uCloudlink Group Inc.

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to the UCloudLink Group Incorporated Third 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. To ask a question, you may press star then 1 on your telephone keypad. And to withdraw your question, please press star then 2. Today's conference call is being recorded. I would now like to turn the conference over to your host today, Mr. Bob Shin, Deputy Investor Relations Director of the company. Please go ahead.

Thanks, everyone, for joining us on our third quarter 2021 earnings call today. The earnings release is now available on our IR website at ir.ucalink.com, as well as via Newswire Services. I will give a brief introduction to our UCALink NASDAQ UCL team. Zhi Ping Peng is our co-founder and chairman of board of directors. Chao Hui Cheng is our co-founder, director, and chief executive officer. Yi Men Shi is our chief financial officer. Zhu Tan 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, Yi-Meng Shi, will then discuss our operation highlights and financial results as presented in Section 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 eCloudLinks Earnings Plus release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. eCloudLinks Plus 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.

Good evening. There are similar contents as the ending presentation of the second quarter of year 2021. During this call, we will outline the major recent developments and highlights. Let's move to the page 13. Euclidean 1.0 is international data connectivity services and has a strong track record of high gross margins and profitability with ongoing growth potential. In the long term, as international travel restrictions continue to abate over time and gradual recovery of international travel benefits our international data connectivity business. Even for the new challenge of the COVID-19 pandemic recently, we still have confidence in the positive trend of international travel because of more and more medicine and vaccines coming to use. With the gradual recovery of international tourism, we saw increase of 1.0 business revenue in the third quarter of year 2021, year over year. And a quarter over quarter with continuous users demand in various markets. For example, our US market has a year of year increase of order demand of 1.0 business during the third quarter of year 2021. We expect our 1.0 business will not just be a simple recovery, but grows with new, with innovative technology and products. We saw positive development of our 1.0 business from our daily active time nodes as international travel users increased quickly in various markets. We intelligently repackaged to minimize data traffic unit cost. Data package cost of single operator or cross mobile network operators, mobile virtual operators have large price difference and we repackage it from wholesale to retail. We have the largest SIM card pool and we acquire data packages at the wholesale local price from operator to partners. Further, we provide high-quality data connection services and elevate user experience of users and business partners through multi-network reselection and combination, which shows our difference. Euclid's one point of business monetization model includes retailing to C, rental or selling to end user, wholesale to B for business partner, and our PaaS and SaaS services, such as CRM, billing management, devices selling, and rental management, et cetera. For wholesale to be, we can be a reseller or provide commission services to our business partners. We allow our business partners share data traffic pools through our PaaS and SaaS platform and change commission fees. We believe the COVID-19 pandemic has negatively impact our 1.0 business. It has create opportunity for potential growth, including increasing demand for mobile data such as traveling, tracking, vaccination digital passports, and the COVID-19 testing reports. Also, we see fewer competitors in the market after COVID-19 pandemic. Let's move to page 14. uClouding 2.0 business is local data connectivity services and become a new driver of growth during year 2020. Our new hypercom technology contributes to the further development and growth of our uClouding 2.0 business. and we expand the business scope of our local data connectivity services. Our HyperCon technology is widely accepted by mobile network operators, business partners in various industries with growth potential, such as with local partners in China, US, and Japan. Our 2.0 business shows greater resilience with proven high demand and growth potential during the pandemic and experienced less negative impact overall. EuroClouding 2.0 business monetization model is similar to that of EuroClouding 1.0, business with a massive potential local user base. We have operators improve services and solve data connection problems through our PaaS and SaaS platform by alliance with more mobile network operators and mobile handset manufacturers, we should be able to embed more global meat inside GMI. In smartphones, such as 5G smartphones, we would accelerate the arrival of the 5G cloud and the applications such as AR, VR, cloud computing, and the autopilot, et cetera. The high quality of 5G application data connection We also bring users high requirement and awareness of data connectivity quality. Further, we make progress through hyper-connectivity solution with the mobile and fixed broadband business, MBB and FBV, under various application scenarios such as home broadband, especially our mobile and fixed broadband business cooperation with one of the major mobile network operators in China has been successful and expanded to more provinces. The increase in total revenues is a strong indication that Euclid is well positioned to grow in the short term due to our continued effort in expanding our platform services business. And in the long term, as we believe that international travel restrictions will be lifted in the future. We have increased in revenue from our 1.0 and 2.0 business in the third quarter of year 2021, compared to the second quarter of year 2021. And we saw faster business development through online and offline channels in our U.S. market. We launched a new branding technology, Hypercom, which allows for us to target IoT opportunities by leveraging 5G mobility to ensure superior network connectivity. Our strategy is to use this technology to introduce innovative products and services into the market. Such new products will accelerate the further development of our 2.0 business Our new tablets equipped with hypercom and cloud-thin technology have been promoted in new industries such as education Our strategy to expand our network and strengthen our core operations with local partners allows our new 5G hypercom products to enter a variety of new industries which require reliable, high-quality data connections, including education, emergency services, live broadcasting e-commerce, Wikitalki, and other IoT applications. Our Hypercom related products and services have been distributed by our offline retail channel and e-commerce platform and our products have received positive feedback and are well recognized and valued by increasing number of users and business partners across a wide spectrum of industries. Let's move to page 15. Based on our innovative cloud theme and hypercom technology, we continue to develop and broaden our scope with new products and services, such as our self-developed terminals and third-party devices. For example, after we unveiled our new Hypercom technology and products in June 2021, we launched our Hypercom technology solutions and products to the market in the third quarter of the year 2021, such as Lumen, the world's first hypercom 5G Wi-Fi device, and Genie, a tablet device. We have positive feedback for our Lumen and Genie, and we continue to cooperate with more business partners. Our IP camera, IPC, has complete testing and is expected to launch for commercial in the near future. Going forward, we will launch more and more innovative products and services with our Hypercom solution. Through embedding our global meet inside GMI, we continue to further expand our PaaS and SaaS ecosystem with users and business partners globally. Our Hypercom technology solution is highly compatible with various application scenarios and smart hardware such as 5G mobile phone, tablets, CPE, etc. Our hypercom technology solution also facilitates us to enter new industries requiring high-quality and reliable data connection, such as online education, emergency response, electric power industry, etc. We believe our PaaS and SaaS ecosystem will continue to expand as we keep investing in R&D and launching innovative products and services to market and elevate data connectivity services such as data connection for Internet of everything. I will now turn it over to our CFO, Yimen Shi, who will go through the business and financial highlights in the section.

Thank you, Mr. Chen. Hello, everyone. Let us turn to page 17. The data for the third quarter of 2021 shows that impact from COVID-19 is becoming stable. The left-hand side of the slide shows the active terminus DATs as of September 30, 2021. Average daily active terminals in the third quarter were 256,124, representing an increase of 1.5% from 252,265 in the third quarter of 2020. Our EuclidLink 2.0 service accounted for around 67% of total DAT during the third quarter of 2021. Average daily data usage per terminal was 1.85 GB in September 2021. Let's turn to page 18, which shows global diversification of our business. We had 96% of the total revenue from outside mainland China. During the third quarter of 2021, Japan contributed to 47% of the total revenue and continued to be the single largest market for our business. For all the country's revenue, the U.S. market has the largest contribution to our business with the further development of our U.S. business, and we will continue to expand all the markets such as Japan, China, Europe, and Southeast Asia, etc. During the third quarter of 2020, we had 5% total revenue came in from mainland China, 56% of total revenue came in from Japan, and 39% of total revenue came in from other countries and regions. Let's turn to page 20. I will go through our financial highlights of the third quarter of 2021. Service-related revenue as a percentage of total revenue was 54.2% during the third quarter of 2021, compared with 48.5% during the second quarter of 2021. Revenue from parts and soft service increased 81.6% from $1.5 million in the third quarter of 2020 to $2.7 million in the third quarter of 2021. This increase was primarily due to the expansion in the number of our business partners that use a path and source service to provide local data connectivity service. Revenue from path and source as a percentage to the revenue also increased to 13.8% during the third quarter of 2021, compared with 8.1% during the third quarter of 2020. Next, I'll move to page 21, which shows the revenue breakdown of our two business segments, namely revenue from service and sales of products. Our total revenue increased by 7.4% from $18 million in third quarter of 2020 to $19.3 million in third quarter of 2021. Revenue from service was $10.5 million, representing increase of 6.4% from $9.8 million for the same period of 2020. This increase was primarily due to higher revenue from past source service, partially offset by a decrease in revenue from data connectivity service. Let us turn to page 22 for gross margins of our business. Our service gross margin increased to 43.5%, and our overall gross margin decreased to 28.3% in the third quarter of 2021. compared to 36.6% and 31.3% during the third quarter of 2020, respectively. The decrease of overall gross margin is mainly because of product mix and the rising material cost due to global supply chain constraints during the third quarter of 2021. The increase of a service gross margin during the third quarter of 2021 is primarily due to increase our part-sourced revenue, which has a higher gross margin over other revenue. Let us move to page 23, which shows the breakdown of our operating expenses, excluding share-based compensations and others. Excluding share-based compensations, operating expenses are the percentage of total revenue, maintaining 61% in the third quarter of 2021, compared with 65% during the third quarter of 2020, and we will continue to improve our operation efficiency of our business in the future. This is page 24. Our CapEx was $0.3 million during the third quarter of 2021, compared to $0.14 million during the third quarter of 2020. CapEx as a percentage of total revenue increased from 0.8% during the third quarter of 2020 to 1.4% during the third quarter of 2021. Let us move to page 25. Net loss during the third quarter of 2021 was $7 million compared to $9.7 million during the third quarter of 2020. Adjusted EBITDA was negative $5.4 million during the third quarter of 2021 compared to negative 5 million US dollar during the third quarter of 2020. With that, let me conclude today's presentations. Thank you, and we start our Q&A session.

Thank you. 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're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. For the benefit of all participants on today's call, If you wish to ask a question to management in Chinese, please immediately repeat your question in English. At this time, we'll pause momentarily to assemble our roster.

And the first question will come from Vivian Jung with Diamond Equity. Please go ahead.

Hello. Good evening. This is Vivian from Diamond Equity Research. First, congratulations on the results. I have two questions. So first is that we know your new technology, Hypercom, and its related products including the tablets were launched like several months ago. So my question is how does that impact the revenue? Can you provide any data Related related to the sales of this part. My second question is regarding the past and services. We see the revenue increase a lot this quarter. So can you provide color on how you develop new business partners and keep expanding in this area. Thanks.

I'm Jeff. Let me answer the first question for tablet. We launched the tablet in the third quarter. Hypercom, we launched the product in September. Actually, I think the HR number is... We deliver it around totally in the third quarter. How many devices? Yeah. Oh, yeah. 180K, right? Yes. Since September, we delivered 18,000 devices for Tablet. We continue to have more orders in the first quarter for Tablet, mainly used in Japan and the United States. For the second question, Ivan, can you answer for the PaaS and SaaS revenue?

Yes. Regarding this PaaS and SaaS revenue, the weight of SaaS revenue has been improving since compared with last year. This relates to our platform centric. uh strategies in eucalyptus local local connectivity service so when we uh when we deliver some more more terminal a device to the to our business partner worldwide and that they might that procure a better package from local carriers they still need to rely on our platform system a part-size platform to provide Hypercom and cloud-themed solution and service to the users. So this PaaS SaaS service is our core strategies for our business in the past one year and also in the future as well. We expect the weight of PaaS SaaS service will be increasing, will be increasing in line with we deliver more terminal to our business partner and more and more daily activity terminal active and used by our users as well. So that's very important for our awareness as the SaaS service has higher gross margins and the more SaaS revenue come into account where we help a lot to improve our profitability of a role and also help a lot on our performance on cash flow as well. Thank you.

Hi Vivian, this is Bob and I want to add some points for our new tablet. As you know that our new tablet comes equipped with our innovative technology, enable it to seamlessly connect to a BAT available network, like mobile broadband MBB plus fixed broadband FPV networks at all times. For example, in the Japanese market, our new tablet facilitates us to enter and cooperate with our business partners in the education industry, such as the online education. This is just one example of our recent development of our HyperCon technology solution and new products. As we always mention that our new technology such as HyperCon technology solution paved the way for our further and quick development of our 1.0 and 2.0 businesses.

That makes sense. Thank you, Bob.

Thank you, Chen and Xu.

Again, if you have a question, please press star, then 1. Our next question will come from Lisa Thompson with Zacks Investment Research. Please go ahead.

Hello, and congratulations on returning to revenue growth. It's great to see. Thank you. My first question is, goes to the last sentence of the press release, only because we had this conversation and you said there's no way you would settle with CMO. So now that you've settled with CMO, how much money do you think that will save you next year as far as expenses of not having any more litigation?

Yeah, this, Yimeng, let me answer your questions. Yes, we disclosed settlement agreements with FEMA related dedications. And that's, yeah, from this settlement, we see this dramatic reductions of dedication expenses in third quarter of 2021. And we see that this, this saving on litigation expenses will be quite significant. You might know in the past couple of years, since the 2018, we involved this long litigation process with the CMO, and that consumes very significant litigation expenses, more than 15 million US dollars in the past three years, more than three years. So that's, I think we, that's where we don't think we will have this kind of significant expenditure in litigation in the future. So that's, I think that's a big a big improvement in terms of expenditure control in the future, as you see. So this will be reflected into our performance in the following periods, this year or next year. So thank you.

So this is my question. So how much less would you have to spend next year than you spent this year, just so I can have it in my model somehow.

For comparable basis, we we can discuss the specifics as a projection for this space of the categories expense after this call. Yeah, we will we will have this additional discussion on this figure is okay.

So, but is it in the millions of dollars for this year?

Yes, yes. This year is more than, we spend litigation expenses for more than millions, a couple of millions US dollars related to litigation expenses.

Okay, and then out of curiosity, did any money change hands in your settlement agreements?

Just with first-party withdrawal or there's a case with no others for that expense that's in-cause related with the withdrawal case.

So they didn't pay you anything and you didn't pay them anything?

No, no, no, no.

Okay.

No, it's a statement. Statement that doesn't withdraw all the case. Okay.

All right, good. Okay. In your guidance that you gave, you're guiding to be sequentially down in revenues from this quarter to next quarter. Where is that coming from? What do you think will be less this quarter?

We discussed the guidance for our fourth quarter, $17.5 million to $18 million. And that's from the reasonable expectations in the assumptions that supply chains, global supply chain constraints still carry on. And we need to prepare this to deliver the orders in this period, global supply chain constraints. So we disclose that guidance, and we try to achieve that guidance. But we believe the orders are still coming for the next years, but we need to manage the risk of supply chains and constraints. So it's a challenge. We have some callers. Yeah, for related products.

Products will go down and the rest of the business will still grow.

That's the expectation, yes. Chen, do you have some comment on that?

Yes, I have two comments. One is for litigation. So we are in a good position, but we don't think it's valuable for us to waste the money in the litigation. That's the major consideration. So that's the first question. Second, so because of the, you know, constraint of the supply chain, so we have more order volume than we can deliver. So that's the delivery challenge for us in the next quarter.

And is that for all the products or any particular ones?

I think all the products.

So because major, you can see, you know, all the, you know, suppression, including the chipset, even, you know, the PCB. Everything is, you know, very tight, you know, surprising.

Okay. And so are you now thinking in 2022 that, say, your tablet delivery is going to be lower than you thought because of this?

I don't think so, because the table is going up.

I think it's going up. It depends on COVID-19. So if COVID-19 is still serious, I think the table is going up. But because we have more product launches, we have Hypercom, we have more 5G products, like U5.0, and we have more products coming up, including the high-end and the middle-end. Also, you can see on my slide, we have more globally inside joint-brand products, such as Push-to-Talk and also IPC, IP Camera. We have more of these products. I think next year, we will launch more products and we will bring more orders.

All right, and that reminds me of the other question. Could you talk a little bit about the IP camera? I don't think that's been mentioned. Are you going to be working with partners to sell that? Who are you selling it to and what countries?

You know, because, you know, our, you know, HyperCon solution is more and more accepted by, you know, this ODM design IP camera company. So we have a new release a month ago. We have been working with one of the big, you know, ODM, IP camera company, name is Jiuan, who has a big market share in China and worldwide. So this company really like our solution because... Yeah, because we embed our software into the camera for the outdoor camera. So this outdoor camera don't need, you know, embed, you know, SIM card. When the signal changes, the user don't need to, you know, come up to the wall and change the SIM card. That's very challenging for the users. And we can get the best coverage and the best, you know, avoid traffic jam for the data. That's why we have more and more cooperation for this IoT, you know, company, like IP Camera, you know, people to talk, and also the power, electricity power, you know, smart monitoring company.

Okay, so you're just going to be selling them software? Isn't there just going to put it in their cameras with their name on it?

Yeah, I think. They sell this solution in many brands. So we will bring in a joint brand to sell the IPC. That's one of the choices. We will bring this joint branding in our offline shop, but also we embed our software into the camera to the other partners. and we can get more revenue and revenue share and share and data traffic and provide a partner better connection for users.

So would revenues show up in product sales or in past sales or in other?

How does that work?

Both. Both, you know, for the joint. Yeah, if joint branding, we sell, you know, a camera, then we get, you know, hardware and... and data revenue. But if just partner or their customer, you know, is under their brand, we only get the revenue for data and path searching.

All right, great. That sounds good. I'd be interested to see that. Are you going to release a product anytime soon with a press release?

Yeah, I think the next quarter will be, because the third quarter is finished testing, first quarter will be available, launching.

Okay, great. Look forward to seeing it. Thank you. That's all my questions.

Again, if you have a question, please press star then 1.

As there are no further questions, I would like to turn the conference back over to the management team for any closing remarks. Please go ahead.

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

The conference call? has concluded. You may now disconnect your line. Thank you.