uCloudlink Group Inc.

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to UCloudLink Group, Inc. second 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 now like to turn the conference 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 second 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. I will give a brief introduction to our EucalLink 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. Yi Men Shi is our chief financial officer. Zhu Tang is our vice president of marketing and sales. 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. Our CFO, Yimeng Shi, will then discuss our operation highlights and financial results as presented in Sections 2 and 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 press 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. I will for the company overview section. There are similar contents as the earning presentation of the first quarter of year 2021. I will focus on our technology update and recent development. Let's move to the page six, which shows the coverage and congestion are two major challenges of various network phase. On the left-hand side, the wide coverage circle on the left-hand side chart are reliable data connection areas, and the shadow areas, that's weak signal. are unreliable data connection. Even for good coverage, it is easy to have a network congestion during the peak times. On the right-hand side, you can see Wi-Fi and mobile signals are severely weakened when penetrating walls. This is often the cause of indoor pool coverage. Operators could not guarantee good indoor coverage, why a user has strong demand of high-quality indoor data connection. To improve unbalanced indoor and outdoor coverage for Wi-Fi and mobile data connection, operators need very high CapEx and could not solve all data connection problems. Through our technology, we can help operators solve the two major challenges which bring great opportunities. Let us move to page 7, which shows our solution for such problems. While our cloud-themed technology through our PaaS and SaaS platform on the HyperCon solution, we can help change unreliable data connection to more reliable data connection. similar to installing navigation plus electronic toll path for traffic. Navigation can automatically identify network congestion and actively choose a better route. An electronic toll path allows users to avoid long queues when switching between the mobile networks intelligently, and awaiting data connectivity user experience. We are able to provide seamless coverage for end users, solve standpoints such as roaming, coverage, and congestion. We improve our network efficiency and access to all available networks worldwide. By bringing reliable connections to formerly unreliable connection areas, we have operators elevate users' mobile broadband and fixed broadband, such as home broadband data connectivity experience, lowering chain rate, and improving overall network efficiency. Let us move to page nine. Our CloudSIM technology has been developed to the hyper-comm stage. The definition of hyper-connectivity basically includes Level 1, which is the evaluation of the connection quality of various wireless access networks, including Wi-Fi and all mobile operators. Level 2, which is the network selection and optimization based on the CloudSIM technology. and a level three, which is optimizing and acceleration of application routing. After one year development, HyperCon products are highly compatible with fast development of 2.0 business, TMI, mobile broadband and fixed broadband, education, autopilot, et cetera. Our hyper-connectivity solution would redefine the mobile network and Wi-Fi user experience and facilitate data traffic marketplace. Users' data connectivity experience is affected by various factors such as signal interference and routing, bandwidth and delay, and server location. uCloud's hyper-connectivity would aim to connect cross-networks and technology systems various themes form factors such as e-themes and software themes or physical themes, cross various physical boundaries such as Wi-Fi, various radio technology, etc. By countries and regions, we plan to achieve the global by identification, monitoring, and optimizing to further elevate user experience in a data connectivity market. In June year 2021, we unveiled our new Hypercom technology and products, such as Lumen, the world's first Hypercom 5G mobile Wi-Fi, and Genie, a Hypercom tablet device. In an official virtual product conference during the Mobile World Congress Barcelona, MWC Barcelona, Going forward, we will launch more innovative products and services. Let's move to page 13. U-Clouding 1.0 has a strong track record of high growth margins and profitability with ongoing growth potential. According to the publication of the World Tourism Organization, UNWTO, in March year 2021. International tourism is expected to recover gradually during the year 2021 compared with the year 2020. We expect that the recovery of international tourism will benefit our 1.0 business. We intelligently repackaging to minimize data traffic unicode. Data packages of single operator all across the mobile network operators, mobile virtual operators has a large price difference and we repackage from wholesale to repair. We have the largest SIM card pool and we acquire data package at the wholesale price at the local price. for operators from operators to partners. Further, we provide high-quality data connection service and elevate user experience of users and business partners through multi-network reselection and combination, which shows our difference. uClouding 1.0 business monetization model includes retailing to see, rental or selling to end-user, wholesale 2B for business partners and our PaaS and SaaS service, such as CRM bidding management, device selling, and rental management, et cetera. For wholesale 2B, we can be reseller or provide commission service to our business partners. We allow our business partners to share data traffic pool through our PaaS and SaaS platform and charge commission fees. We believe while the COVID-19 pandemic has negatively impacted our 1.0 business, it has also created opportunities for potential growth, including increased demand for mobile data such as traveling, tracking, resignation, digital passport, and the COVID-19 testing report. Also, we see fewer competitors in the market after COVID-19 pandemic. We expect recovery of the international traveler will benefit to our 1.0 business, such as the U.S. market during the second quarter of year 2021. We expect our 1.0 business will not just be a simple recovery, but growth with new development with innovative technology and products. Let's move to page 14. UCloud in two point of business become a new driver of growth during year 2020. Our two point of business shows greater resilience with proven high demand and growth potential during the pandemic and experience less U-Clouding 2.0 business monetization model is similar to that of U-Clouding 1.0 business with the massively potential local user base. We have operators improve service and solve data connection problems through our PaaS and SaaS platforms. During the COVID-19 pandemic, for example, remote work and learning also require high-quality, reliable data connection services. By alliance with more mobile network operators and mobile handset manufacturers, we should be able to embed more local needs inside GMI in smartphones, such as 5G smartphones. 5G also brings us great opportunities. We would accelerate the arrival of the 5G cloud era. and applications such as AR, VR, cloud computing, and autopilot, etc. The high quality of 5G application data connection will also bring users high requirements and awareness of data connectivity quality. Further, we make progress through hyper-connectivity solutions with mobile and fixed broadband under various application scenarios such as home broadband. We also intend to proactively explore opportunities in new industries and various IoT application scenarios. Despite the continued impact of the COVID-19 pandemic over the global economy, we demonstrate commercial resilience and business vitality in the second quarter of year 2021, generating revenue of U.S. dollar 19.2 million, above the top end of our guidance range, with the revenue mainly coming from the Japan-U.S. and mainland China market. In the Japanese market, We successfully launched and started to ship a new tablet targeted at the education industry. The new tablet comes equipped with CloudSIM technology enabling it to seamlessly connect to better available mobile and fixed orbit at all times. In the U.S. market, we continue to extend and deepen cooperation with online and offline distributors and record a new 12-month high for sales via Amazon in the quarter. We also saw a significant year-over-year increase in order demand for international data connectivity service in the U.S. market compared with the second quarter of year 2020. In the Chinese market, we steadily increase our number of mobile broadband and fixed broadband-related product installations through cooperation with major mobile network operators in Shenzhen. These installations serve to elevate user experience and scale up our potential user base in areas such as home broadband services, giving us a good reference case for further business development with the mobile network operators across other cities in China. Thank you, everyone. Let us turn to page four of the earning presentation, which shows our vision and vision. We have redefined the mobile data connectivity experiences allowing users to gain access to mobile data traffic allowance shared by network operators on our marketplace. Our technology facilitates carriers and users' single operator entry point to access all available local and global networks and would enable people to use mobile data traffic freely anytime, anywhere, like We expect to eventually cover all available networks from operators globally with the recovery of COVID-19 pandemic and development of 2.0 business and eventually build a full global marketplace of mobile data traffic. We believe that from connectivity to better connectivity, is the trend of the information era, and we would enable all business partners and users to have a better data connectivity. Our innovative technology facilitates us to establish a leading technology position of our PaaS and SaaS platform in the early stage of 5G, and we dedicate to promoting better connection to everyone. I will now turn it over to our CFO, Yi-Meng Shi, who will go through the business and financial highlight section.

Thank you, Mr. Chen. Hello, everyone. Let's start from page 16 for our business timeline. The data for the second quarter of 2021 shows that the impact from COVID-19 is charming. The left-hand side of the slide shows daily active terminals as of June 30, 2021. Equally 2.0 surveys of 24 a month, around 68% of total DAT during the second quarter of 2021. Average daily data usage per terminal was 1.9 gigabytes in June 2021. Let's turn to page 17. which show global diversification of our business. Mainland China's revenue as a percentage of total revenue increased to 8% during the second quarter of 2021, compared to 6% during the first quarter of 2021. And we had 92% of total revenue from outside mainland China. During the second quarter of 2021, Japan contributed to 53% of total revenue, and it continues to be the single largest market for our donors. For all the countries' revenue, the U.S. market has the largest contribution to our donors. In the second quarter of 2020, we had 80% of total revenue coming from mainland China, 56% of total revenue came from Japan, and 36% total revenue came from other countries in the region. Let's turn to page 19. I will go through our financial highlights of the second quarter of 2021. Service-related revenue as a percentage of total revenue increased from 46.9% in the second quarter of 2020 to 48.5% during the second quarter of 2021. Revenue from parts and the soft service increased 589.5% from half a million US dollars in the second quarter of 2020 to $3.2 million in the second quarter of 2021. The increase was primarily due to the increase of business partners that use our PaaSOS service to provide local data connectivity service. Revenue from PaaSOS as a percentage of total revenue also increased to 16.4% during the second quarter of 2021, compared with 12.9% during its first quarter of 2021. Let's also move to page 20, which shows the revenue breakdown of two business segments, namely revenue from service and sales products. During the second quarter of 2021, revenue from service and sales products accounted for 49.5% and 51.5% of total revenue, respectively. Our total revenue decreased by 8.5 percent from 21 million U.S. dollars in the second quarter 2020 to 19.2 million U.S. dollars in the second quarter 2021. Revenue from service was 9.3 million U.S. dollars representing a decrease of 5.5 percent from 9.9 million U.S. dollars within the period of 2020. This decrease was primarily due to the lower revenue. from international and the local data connectivity service partially offset by an increase in revenue from PATH and SaaS service. Our total revenue increased 8.7 percent compared to 17.7 million US dollars in the first quarter of 2021. Let's turn to page 21 for gross margin of our business. Our service gross margin increased to 45.4 percent And our overall gross margin increased to 28.1% in the second quarter of 2021, compared to 35.4% and 26.2% during the second quarter of 2020, respectively. The increase of service gross margin during the second quarter of 2021 is primarily due to the increase of our past sales revenue, which is a higher gross margin over the other business revenues. Let us move to page 22, which shows the breakdown of our operating expenses, excluding share-based compensation and others. Excluding share-based compensation, operating expenses as a percentage of total revenue decreased from 71 percent during the first quarter of 2020 to 61 percent during the second quarter of 2021, and we will continue to improve our operation efficiency of our Next, I'll turn to page 23. Operating cash flow was negative 6.1 percent of millions during the second quarter of 2021 compared to negative 2.8 million US dollars during the second quarter of 2020. Our cash flow was normal with sufficient cash and cash equipment as of June 30, 2021. Our capex was 0.3 million US dollars during the second quarter of 2021. compared to $22 million during the second quarter of 2020. CapEx, or the percentage of total revenue, increased from 1% during the second quarter of 2020 to 1.3% during the second quarter of 2021. Let us move to page 24. Net income during the second quarter of 2021 was elective $8.2 million compared to elective $41.6 million during the second quarter of 2020. Adjusted EBITDA was less than $5.5 million during the second quarter of 2021, compared to less than $3.1 million during the second quarter of 2020. With that, let me conclude today's presentations. 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 one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If 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. Again, it is star than one to ask a question. At this time, we will pause momentarily to assemble our roster. The first question comes from Vivian Jung with Diamond Equity. Please go ahead.

Good evening. This is Vivian from Diamond Equity Research. Thanks for taking my question. So we see the company just launched a new Haparcon-enabled product in Japan. So can you update more information about this product and its market position? Are there any competitors you believe for this product in the market? My second question is regarding your overseas extension. Can you provide more colors on the recent partnerships you are getting in the second quarter? Thank you.

This is Tanju speaking here. We have launched our product with the HyperCon feature in Japan and also some other countries. And we have two products. One product is the tablet. And another one we call Neuman. Neuman is a 5G mobile Wi-Fi. And we believe that our product is the first one in the world to have this feature. And we do not have any competitors in this domain because our hypercom can connect to any kind of network in the world, like Wi-Fi or any mobile network. And the semi-tuners, we may have multiple connections. For example, one Wi-Fi connection simultaneously with one mobile network, and we can switch from one network to another one. This is between the Wi-Fi and the mobile network, or from one mobile network to the other network. We believe this is quite a unique feature, and I cannot see And the benefit which we provide to our end users is to give more reliable connection to our consumers. For example, if our consumer uses the mobile Wi-Fi for remote learning or or just like us to have a conference call or video conference call, we will have a much better connection than the other one. Even one base station shut down because of the earthquake, for example, and we can always switch immediately between the other network without interruption of the conference. Okay. Clear?

Yes. My second question is regarding your overseas extension. Can you provide more colors on the recent partnerships you are getting in the second quarter?

actually you may notice that our market share our business in the United States you can see an increase I think this is one market right now our market The largest market of ours is Japan and we believe that next one should be United States. And then for the Asia Pacific and also Europe, we also put more human resource sales in that region. We think that we will get more market share also in there.

Okay, great. Thank you for the additional details.

This is . I think I have some adding points for your first question regarding the HyperCon solution. So as you know that we already unveiled our HyperCon solution and the related products and services. So apart from Japanese market, we actually, for other markets, we also made a progress through our hyper-connectivity solution with mobile and fixed broadband business, which we call NBB plus FBB. and the various application scenarios, such as in the Chinese market for home broadband. And we received very positive feedback of our 5G and 4G millisecond multi-network reselection technology, et cetera. And for your second question, as you know that we published press release regarding some partnership, either in Southeast Asia, in Europe, and also in the U.S. market. And as you know that U.S. and Europe, we continue to develop, and also mainland China is our major market as well. And for the partnership, we actually innovatively cooperate with MNOs plus mobile phone handset manufacturer which is a very innovative business model for us and we believe that such kind of cooperation will give us more business development potential and also it will help us to scale up our user base through our PaaS and SaaS platform, and we are continually expanding our PaaS and SaaS ecosystem globally. Okay, thank you. Great, thank you, Bob.

Yeah, so I have some more comments. Yeah, sorry, I'm Jeff. I have more comments. So because we already finished the first delivery of the, you know, Hypercom product, such as Tablet and Lumen, the feedback from the user is very positive. So it's quite good. That's the first feedback. And the second, for your second question, I have more comment. Because, you know, except the Japan market, U.S. and China become another two faster growth market. And also our business plan is to add more country now, even we are under, you know, COVID-19 impact. So another, uh, progress is for past us already is, uh, you know, uh, increased much faster than, than before. So that's the, uh, some information.

Great. Great. Thank you for the information. Congratulations on the quarter.

The next question comes from Lisa Thompson with Zach's investor research. Please go ahead.

Good evening. So I have a few questions about your future revenue guidance. I believe that you talked about having some large education contracts for the tablet in Japan. It doesn't look like that's going to happen next quarter. Could you tell us what happened to that business? Have they canceled the orders? Are they going to do it next year? or is it just going to be delayed? Can you talk a little bit about what's going on there?

Hello?

Yes, I'm certain they will respond momentarily.

Oh, okay, sorry. I never know. No, that's okay. Yeah, we can see several impacts. The first is COVID-19, you know, slow down everything like in Japan. So the business progress, everything slow down. So we believe the requirement is there, but need more time, that's first. And the second is because of the shortage of the chipset and the supply of chipset, you know, become very tight and price going up. That's the second impact. The third is our product, you know, a little bit delivery of our product a little bit late, about one month late. So all these, you know, these futures impact our Q3, you know, for tapering. But we believe the market is there and we will get, you know, the order in the first quarter, you know.

So you said first quarter of 2022?

Yeah, just delay. No decrease or disappear of the market. I believe the market is still there and we are enlarging the market. So it just needs time and also to overcome the supply issue.

Okay, that's good. So it doesn't matter that it's the middle of the school year? You didn't miss the whole year?

Not in the midst of the whole year, just the delay, the delay that's delivering this product due to the supply chain restrictions somehow. So the demand is still there and the demand is increasing as we need. So it will come back. They will come back in the future.

Okay, so do you feel then that Q4 this year is going to be similar to Q3?

We will disclose the Q4 guidance in the next year call. We will give a call at that time. We give this guidance for the third quarters and we will deliver the third quarters guidance as we disclose. So that's our targets that we are focused on.

All right. Can you just give a current update on the status of the distribution of your 5G products? Like where are they being sold now and when do you think they'll be sold in other geographies?

So we just launched a 5G product, Lumen, in August. So about one month delay for our origin plan. From the feedback from the user and the partner and also channel partner and the mobile network operator partner, it's quite positive. But because this is a high-end product, it is a very strong product. And with the Hypercom solution, it's the best 5G and Wi-Fi hotspot and can provide a better connection for the 5G and Wi-Fi. So the feedback is very good. But because it's a high-end product and the price is very high, I think it's mainly for enterprise and education. And industrial internet, that's for high end application. That's the product in the position. And for the coming quarter, the first quarter, we will launch a middle-end 5G product. We call the second type of 5G product, we call U50, and we're available end of the year. So more and more 5G products are available, and also we have come down the price, and we are more competitive here, like 4G. So we believe 5G eventually we get a bigger market share and get a better quality. So that's for our 5G product strategy. So for Newman, we of course understand it is for higher market, for enterprise, for education, for the industry, working environment application. And that's the target market.

So if I wanted to buy a Newman, where could I buy one? What countries?

So you can buy in Amazon, you know, like in Japan, in Europe, in China, also online and offline. And United States, because it is a United States radio band, it's different. So we couldn't buy in the Amazon United States for Newman. But we will provide later, once the radio frequency is ready, and it will be launched in United States.

Okay, great. Thank you. One last question. I noticed that the gross margin went down considerably for product. What's happening there? Is that just because of the startup costs of the 5G?

In the second quarter, yes, there's gross margin for that product went down a bit. The main reason is there's a product mix. We sold some no gross margin products in the second quarters. For instance, it's a low gross margins Wi-Fi dongle. to one Japanese customer. But every product will provide opportunities to device connected to a PowerSource platform. So you will find that we have offset. We have offset by increasing PowerSource service. which give us a higher gross margins in service gross margins in the second quarters. So the product serving is give us, we have more opportunity to connect the consumer to our pasta platform. So we maintain our product sales as suitable gross margins portfolios. But this trend cannot be predictable. It depends on the product mix, how we're selling in the following quarter and the following period.

Another impact comes from a chipset price going up a little bit.

Ah, okay, great, thank you, that makes sense. That's all my questions.

Again, if you have a question, please press star then one. 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 further questions, please feel free to contact Eucalink Investor Relations through the contact information provided on our website or TPG Investor Relations.

This concludes the earnings conference call. You may now disconnect your line. Thank you.