uCloudlink Group Inc.

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to UCloudLink Group, Inc., fourth quarter and full year 2020 earnings conference call. At this time, all participants are in a listen-only mode. After prepared remarks by the management team, there will be a question and answer session. Today's conference call is being recorded. I would now like to turn the call over to your host today, Mr. Bob Shen, Deputy Investor Relations Director of the company. Please go ahead.

Thanks, everyone, for joining us on our fourth quarter and four-year 2020 earnings call today. The earnings release is now available on our IR website at ir.ucloudlink.com as well as via Newswire Services. Here, I give a brief introduction to our uCloud Link team. Zhi Ping Peng is our co-founder and chairman of a board of directors. Chao Hui Chen is our co-founder, director, and chief executive officer. Zhi Gang Du is our director and chief operating officer. Yi Men Shi is our chief financial officer. Xin Quan Xu is our chief sales officer. Our CEO will begin with an overview of our company and business highlights, which will cover section one of the earnings presentation posted on our IR website. And then our CFO, Yi-Meng Shi, will discuss our operation highlights and financial results in section two and section three. Before we proceed, please note that this call may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties, and other factors not under the company's control. which may cause actual results, performance, or achievements of the company to be materially different from the results, performance, or expectations implied by these forward-looking statements. All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors, and the details of the company's findings with the SEC. the company does not assume any obligation to revise or update any forward-looking statements as a result of new information, future events, changes in market conditions, or otherwise, except as required by law. Please also note that your CloudLinks earning plus release and this conference call include discussions of unaudited gap financial information as well as unaudited non-gap financial measures. uCloudLinks press release contains a reconciliation of the unaudited non-gap measures to the unaudited most directly comparable gap measures. I will now turn the call over to our co-founder and CEO, Mr. Chao-Hui Chen. Please go ahead.

Okay, so I'm Jeff. There are similar contents as the earning presentation of the third quarter of year 2020. I will focus on page 6, page 9, page 11, page 12, and page 13. Let's move to the page 6, which shows navigation plus electronic toll path concept applied to the data connectivity service market. The white coverage circle on the left-hand side chart are reliable data connection areas, and the shadow areas are reliable data connections. To solve such network connection concerns, it is not enough to just construct hardware of network because network coverage requires time, resource, and investment. There are always shadow areas with poor network coverage, even if mobile network operators invest in increasing infrastructure such as space stations. The right-hand side chart shows our solution for such problems, while our clouding technology through our path and start platform, we can help change unreliable data connection to more reliable data connection, like installing navigation plus electronic toll path for traffic. Navigation can automatically identify congestion and actively choose the better route And the electronic toll path allows users to avoid long when switching among the mobile networks. An intelligent tray elevate data connectivity user experience. For example, if one operator has bottleneck of coverage during peak time or less connection signal for a certain location, we can use our navigation to improve the coverage by intelligently switching to another operator network and provide better service coverage to users. Our business enables users and business partners to select and connect to a high-quality mobile network regardless of location. Our PaaS and SaaS platform also works like an electronic toll pass. that enables faster and efficient operation management and the speed connection. By changing unreliable connection areas to more reliable connection areas, we can help elevate users' mobile data connectivity experience and improve our network efficiency, which also improves carrier return on return on investment, ROI. There are great potential of applications in areas such as mobile network operators, data connection service, education, industry games, remote working, industrial automation, and autonomous driving, et cetera, which require better network connection. Please turn to page nine. So let's take a look at our innovative cloud thing technology. So the second and first is the same like before. I just come from our new concept for hyper-connectivity facilitate data traffic marketplace for this part. The definition of hyper-connectivity basically includes level one, which is the evaluation of the connection quality of various wireless access networks. Level two, which is network selection and optimization based on the CloudSync technology. And level three, which is optimizing and acceleration of application routing. Such hyper-connectivity solution will make users' applications get better connection experience, which helps realize navigation plus electronic toll path. 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 routine, bandwidth and delay, and server location. We innovatively applied navigation plus electronic toll path concepts over the mobile network to our users and business partners in mobile data connectivity market, while our hyper-connectivity technology through PaaS and SaaS platform, we focus on establishing a stable, reliable, safe network connection with security for our business partner and users. uCloud Link's hyper-connectivity will aim to connect across all networks and technical systems, across various themes form factors, thin form factors, such as e-thin and soft thin, across various physical media, such as Wi-Fi and various radio technology, et cetera, by countries and by regions. We will achieve the goal by identification, monitoring, and optimization to further elevate user experience in the data connectivity market. Our cloud thin technology facilitates a valuable service to both users and carriers. As of December 31, 2020, we have 74 patents approved and 79 patents pending for approval globally. Let's move to page 11, which shows that our cloud-themed technologies through PaaS and SaaS platform could help mobile network operator, MMO, decrease their chain link. The quality of mobile data connectivity is the major factor which influence users switching mobile network operators. For example, according to China Academy of Information and Communication Technology, CAIST research, According to search, main reason for China users' mobile number possibility switch network operators are seeking better coverage, cheaper pricing, and better data package. According to the public information, certain mobile network operators in mainland China had net lost over 10 million mobile network subscribers during year 2020. As mentioned above, it always has shadow areas of unreliable connection and it cannot be fully solved by mobile network operators. We can elevate users' experience such as operators' unreliable connection and no connection area to more reliable connection service level, which help avoid the loss of such mobile network subscribers. With the CloudSync technology through our PaaS and SaaS platform, such as the recent launch of our smart multi-network reselection technology could facilitate mobile network operators improving network coverage and efficiency. elevate their service to users, which would help reduce trend late, bringing add-on value to carriers to meet users' requirements for better mobile data connection. By alliance with the mobile network operators and the cooperation with mobile handset manufacturers globally, we expect high growth potential in the data connectivity service market. Let's move to page 12, which is the most important page. It shows the progress of the fourth quarter of the year 2020 and updates the changes we've made. Despite 2020 being a challenging year, we demonstrate resilience and agility amidst uncertainty during the COVID-19 pandemic. accumulating the enforced quarter revenue of US$70 million, in line with our quarterly budget. In the Chinese market, the establishment of a strategic partnership with Shenzhen branch of China Unicom was an important development for our local business, which we expect will help us broaden our user base more quickly and efficiently. We further invest in Beijing Huaxiang Lianxin Technology CoLTD, which is one of the licensed mobile virtual network operators in China. As we look to proactively expand and enhance our PaaS and SaaS platform ecosystem, and join new industrial business partners in various aspects of IoT applications. We signed a milestone strategy cooperation framework agreement with the China Vehicle Interconnected Transport Capacity Technology, COLTD . In the Japanese market, we cooperate with numerous partners and mobile network operators such as NTT. to further develop local mobile broadband service and strengthen our existing relationships, which contribute to continuous growth momentum. In the U.S. and Europe market, we optimized our website to enhance our glaucoma brand e-commercial efforts as a part of our global expansion strategy. The recent launch of three global meat products represents our effort to offer more wide-ranging solutions in order to connect users worldwide. In the U.S., our global meat brand has a 100% uptake in its traffic to its local e-commercial sites. and set a new record high of man-resistant users in its APP during the first quarter of year 2020. We expect that the widespread vaccination will help cross-border activities and international tourism recover, creating more new growth opportunities in year 2021 with, for example, our uCloud Link 2.0 local business. Looking ahead, we continue to focus on our experience and one way we are developing it is through our navigation plus electronic toll pass service. Our mobile network via our hyper-connectivity technology through PaaS and SaaS platforms. We are also looking to capture additional business opportunities such as mobile network operators, mobile broadband, improving network coverage for carriers, and also elevating user experience. we are targeting opportunities related to network management, such as remote working and education and 5G opportunity for product and service. Our cloud-themed technology, such as multi-network reselection technology, will reduce the network closing time to milliseconds. It is an accelerator of 5G cloud application and ready for commercial use. We believe our technology is highly compatible with various application scenarios where high-quality connection is necessary. For example, Internet of Vehicle, autonomous driving, AR, VR, cargo and logistics, and cloud computing. With hyper-connectivity, we are dedicated to closing and connecting with all local networks and technical systems, improving the user experience by optimization of all layers including assess, routing, and application layers. We expect all other opportunities will further expand our PaaS and SaaS ecosystem. We continue to form alliance and strengthen cooperation with mobile network operators and mobile virtual operators and business partners globally to establish leading technology position of our PaaS and SaaS platform during the 5G cloud era. So let's turn to page 13. Recently, we announced recent low change for senior management through our pay our Chief R&D Officer assumed the role of the Chief R&D Officer and the Chief Supply Officer, replacing Zhong Qi Kuan in the latter role. These changes take effect on January 27, year 2021. The move to the restructure management roles was designed to better align senior leadership positions with the strategy development of our business as we continue to improve operational efficiency. It elevates supply chain management and delivering sustainable growth. I will now turn it over to our CFO, Yimeng Shi, who will go through the business of financial highlights section.

Thank you, Mr. Chen. Hello, everyone. Please turn to page 15 for our business highlights. The data for the third and fourth quarter of 2020 shows that impact from COVID-19 is becoming stable. The left-hand side of the slide shows daily active terminal DAT as of December 31st, 2020. You can see from the middle of the slide showing DAT breakdown by equalizing 1.0 and 2.0 data connectivity service. In addition, Our EuclidLink 2.0 local mobile data traffic is showing steady development and has been less impacted by COVID-19. Our EuclidLink 2.0 service around 67% of total DAT during the fourth quarter of 2020. Average daily data usage per terminal was 2.01 gigabytes in December 2020. For the full years of 2020, Average daily active terminal were around 246,000 representing an increase of 31.3% from around 187,000 in 2019. We expect the launch of vaccine in 2021 will benefit to our business. 5G and IoT are both a driver for EuclidLink 1.0 as well. Let's turn to page 16, which shows global diversification of our business. Mainland China's revenue as a percentage of total revenue continues to decrease as we diversify our global business. We continue to build our ecosystem with our business partners in various countries and regions. As of fourth quarter 2020, we have 95% of total revenue from outside mainland China. During the fourth quarter of 2020, Japan contributed to 47% of the total revenue. The increase of percentage of other countries is mainly because of the expansion of business and development in related markets such as the United States. After investment in MVNO Huaxiang Lianxin and cooperation with MVNO China Unicom Shenzhen. We believe China market will regain its growth. Looking ahead, we expect all these new opportunities such as Ukraine 2.0 business will further develop our business potential in 2021. We are also dedicated to our R&D with the further investment in sales and the marketing expansion capability to bring us sustainable growth in the future. Let's turn to page 18. I will go through our financial highlights of the fourth quarter 2020. For four years 2020 financial, please refer to our early release. Our global revenue decreased by 68.3% from $53.7 million in the three months ended December 31, 2019 to $17 million in the three months ended December 31, 2020. Revenue from service was $9 million, representing a decrease of 63.3% from $24.6 million for the same period of 2019. The decrease was primarily attributable to the decrease in revenue from international data connectivity service and the past source service to certain extent, mainly because of continuous and prolonged impact of pandemic of COVID-19. Service-related revenue as a percentage of the total revenue increased from 45.7% in the first quarter of 2019 to 52.9% during the first quarter of 2020. On the other hand, our 2.0 local data connectivity service were less impact by COVID-19. So far, we have started our 2.0 local data connectivity service in Japan, and we saw the continued development of our 2.0 local data connectivity service during 2020. We will further expand to other potential markets such as United States, Europe, and Asia, et cetera. Revenue from past and past service were $1.9 million, representing a decrease of 47.3% from $3.5 million in the same period last year. This decrease was primarily due to the negative impact COVID-19 on our partner that used our power source service to provide international data connectivity service. In the meantime, the demand of our local data connectivity service business partner are relatively steady. Revenue from sales product were $8.0 million, decreasing of 72.5%. from $29.1 million in the same period last year. This decrease was primarily due to the continuous negative impact of COVID-19 pandemic. Our total revenue decreased by 43.4% from $148.4 million in 2019 to $89.6 million in 2020. Revenue from service decreased by 49.3% from $91.1 million in 2019 to $46.2 million in 2020. Revenue from sales products decreased by 35.5% from $67.3 million in 2019 to $43.4 million in 2020. Let's now move to page 19. which show the revenue breakdown of our two business segments, namely revenue from service and sales products. During the fourth quarter of 2020, revenue from service and sales products accounted for 52.9% and 47.1% of total revenue, respectively. We can see that the percentage of revenue from service increased compared with 45.7% in the fourth quarter of 2019. We will continue to improve and optimize our revenue structure to facilitate our business growth and performance. Let's turn to page 20 for gross margins of our business. Our service gross margin, our overall gross margin, will increase to 41.2% and 31.4% in the first quarter of 2020 compared to 36.6% and 31.3% in third quarter of 2020, respectively. It was mainly because we improved efficiency of revenue cost structure during the first quarter of 2020. Also, increase of power source revenue, which has a higher gross margin contributed to the increase in service gross margin during the first quarter of 2020, compared with the third quarter of 2020. The pandemic impact our service gross margins and overall gross margin during the year 2020 to mitigate the prolonged impact and uncertainty of COVID-19. We reviewed comprehensively at our cost during the pandemic. We will continue to work on measure to optimize our cost structure going forward. Let us move to page 21, which shows the breakdown of operating expenses, excluding share based compensation, and others. Total operating expense decreased 14.5% from $16.6 million during the fourth quarter 2019 to $14.2 million during the fourth quarter of 2020. We took comprehensive mitigation measures such as risk and cost control, liquidity, and cash flow management to offset the negative impact from COVID-19. Total operating expense as a percentage of total revenue increased from 31% during the fourth quarter 2019 to 83% during the fourth quarter of 2020. This was mainly due to the decrease of overall revenue. We continue to dedicate to R&D with optimized efficiency in key project output to keep our leading position in the long run. Excluding share-based compensation and others, our R&D expenses accounted for 27% of overall operating expenses during the fourth quarter of 2020. G&A expense accounted for 46% of total operating expenses during the fourth quarter of 2020, which consists of some one-off expense, like certain professional service fee of around $1.4 million, and a write-down of account receivable, $0.8 million. Operating cash flow was negative $5.5 million during the first quarter of 2020 compared to positive $1.1 million during the fourth quarter of 2019. Our cash flow was normal with sufficient cash and cash equivalents as at December 31st, 2020. $0.4 million during the first quarter of 2020, compared to $0.9 million during the first quarter of 2019. Compared with the third quarter of 2020, increased CapEx during the first quarter of 2020 was mainly because certain license fee for software. CapEx as percentage of total revenue increased from 1.7% during the first quarter of 2019 to 2.2% during the first quarter of 2020. It was mainly due to the decrease of revenue. Let us move to page 23. Income during the fourth quarter of 2020 was negative $12.4 million compared to positive $2.1 million during the fourth quarter of 2019. Adjusted EBITDA was negative $7.9 million during the fourth quarter of 2020 compared to positive $2.9 million during the first quarter of 2019. Looking ahead, we are focused on improving and optimizing our revenue cost structure with operational efficiency, evaluating management systems, as well as standardized and systemizing processes. We believe all of our business opportunities and optimizing efficiency measures will facilitate the delivery of our 2021 guidance. With that, Let me conclude today's presentation. Thank you and we start our Q&A session.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. At any time your question has been addressed and you would like to withdraw your question, please press star then two. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. At this time, we will pause momentarily to assemble our roster. The first question comes from Harris Ken with Link Partners. Please go ahead. Good morning.

Can you hear me?

This is Ken from TagWords Financial Partners. Thank you for taking my questions. I have two questions. The first question is about the international expansion of the business. Can you provide more colors on the recent partnerships, including Nucor Wireless in the U.S., Shure Access, and the HKM to expand the Southeast Asian business? And my second question is regarding the future revenue mix. We would love to understand how you see the trend line for the future global geographic revenue mix.

Excuse me, the speaker location, kindly unmute when you're ready. Yes. Okay, please go ahead. I can see the activity. Go ahead.

Okay, good morning. This is Ken from Tagverse Financial Partners. Thank you for taking my question. I have two questions. The first question is about the international expansion of the business. Can you provide more colors on the recent partnership, including the new core values, shore access, and HKM, any matrix? Maybe you can provide like DAT or daily usage growth. My second question is regarding the future revenue mix. We would love to understand how you see the trend line for the future global geographic revenue mix. Thank you.

So yeah, I'm Jeff. So let me answer your first questions about our business expansion globally. So for Japan, so I think that in Japan, in most countries, because of pandemic, COVID-19. So 1.0 business, it doesn't matter our business and the partner business are impacted by COVID-19. But I think like in Japan, a lot of our local partners, they turn to local business. So you can see we still can see our business growth. So that's the one aspect. So like in Japan, so we are traditionally our 1.0 international business. We're majorly working with the airport rental, business travel, Wi-Fi rental. And now for local business, we are now working with a local partner, like a mobile watch operator. mobile network operator and mobile watch operator together. So you can see our local business is close. We believe when COVID-19 recovery in the future, we will, in Japan, we will recover for international business and local business. So that's for Japanese. And for U.S., let's go to U.S. It's similar. U.S. now we move to the local business with our partner. And also, so we already recently, we just announced we're working with local rural area operators and some channels together for local business, like for education, remote education, you know, access, for radio access, similar solutions. So we can see the growth both in the online side and the offline side. So that's in U.S. In Southeast Asia, it's similar like in Indonesia. We expand our business with local partners for local business. And Malaysia is the same. We are our partner and ourselves tend to the local business. And we are more working with the local partner like operator and mobile watch operator. And also, in Europe, it's a similar situation. So most of our business now is turned to the local business. Also, we are not prepared for the international business, no business. We believe at the end of this year and after COVID-19, so from Q3, international business will have a gradual recovery. So next year will be much more recovery. So this year from quarter three, we start with recovery. That's for business in our traditional part. Also, we have new business like IOT business. We start in China and in Japan. We start the IOT business with the local partners as well. But major is focused on the local business, like with the local mobile broadband and the local like a vehicle company, this part of business.

For the second question regarding the revenue mixture, I answered this second question. To break down the revenues mixtures in the first quarter of 2020, the total revenue was $17 million. Revenue from service was $9.0 million. million U.S. dollar, including this 9.0 million U.S. dollars, 5.8 million U.S. dollar from international data connectivity service, and 1.2 million U.S. dollar from local data connectivity service. And also we have had 1.9 million U.S. dollars from the PathSource platform service. So for the whole years And the total, the whole year's revenues was 89.6 million US dollars, of which 46.2 million US dollars from service. Within this 46.2 million US dollars, the 30.8 million US dollar revenue came from international data-connected service. $9.2 million from local data community service, and also $5.7 million from the past SaaS platform service. Also, we generated $43.4 million for sales of products.

Okay. Hi, Tedros. This is Bob Shen. I will add some points for your two questions. First one, regarding your first question, it is our international expansion. Yes, you are right. We are an international company, and we are dedicated to diversifying our revenue with our global business partners. So as we did before, in order to elevate our local service brand, we are enhancing our e-commerce efforts in strategic key markets such as United States, Europe, et cetera. And we did a lot of efforts such as elevating and optimizing our websites and also streamlining our sales function and teams in the local markets in order to continue to improve the overall user experience and overall satisfaction globally. For the Southeast Asia, yeah, you are right. You named some business partners we already had. We actually strengthened our cooperation and alliance with these business partners, and also we are dedicated to cooperate with more new business partners. If we have any new cooperation or alliance, we will release in our official IR news. Regarding your second question, yes, as our CFO mentioned, yes, we will have this diversification in our global expansion. But I want to mention that you can see from the chart that during the first quarter of 2020, our Made in China revenue takes around 5% of the overall revenue, which is the same with our third quarter of 2020. But with our cooperation, such as our cooperation with China Unicom Shenzhen, actually, we are exploring more new business models and cooperations with ,, and mobile phone manufacturers, and we want to put all business partners, such as M&Os and mobile phone manufacturers, all to our ecosystem globally. Okay, so with this strategic alliance and cooperation in mainland China, we expect that this year, 2021, our China revenue will regain growth. Okay, thank you.

Thank you.

As there are no further questions now, I'd like to turn the call back over to management for closing remarks.

Thank you once again for joining us today. If you have any further questions, please feel free to contact UCLoudink's Investor Relations through the contact information provided on our website or TPG investor relations.

The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.