uCloudlink Group Inc.

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to the UCloud Link Group, Inc. First Quarter 2021 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 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 first quarter 2021 earnings call today. The earnings release is now available on our IR website at ir.ucloudink.com as well as via Newswire services. Here I give a brief introduction to our UCloudink team. Zhi Ping Peng is our co-founder and chairman of 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 1, 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 2 and Section 3. 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 filing 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 uCloud Link's Earnings Plus release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. uCloud Link's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to our co-founder and CEO, Mr. Chao-Hui Chen. Please go ahead.

Thank you, Bob. There are similar contents as the earning presentation of the fourth quarter of year 2020. I will focus on page 8, 9, and our recent development on page 14. Let's move to page 8. The definition of hyper-connectivity basically includes level 1, which is the Evaluation of connection quality of various wireless access network include Wi-Fi 3G, 4G, or 5G. Level two, which is network selection and optimization based on the cloud scene technology. And level three, which is optimizing and acceleration of application routing. 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 routing, bandwidth and delay, and server location. We innovatively applied navigation plus electronic toll path concept over wireless network to our users and business partners in mobile data connectivity market. While our hyper-connectivity technologies through PaaS and SaaS platform, we focus on establishing a stable, reliable, safe network connection with security for our business partners and users. U-Clouding hyper-connectivity would aim to connect cross-network and technology systems, cross various themes from factors such as e-themes and software themes, cross various physical boundaries such as Wi-Fi and various radio technologies, et cetera, by countries and regions. We will achieve the goal by identification, monitoring, and optimization to further elevate user experience in the data connectivity market. Hyper-connectivity technology, such as millisecond multi-network reselection technology, will provide user application with better connection experience, which helps Realized navigation plus electronic toll path hyper-connectivity solution would guarantee data connectivity and network security. We are a high tech data connectivity service solution company dedicated to closing and connecting with all global networks and technology systems. improving the user experience by optimization of all layers including assess, routine, and application layers. We will also officially release our new hyper-connectivity product and service in the near future. Let's move to page nine. Our innovative hyper-connectivity solution We provide industries and users with robust network connection, that means reliable, speed, and safe through PaaS and SaaS platforms. We focus on establishing stable, reliable, safe, and efficient network connections for our business partners, operators, and users, which is a fundamental requirement of wireless network connection. Our cloud-synced technology, such as smart multi-network reselection, has developed to the hyper-connectivity technology stage, which facilitates the realization of navigation, plus electronic toll paths across various networks. For industrial applications, Hyper-connectivity solution is highly compatible with industries requiring high-quality data connectivity, such as cargoes and logistics, internet of vehicles, autonomous driving, AR, VR, 5G cloud computing, chains and yards, emergency response, power monitoring, etc. Apart from the telecom industry, we will have more business opportunities in more industries. For users, hyper-connectivity solutions can elevate data connectivity users' experience such as education, remote working, video and entertainment, home broadband. mobile broadband indoor coverage and reliable fixed broadband Wi-Fi coverage, etc. Our innovative hyper-connectivity technology guarantees data connectivity and network security for various industries and users. Let's move to page 14, which is the most important page. which shows the progress of the first quarter of year 2021 and updates the change we made. Despite the lingering impact from the COVID-19 pandemic, we record an uplifted revenue of US dollar, 17.7 million US dollar. During the first quarter of year 2021, versus the fourth quarter of the year 2020. In line with our quarterly budget, the launch of the 5G-related products and services, multi-network mini-second reselection technology, and the hyper-connectivity solutions allows navigation plus electronic whole paths to elevate user experience with better data connection and facilitate us to enter and expand to new industries that require high quality data connectivity such as education, remote working, video, Internet of Week, emergency response, electronic power monitoring, and surveillance industries. We expect that the technology would help us acquire more users, establish cooperation with mobile network operators and mobile virtual network operators, and expand the SaaS ecosystem. In the Chinese market, we make progress through hyper-connectivity solutions with mobile and fixed broadband business. under various application scenarios, such as home broadband, and receive positive feedback of our 4G, 5G, millisecond multi-network reselection technology. In Japanese market, we form new alliance with one of the mobile network operators and plan to cooperate with business partners in education industry, which we believe will contribute to our continued growth momentum. In the U.S. market, we have faster growth and recall a high sales of LocalMe mobile Wi-Fi hotspot via Amazon for the past 12 months ending in March of year 2021. After winning the patent litigation and excluding patent-related interference, we will apply all our innovative technology in the United States, such as 5G mini-second network reselection and hyper-connectivity solution. In Europe, we invest in IQ-SIM, the leading provider of open virtual SIM vSIM platform, and vSIM-enabled mobile device based in France. which is an important component of our global investment. We will also officially release our hyper-connectivity product and service in the near future and are proactive exploring opportunities in new industries such as Internet of Week and education. We expect that widespread vaccination will continue to increase recovery of cross-border activities and international tourism, which we expect will benefit our 1.0 international business. Leveraging our innovative technologies, we will continuously develop our 2.0 local business and various IoT application scenarios with new industries which require high-quality data connectivity. I will now turn it over to our CFO, Shi Yimeng, who will go through the business and financial highlight section.

Thank you, Mr. Chen. Hello, everyone. Let us turn to page 16 for our business highlight. The data for the first quarter of the 2021 shows that the impact from COVID-19 is becoming stable. The left-hand side of the slide shows daily active terminal DAT as of March 31st, 2021. Euclidean 2.0 service accounted for around 66% of the total DAT during the first quarter of 2021. per terminal was 1.98 gigabyte in March of 2021. Let's turn to H17, which shows global diversification of our vendors. Mainland China's revenue as a percentage of total revenue increased to 6% during the first quarter of 2021, compared to 5% during the fourth quarter of 2020. and we had 94% of total revenue from outside mainland China. During the first quarter of 2021, Japan contributed to 57% of total revenue and continued to be the single largest market for our business. For other countries' revenue, the U.S. market had the largest contribution to our business. During the first quarter of 2020, we had 19% of total revenue came in from mainland China, 53% of total revenue came from Japan, and 28% of total revenue came in from other countries and regions. Let's turn to page 19. I will go through our financial highlights of the first quarter of 2021. Service-related revenue as a percentage of total revenue decreased from 15% in the first quarter of 2020 to 47.4% during the first quarter of 2021. The development of a local data connectivity service through our PaaS and SaaS platform contributed to the demand of the sales of products. Revenue from PaaS and SaaS service increased 18.3% from $1.9 million in the first quarter of 2020 to $2.3 million in the first quarter of 2021. This increase was primarily due to the increase of business partners that used a power source service to provide local data connectivity service. Revenue from power source as percentage to the revenue increased to 13% during the first quarter of 2021. Let us move to page 20, which shows revenue breakdown of two business segments, namely revenue from service and sales products. During the first quarter of 2021, revenue from service and sales products accounted for 47.4% and 52.6% of total revenue respectively. Our total revenue decreased by 47.2% from $33.5 million in the three months ended March 31, 2020 to $17.7 million in the three months ended March 31, 2021. Revenue from service was $8.4 million, representing a decrease of 51.9% from $17.4 million for the same period of 2020. This decrease was primarily attributable to the decrease in revenue from international and local data connectivity service to certain extent. mainly because of the continuous and prolonged impact of COVID-19 pandemic. Our target revenue increased 3.9% compared to $17 million in the first quarter of 2020. This up to page 21 for gross margin of our business. Our service gross margin and overall gross margin were decreased to 35.9% and 31.3% in the first quarter of 2021, compared to 51.1% and 35.3% in the first quarter of 2020, respectively. The COVID-19 pandemic impact our service cost margin during the first quarter of 2021, and our overall cost margin was relatively stable during the past three quarters. Let's move to page 22. which shows a breakdown of operating expenses. Excluding share-based compensation and others, excluding share-based compensation, operating expenses are the percentage of total revenue decreased from 83% to 71% in the first quarter of 2021 compared with the first quarter of 2020. Also, R&D expenses are the percentage of total operating expenses increased to 29% during the first quarter of 2021, compared to 27% during the first quarter of 2020. G&A expenses accounted for 47% of total operating expenses, which consists of expenses like professional service charge. Let's turn to page 23. Operating cash flow was negative $6.7 million during the first quarter of 2021, compared to positive $6.7 million during the first quarter of 2020. Our cash flow was normal with sufficient cash and a cash equivalent as of March 31, 2021. Our CapEx was $0.1 million during the first quarter of 2021 compared to $1.0 million during the first quarter of 2020. CapEx's percentage total revenue decreased from 3% during the first quarter of 2020 to 0.6% during the first quarter of 2021. Let's now move to page 24. Late income during the first quarter of 2021 was negative $15.4 million compared to positive $0.2 million during the first quarter of 2020. Adjusted EBITDA was negative $6.7 million during the first quarter of 2021 compared to positive $1 million during the first quarter of 2020. With that, let me conclude today's presentations. Thank you, and we start our Q&A session.

Yes, thank you. We will now begin the question and answer session, as mentioned. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. 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 the roster. And the first question comes from Vivian Zhang with Diamond Equity Research.

Hello. Hi.

Hello, this is Vivian from Diamond Equity Research. Thank you, management, for taking my questions. So we have seen COVID-19 surge survey hitting globally, especially in India, Japan, and Southeast Asia since April. So my first question is, how will this affect your overseas business? Will the company adjust your international strategy and growth expectations for the second quarter? Do you provide any guidance on revenue or net income? My second question is, could you please give us more color about your 5G-related technology and business and how this will contribute to your future growth when overseas traveling in Syria and downtown with too many restrictions? Thank you.

The first question is regarding the impact of COVID-19. Yes, as we know, it's only released and we have been impacted by the COVID-19 so far. And so we expect that the implications of COVID-19 will continue. to the years, the remaining years. Our other look, we expect more came from the local connectivity service, local mobile providers demand. The growth as a market mainly came from the Japanese market, which is the biggest market the drivers for growth in the first quarter of this year, and we believe the main drivers growth for the second quarter came from the Japanese market as well. For the second 5G related, we have our CEO, Mr. Chen, to answer.

I'm Jeff. Let me answer your 5G questions. Because we understand 5G radio frequency is higher than 4G. So that means the same coverage like 4G, 5G needs around a four-time space station number. That's a huge investment. So we understand outdoor coverage maybe is good, but most challenges indoor coverage because 5G in some distance is going to build a mobile broadband to replace the fixed broadband. So indoor, how to improve the indoor coverage becomes a challenge. So that's a bigger question. Our hyper-connectivity technology will improve this part. So for example, like highway, one then is easy to be blocked. And there may be another carrier in this region that have coverage. So different carrier. they have different coverage. So in one location, with the multi-network, we will improve the indoor coverage, plus the Wi-Fi. So Wi-Fi, 5G, 4G, any available network indoor, we will reselection. and evaluate the network, that means we can enable the mobile broadband more popular indoor and replace the fixed broadband. That will happen. That means we will accelerate the 5G coverage and experience, especially indoor. For the initial stage, 5G number, base station number is not so many. The coverage is poor. If we can We can let cross multi-carrier network for 5G coverage. We can improve the whole country's 5G coverage. That means we can acceleration the 5G become popular. Currently, I think 5G most typical application is enable mobile cloud happen. The base needs good courage, then this will happen. So that's the fourth part. And the second part is 5G looming globally. So we understand 5G looming, not yet really start. For 4G, the looming, we have sort of problem. And 5G, we can understand is we are more challenging. So with our technology, we will change more easily to let 5G normally happen. For example, any device or handset embed our hyper-connectivity solution plug-in inside. That means we can let this device use any word of the 5G network without need, you know, really complicated looming bargain. We just acquire local SIM card and wire our application. The user and device can use the 5G network worldwide. We create a new way for 5G looming, simplified 5G looming. Also, by the way, we can improve 5G looming time latency. So we understand latency is a key point for different ways of 5G, not only just with 4G. Time latency is very important. That enables 5G to apply to cloud and AR, VR. You can imagine when you... use the 5G, you know, roaming outside and never will return to your country, then go to internet, the latency will become longer and your AR, VR will become a problem again. Under this case, we are aware of the advantage to have 5G not only in domestic, but also for the international application, especially for the time latency. We are a unique solution. Fundamentally, we believe we are an accelerator of 5G that comes at least one year with our technology in the industry. So that's the product. And we already launched our 5G MiFi and embed the handset with our hyper-connectivity solution. And we will announce our hyper-connectivity solution in the 5G MiFi in the next month. And we have this solution announced, official announced.

Hi, Vivian. This is Bob Shen. I think let me add some color to your second question, because as we mentioned, we continue to keep investment in our R&D, especially like the 5G-related products, as our CEO just mentioned, like 5G mobile Wi-Fi or like 5G customer-premised equipment, CPEs. and also together with our technologies such as 5G millisecond multi-network selection technology. And we believe that all these devices and all these innovative technology will facilitate us to establish our leading technological position of our PaaS and SaaS platform in the early stage of 5G. Thank you.

And that makes sense. Thank you, Bob. Thank you, Chen.

Thank you. And the next question comes from Lisa Thompson with Zacks Investment.

Good evening. So I have a number of questions about the quarter. First off, I see that you had a very good improvement in product sales. and the gross margin looks like it might have been a record high. What is causing that? Is that the first time you're shipping 5G devices? What happened in the quarter?

The gross margins in the first quarter is high. The overall gross margin we disclosed is stable in the past three months. Yes, the products we sell to the Japanese market. So that's the pricing, and the pricing for selling to the Japanese market is good. And so we have a good state of gross margins related to the product selling to Japan. For service gross margins, it's fluctuated with the mixtures of the service category, and depending on the proportions, how much is the sales service. came from the local connected service, how much is the service came from the PaaS and SaaS, and etc. The PaaS SaaS service is the highest across the margins per second. So when the more PaaS SaaS service booking in account, then this will give us improvement on survey score margins in the futures we expect. And so when the international tourist is recovered, when the vaccinations have made progress across countries, the international roaming service is a higher sports margin as well. So our service margins will be improved when we have more service came from PASA or came from the international roaming service. Hello?

Okay, yes.

Yeah, I think, Lisa, also, yeah, apart from Japanese market, as our CFO mentioned, we also are enhancing our e-commerce efforts in other strategic key markets, with high growth potential, such as the United States and Europe. And one example, our CEO just mentioned that we record a high sale in the United States. And we're also optimizing, improving our website, streamlining our sales function in the local market. to continuously improve the user experience and overall satisfaction. That's basically what we do.

So the 1.3 million incremental in product is that U.S. and Japan? Where did that come from? 5G or where is it?

Yeah, I want to answer your question because 5G is a new product just newly launched in this quarter. So the volume is very small. So it hasn't shown a big contribution to our margin. But we believe in the following quarter, following the 5G revenue increase, we believe the margin will be higher than 4G. Of course, that's the... Because 5G, no matter the data or the device, is more expensive than 4G. And we believe in the following quarter, once the 5G revenue share percentage increase, revenue will be better. That's one reason. Another reason, because our past and past, we have algorithm of the SIM card and the traffic package, you know, you know, we have efficient. So how to more efficient use the SIM card and the data package for sharing. There's another way we can increase our margin. So we believe our technology and the product in 5G and the algorithm will help us to increase the margin in the future.

Okay, that helps. I was wondering if the 5G was brand new this quarter. Okay. What's your feeling on services? It was down again sequentially. Is that going to bottom anytime soon? Are we going to see a sequential improvement there?

Sorry, can you repeat your question?

Right.

Services revenues was down again sequentially. Has that bottomed yet? Do you expect that to improve next quarter? or is it going to decrease again?

Yeah, the service revenue is, yeah, it's struggling, you know, this lingering COVID-19 impact. But the positive things is our past source, service revenue, is increasing, has been increasing, that's consistent with the business models in local markets. So we provide a platform to our local business partners who use our platform, but they purchase local data from local carriers. They don't purchase local data from Eucalink. So we only have some revenue sharing charged to our local business partners, not something times 10% around their service revenues. But the gross margin is good. On the other side is our service revenue is not increased so much as our business partners. So we expect when we, in the following quarters, I think the service revenue will a little bit slow in increasing. We have delivered more products to our business partners and more business partners connected to our thought platform. So that's what we believe we're improving our revenues mixtures in the future.

So do you think Q2 service revenue will be over $8.4 million or not?

Yeah, it's something similar. Yeah, something similar. But the drive-in maybe more came from we're selling more product to our business partners.

Okay. Okay. And as far as operating expenses, now for the last two quarters, you've had between $5 and $6 million in stock-based compensation. Should we expect that every quarter? Sure.

The second quarter's shares conversations I think is smaller than the first quarter's. It's not a big chunk like the first quarter's amount. But we do have spreading share-based conversation in the following quarters.

So what should I put in for that? You know, $4 million a quarter or what do you expect going forward since that's, you know, something under your control?

Yeah, I can share this information to use after this conference call. Is that okay?

Sure. Okay. All right. And then I guess my last question is, you originally thought this year you could do $107 to $130 million for the year. Are you still comfortable with that, or should we ignore those numbers?

Okay.

So far, as we disclose our guidance for the second quarters, it's $18 million to $19 million for the second quarters. And we still keep this guidance for the whole years. The range is $1 or $7 million to $130 million. We will review that projection for the whole year on a quarterly basis. So we will adjust it if we have a change in the next quarter or something.

Okay, great. Thank you. I just wanted to check on that. Thank you. Those are all my questions.

I can answer your question regarding the SPC for taking quarters. It amounts roughly to $1.8 million for the taking quarters SPC.

Okay, and should I throw that in for Q3 and Q4 also? Or we don't know?

I will answer this Q3, Q4. We'll answer that to you later. It's okay.

Okay, great. Thank you so much.

Thank you. Thank you. And once again, please press star, then 1 if you would like to ask a question. And the next question comes from Ken Gao with Tigris Financial Partners.

Good morning.

Hello. Yeah, this is Ken Gao from Tigris Financial Partners. I think most of my questions have been answered. So, two additional questions. So, Ken, give us any updates on the strategic cooperation with China Vehicle And next question will be like, if you can bring more colors on the new strategic alliance with Japan M&O in education industry. That's it.

Chinese company of vehicle, Chinese vehicle company is just under the financial reorganization process. So we are waiting the finisher of this process. and we will start our delivery of our contracts with them. Second question is about the Japanese market, right? What about Japanese? So in Japanese market, we have cooperation with first tier one telecom operators, and we have a contract with them. And respectively, we will have a delivery plan for them starting from Q3 for education pad products.

Yeah, with our hyper-connectivity. And we also are operating with NTT for mobile Wi-Fi and handset.

Thank you.

Thank you. And the next question comes from Hunter Diamond with Diamond Equity Research.

Hi, good evening. So I just have one more question. I think a lot of it was answered by the previous analysts and investors. Can you discuss the Internet of Vehicles and education? Anything you can tell us on what those products might be, who the competitors would be in those sectors, or is it still too early to kind of give any additional guidance on that? Thank you.

Yeah, so, you know, for the, you know, because, you know, we provide, you know, high, you know, reliable connectivity, we call, we apply, you know, high connectivity, you know, solution for IoT industry. So, this is quite unique, you know, because, you know, most like a vehicle, you know, Autopilot in the power monitoring industry, so they need a very reliable connection. In this industry, and also I just mentioned for the emergency response situation, So for all these industries, we get a very positive feedback and we have more and more flame contracts we sign with them in the near future. So you can see a lot of cooperation will happen in recent time. So that's the positive part. We believe in the future, like 5G for industry, 5G for autopilot is also a big opportunity for us. Another industry requires high reliable connectivity. We call it remote working and education because our solution can... Not only just made Wi-Fi more reliable, when your Wi-Fi become proven or become, you know, interrupt, so our 4G, 5G will automatically backup. And also, this 5G, 4G is close all available network, not only just one carrier. So all the carriers available, we will support your Wi-Fi together, let the Wi-Fi become more robust so we can enable your device such as a tablet, your laptop during the remote working and education period become more reliable. And that's a huge need for this industry. We already approached some industrial leading solution provider. So they do like our new solution. So we can provide the best connection. And that mobile Wi-Fi, this unreliable connection becomes reliable, especially during your Wi-Fi loader and your device not in the same room. That becomes harder. And our solution can solve this problem perfectly. So that's why we sell not just traffic, we sell a guarantee, a quality connection for this industry. So we become more and more popular in this industry. So for this solution, we haven't seen competitors yet. So we're leading this technology. We will launch this hyper-connectivity solution in the near future and just in next month also. So under this solution, we have first applied in our 5G, 4G, and all our solutions. And these were including the level one, In the physical layer, we will let a device enable the device with our hyper-connectivity application. We let device charge all available network, no matter Wi-Fi, 4G, 5G, and we will select the best one, and then the application working first. And the second, we will evaluation. the quality of network, then reselection, use our millisecond reselection to choose the best one or to support your connection and your application. And finally, we will also improve the routing acceleration because we understand that your tablet application and between your tablet application or your handset application, to the server so that we can find the best routing, acceleration of the IP routing. For level one, level two, level three, we can make your connection become fast, reliable, and become more robust. So that's quite a unique solution. We can say from the fourth generation we call So we can see that network, but time needs around 20 to 30 seconds. Then last year we launched our mini-second enabled device switch between different available networks, just mini-second. And now in middle of this year we will launch our hyper-connectivity solution that not only physical layer, and the second layer also is the routing layer to make your application more reliable and more fast and security. So that's quite a unique solution. So we create a new kind of solution creator.

Great. Thank you very much for the additional details. Congratulations on the quarter.

Yeah, thank you.

Thank you. And once again, please press star then 1 if you would like to ask a question. All right. As there are no questions at the present time, this concludes our question and answer session. I would like to turn the conference back over to management for any closing comments.

Thank you once again for joining us today. If you have any further questions, please feel free to contact UCLinx Investor Relations through the contact information provided on our website.