its financial statements for the fiscal year ended December 31, 2021. On May 23, 2022, the company dismissed PricewaterhouseCoopers Zhong Tian LLP and engaged Audit Alliance LLP as its independent registered public accounting firm. Audit Alliance LLP has been engaged to audit and report on the consolidated financial statements for the year ending December 31, 2022.
We consider uCloudlink both a reopening and 5G play as it was heavily dependent on the international traveler, and because it has launched products and services using 5G. It stands to benefit greatly from 5G in that 5G enables more applications, as well as the fact that 5G coverage is spotty and the ability to blend 5G connections among carriers worldwide and seamlessly should drive more customers to uCloudlink.
The stock has come down considerably and the company is now trading at an enterprise value of $33 million with expected revenues of $81 million to $100 million this year. Using our estimate of $80 million, that is only 0.4 times sales compared with peers that trade at 4.5 times.
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