uCloudlink Group Inc.

Hello and welcome to the uCloud Link Group, Inc. first quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Jillian Zhang, investor relations of the company. Please go ahead.

Thanks everyone for joining us on our first quarter 2022 earnings call today. The earliest release is now available on our IR website at ir.euclolink.com, as well as our NewsWare survey. I will give a brief introduction to our Euclolink management 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 Mengshi 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 one of the earnings presentation posted on our IR website. Our CFO, Yi Mengshi, will then discuss our operations highlights and financial results as presented in Sections 2 and 3. Before we proceed, please note that this Quorum contains 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 the known and unknown risk 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 this forward-looking statement. All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors, and details of the company's filings with the FCC. The company does not assume any obligation to revise or update any forward-looking statements as a result of new information, future events, chance in market conditions, or otherwise expect as required by law. Please also note that EuclidLink's earnings press release and this conference call include discussions of non-audited gap financial information as well as non-audited non-gap financial measures. EuclidLink's press release contains a reconciliation of the non-audited non-gap measures to the non-audited most directly compared gap measures. I will now turn the call over to our co-founder and CEO, Mr. Chao-Hui Chen. Please go ahead.

Thank you. Page 4 to page 12 are similar contents as the earning presentation of first quarter of year 2021. We still encourage you to review in the quarter one year 2022 earning presentation. upload to our investor relationship website with some latest updates. Hence, I will now elaborate on a path similar with quarter four earning results, but will instead focus on our most recent developments in the fourth quarter. Please turn to page 13. uClouding 1.0 is our international data connectivity services business, which has had a strong track record of high gross margins and profitability with ongoing growth potential. We have established an intelligent wholesale to retail repackaging solution to minimize unit cost of data traffic. In that, as data packages of single operators across mobile network operators, mobile virtual network operators are priced differently. This is attributable to our large SIM card pool and our ability to acquire data packages at a local wholesale price from operator and partners. We further differentiate ourselves with our multi-network reselection and combination technologies, which could ensure high-quality data connectivity and improve user experience. uClouding 1.0 business monetized model includes retail to see rental or selling to the end user, wholesale to be for business partners, and our PaaS and SaaS services such as CRM, billing management, devices selling, and rental management, etc. For wholesale-to-be, we can act as a reseller or provide commission services to our business partners. We allow our business partners to share data traffic pools through our PaaS and SaaS platform and charge a commission fee. During the first quarter of the year 2022, our 1.0 business revenues have slightly increased by 2.2% compared to the same period in year 2021. As international travel restrictions around the world continue to abate over time, the number of daily active terminal, DAT, for the 1.0 business has increased during the first quarter of year 2022, indicating that more and more customers are using our products and services. With an increasing diversified geography market composition, we are positive that the revenues from 1.0 business will steadily grow and exceed the pre-COVID-19 level in the future. we will continue to develop and enrich our 1.0 product offerings. Our goal, as always, is to provide the best quality products and services for our global customers, which ensure better international data connectivity. Let's move to page 14. UCLARIM 2.0 is our local data connectivity services business and has become a new driver of revenue growth since the year 2020. Its business monetization model is similar to that of uClouding 1.0 with a massive potential local user base. Our new HyperCon technology contributes to the further development and growth of our uCloud in 2.0 business. We have expanded the business scope of our local data connectivity services. Currently, our innovative HyperCon technology is widely assessed by mobile network operators and business partners in various industries with great growth potential. such as with local partners in China, US, and Japan. In the past quarter, we have continued to strengthen our presence in our existing markets, including Japan, North America, Southeast Asia, where we have helped operators improve their data services and solve data connection problems through our PaaS and SaaS platform. we provide high-quality data connection for 5G applications in response to the increased demand for better connectivity services. Furthermore, as people get used to the new normal, our products and services provide better performing solutions for remote work and learning which require reliable connectivity as well. We adapt ourselves to involving market by introducing innovative products to address various 2.0 business applications scenarios. During the first quarter of year 2022, our various IoT solutions, which have successfully start to gauge customers' interest and being perceived as reliable and high-quality data connectivity services in market, like Japan and North America, achieved further recognition. Our revenues from 2.0 business increased 185.4% compared to the same period in prior years. Our customers were able to realize the reduced operating costs and improve data connectivity experience through these cutting-edge IoT solutions. And we continue to focus on exploring new business prospects to serve a broader spectrum of partners with IoT needs. We expect our 2.0 business to grow with the support of our innovative cloud theme and hypercom technology as we continue to introduce our solutions, services and products to the market and strengthen our collaborations with local partners. Let's move to page 15. Based on our innovative cloud theme and HyperCon technology solution, we continue to develop and broaden our portfolio of offerings with new products and services, such as our self-developed terminals and third-party devices. Our HyperCon technology solution has been well perceived and related products including industry Wi-Fi loader, IP camera, power, energy services, like live broadcasting e-commercial, autopilot, augmented reality, and virtual reality, AR, VR, and clouding computing, et cetera, are gaining recognition proven by a growing user base across a wider spectrum of industries. In the first quarter of the year 2022, we promote more innovative 5G products in countries and regions such as the US, Japan, and Europe. Furthermore, we have a leading global 5G long-mean solution, which is an easier long-mean solution for carriers, and we are one of few company that could provide 5G products with a global ban and global looming. This reflects our market confidence and continued efforts on elevating our user experience as this new product equipped with our innovative 5G technologies marks not only the gradual recovery, but also a new beginning for our growth path in the post-pandemic era. In terms of IoT side, we applied GMI, Glaucoma Insight solution in IP camera commercially, and it has been promoted among multiple markets. Going forward, we plan to launch more of these types of innovative products and services. uCloud Link's position is set as the pioneer technology solution provider in the data connectivity market. Through our mature 1.0 business and the newer 2.0 business, uCloud Link is promoting the long-term development of the PaaS and SaaS ecosystem, which which have been recognized by various savings partners as a show in its increased revenue contribution by 7.8% in the first quarter of year 2022. Additionally, we have entered two new regional markets during the period. PaaS and SaaS platform is built upon uClouding 1.0 and 2.0 business lines, and its growth implies our ability to construct a healthy ecosystem. This requires our non-stop efforts in maintaining and expanding a strong partnership base, which includes more financial operators mobile virtual network operators, SIM card providers, our business customers and more, we remain confident in our business development teams and to empower the building of our PaaS and SaaS ecosystem and in our research and development team to address diversified needs our customers have posed to us. In a reminder, of year 2022, we expect past and past platform revenue to grow into more a significant driver of your clouding business. And that continues to enlarge its marginal efforts and improve margin profiles. We are able to reduce operating expense and decrease the net loss through streaming line our business operations, including optimizing labor costs compared to the first quarter of the year 2021. Going forward, we expect to further lower operating costs as a way to improve our operating and financial performance. We believe that from the connected to better connection, new clouding is a significant driving force in the transformation of an increasingly advanced information era. We are committed to building a more connected future for more customers and users, and we strive to make a positive impact in serving a global user community. I will now turn it over to our CFO, Yimeng Shi, who will go through the business and financial highlights.

Thank you, Mr. Chen. Hello, everyone. Let us turn to page 17 for our business highlights. The left-hand side of the slide shows the active terminals, DAT, as of March 31, 2020. 22. Average daily active terminal in the first quarter were 273,870, of which 1,430 owned by the company and 272,442 owned by Albinestana, representing an increase of 33.5% from 205,082 in the first quarter of 2021. EuclidLink 2.0 service accounted for around 69.5% of the total DAT during the first quarter of 2022. Average data usage at terminal was 1.74 gigabytes in March 2022. Let's turn to page 18, which shows global diversification of our business. We had around 96% of total revenue from outside mainland China. During the first quarter of 2022, Japan contributed to around 40% of total revenue. For other countries' revenue, the US market had the largest contribution to our business with further development of our US business. And we will continue to expand on the market, such as Europe and Southeast Asia, et cetera. During the first quarter of 2021, we had 6% of total revenue came in from mainland China, 58% of the total revenue came from Japan, and 36% of total revenue came from all the countries in the region. Let's turn to page 20. I will go through our financial highlights for the first quarter of 2022. Service-related revenue, or the percentage of total revenue, was 62.9% during the first quarter of 2022, compared with 47.4% during the first quarter of 2021. Revenue from local data connectivity service and personal source service increased 185.4% and 7.8% year-over-year, respectively. This increase was primarily due to the expansion in the number of our business partners that use our PaaS and SaaS services to provide local data connectivity service. Revenue from PaaS and SaaS, a percentage of total revenue, also increased to 15.8% during the first quarter of 2022 compared with 12.9% during the first quarter of 2021. Next, let's move to page 21, which shows the revenue breakdowns of our two donut segments, namely revenue from service and sales of product. Our total revenue decreased by 11.8% from 17.7% million US dollar in the first quarter of 2021 to $15.6 million in the first quarter of 2022. Due to the relative impact of local COVID-19 resurgence and subsequent lockdown in certain cities in China, including where our main manufacturers are based, which has impacted our revenue from sales products. Revenue from service was $9.8 million, representing an increase of 17.2% from 8.4 million for the same period of 2021. This increase was primarily attributable to the increased revenue from local data connectivity service. Let's turn to page 22 for gross margins of our bonus. Our service gross margin increased to 49% in the first quarter of 2022, compared to 35.9% in the first quarter of 2021. and our overall gross margin was 37.4% in the first quarter of 2022, increased from 31.3% during the same period, 2021. The increase of service gross margin during the first quarter of 2022 was primarily attributable to the increase of our past and past service revenue and data connectivity service by e-commerce retailing sales. both of which have higher gross margins over other business line. Let us move to page 23, which shows the breakdown of operating expenses, excluding share basis compensations and others. Excluding share basis compensations, operating expenses as a percentage of total revenue was 60% in the first quarter of 2022, compared with 71% in the first quarter of 2021. We have further streamlined our bonus operation, including optimizing labor costs. And our total operating expenses, excluding share-based compensation, were decreased to $9.3 million in the first quarter of 2022, compared to $12.6 million in the same period of 2021. Let's turn to page 24. Operating cash flow was negative $1.4 million during the first quarter of 2022, compared to a negative $6.7 million during the first quarter of 2021. Our cash and account equivalent and short-term deposits were $11.2 million as at March 31, 2022. Our CapEx was $6,000 compared to $0.1 million in the same period of 2021. Let us move to page 25. Late loss during the first quarter of 2022 was $7.9 million, compared to $15.4 million during the first quarter of 2021. Adjusted EBITDA was a negative $3.9 million during the first quarter of 2022, compared to a negative $6.7 million during the first quarter of 2021. As mentioned above, The company is working towards improving its bottom line results and financial positions. With that, let me conclude today's presentations. Thank you. We start our Q&A session.

We will now begin the Q&A session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Vivian Zhang with Diamond Equity Research. Please go ahead.

Good evening. This is Vivian Zhang from Diamond Equity Research. Thanks for taking my classroom. So my first question is that can you give us some additional color on your Internet of Things solution and its market opportunity?

Yeah, so yeah.

Mr. Chen, can you answer the question?

Yeah, so yeah, for international business, we believe, we can see that from the DAT, we can see the first quarter of year 2022, we can see the data is recovery, so DAT is increased. That's the data performance. From our product side, we not only have the normal Cloud Theme solution, Now we have a Hapcom solution. Hapcom means that we can provide much better experience for multi-network handover from more than 10 seconds now can go to the millisecond. That's one of the new product, new service. Another is for 5G. We provide a 5G product. So we are now a very few vendor, almost it's only one vendor who can provide a global 5G network looming. So because our 5G product with the almost all countries 5G radio band and also the 5G, you know, roaming capability. That's very rare in the industry. So all these preparation is let us in a good position for, you know, recovery of COVID-19, after COVID-19. So I think we are in a good position.

Okay, okay, I see. So my second question is regarding the COVID-19 impact. Because we've seen some Chinese cities like Shenzhen reopen in the second quarter after the lockdown, but there's still some controls may still be in place in the cities. So do you think there will be some recovery in revenues from sales of products in the second quarter? or those continue to affect your launch and manufacturing of 5G products given that your main manufacturers are based in Guangdong, China?

Yes, it is impacted in the fourth quarter, especially both Shenzhen and Shanghai because this supply chain, part of our supply chain is based in Shenzhen and some part of our partner is based in Shanghai. It is impacted by the lockdown due to COVID-19 in China. But I think we can see that in Guangdong it's early recovery. I think the second quarter there's no any problems from the current scenario. Also, we removed some of our supply chain from Shanghai to Shenzhen. So in the second quarter, we believe the impact from the COVID-19 will be almost disappear. I think heavy impact by the quarter one. Quarter two, we can see it's much, much better. So that's the one of the situation. Another is because our first quarter, our new device products delivery, it has impact because of the lockdown in the first quarter for manufacturer. Also, because of the first quarter of the revenue and delivery, the source order comes from the last quarter, quarter four. Quarter four is a heavy impact by, you know, Omicron, COVID-19. So I think second quarter will be much better.

Okay, that's all. Thank you.

Again, if you have a question, please press star, then one. This concludes our question and answer session. I would like to turn the conference back over to Jillian Jung for any closing remarks.

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

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