uCloudlink Group Inc.

Hello and welcome to the uCloud Inc. Group, Inc. Second Quarter 2022 Earnings Conference Call. All participants will be on the send-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note, today's event is being recorded. And now I would like to turn the conference over to Jalene Zhang, Investor Relations. Ms. Zhang, please go ahead.

Thanks, everyone, for joining us on our 17th quarter 2022 earnings call today. The earnings release is now available on our IR website at ir.uclulink.com, as well as our news web service. I will give a brief introduction to our UCLULINK management team. Zhi Ping Peng is our co-founder and the chairman of the board of the directors. Chao Hui Chen is our co-founder, director, and chief executive officer. Yimeng Xu is our chief financial officer. Zhu Tan is our vice president of the 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 Xu, will then discuss our operation 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 Security Mitigation Refund Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve the 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 expressly qualify in their entity by the cautionary statement, risk factors, and details of the company's findings with the FDC. The company does not assume any obligation to revise or update forward-looking statements as a result of new information, future events, changes in the market conditions, or otherwise, effects as required by law. Please also note that UCLogLink's earnings press release and this conference call include discussions of the non-negotiated gap financial information as well as non-negotiated non-gap financial measures. EuclidLink's press release contains a reconciliation of the non-audited, non-GAAP measures to the non-audited, most directly comparable GAAP measures. I will now turn the call over to our co-founder and CEO. Mr. Cha-Hui Chen, please go ahead.

Yes, thank you, Julian. Page 4 to page 12 are similar contents as the earning presentation of the first quarter We still encourage you to review in the second quarter of year 2022 earnings presentation upload to our investor relationship website with some latest updates. Hence, I will now elaborate on the path similar with the fourth quarter of year 2022 earnings release. instead focus on our most recent developments in the second quarter. Let's move to page 13. uClouding 1.0 is our international data connectivity services business, which has had a strong trade record of high growth margins and profitability with ongoing growth potential. During the second quarter of year 2022, our 1.0 business revenues have increased by 40.1% compared to the same period in year 2021. As international travel restrictions around the world continue to abate over time, the number of average daily active terminals for the 1.0 business has increased during the second quarter of year 2022. Compared to the second quarter of the year 2021, average daily device terminal has increased by 23.6%. A testament to the faster recovery of our 1.0 business, which indicates that more and more customers are using our products and services. With our innovative global We hope to strengthen our leading technology position in providing reliable, high-quality international data connectivity services in more than 140 countries, powered by our PaaS and SaaS platform, enabling single operator entry points to access more than 300 global mobile network operators, a web network We remain positive about the ongoing recovery and growth of global tourism demand and expect revenue from 1.0 business to steadily close and exceed pre-COVID-19 level in the future. Let's move to page 14. uClouding 2.0 is our local data connectivity services business. and has become a new drive of revenue growth since the year 2020. Its growth is built upon our efforts in exploring market opportunities such as the post-pandemic new normal lifestyle that people are getting more and more used to. The development of 5G applications and in the IoT area, our ability to improve network conversions, data connections, cooperation with intelligent hardware manufacturers to implement , et cetera. In the past quarters, we have continued to strengthen our presence in our existing market, including Japan, North America, Southeast Asia, where we help operator and business partners improve their data connectivity services and soft data connection problems through our platform based on our patent technologies, including Cloud Theme and Hypercom technology solution. We adapt our step to the evolving market by introducing and upgrading innovative products to address various 2.0 business application scenarios. During the second quarter of the year 2022, our various IoT solutions, such as industry Wi-Fi loader, IP camera, has gained increasing recognition in various markets, actively extending our footprint into more industries, including power, emergency services, autopilot, et cetera. This is reflected by a 52.6% increase in the 2.0 revenue during the second quarter of year 2022 compared to the same period in the pre-op years. Our customers were able to realize reduced operating costs and improved 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 the HyperCon 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 offering with new products and services, such as our self-developed terminals and third-party devices. In the second quarter of year 2022, we continue to promote our existing portfolio of innovative 5G products in countries and regions such as the US, Japan, and Europe. We are now one of the few companies that could provide 5G products with a global radio band. In terms of the IoT side, the IP camera, which was applied with our GMI solution that we launched commercially in the fourth quarter of the year 2022, has now been promoted in the international market and receive global recognition with the innovative technologies that ensure a reliable, high-quality, and innovative mobile data connection for the devices. Going forward, we plan to launch and provide more of these types of innovative products and services. UCloud is positioned as the pioneer technology solution provider in the data connectivity market. Based on a mature 1.0 business, and newer 2.0 business, we promote the long-term development of our PaaS and SaaS ecosystem, which has been recognized by various business partners. We remain confident in our business development teams to empower the building of our PaaS and SaaS ecosystem, and in our research and development teams to address diversified needs our customers pose to us. In the coming quarters, we expect past and present revenues to grow into a more significant drive of our business and continue to enlarge its marginal effect and improve margin profiles. We are more than pleased to announce that our total revenue reached U.S. dollar 18 million. during the second quarter of the year 2002, which has slightly above our previous projection range due to a faster than expected recovery of international data connectivity services and development of local data connectivity services. We successfully achieved a positive operating cash flow for the first quarter since the second quarter of year 2020 during the COVID-19 pandemic. We are confident in our financial and operation position to feel a better result in the future. We believe that from connected to better connection, uCloud is a significant driving force in the transformation of the increasing advance information. We are committed to building a more connected future for more customers and users. We have tried to make a positive impact in the serving a global user community. I will now turn it over to our staff of Yimeng Shi, who will go through the business and financial highlights.

Thank you, Mr. Chen. Hello, everyone. I will quickly go over our business highlights for the quarter ending June 30, 2022. average daily active terminal for the second quarter were 292,432, including 1,223 owned by the company and 291,209 owned by our business partners, representing an increase of 23.6% from 236,000 553 in the second quarter of 2021. Our EqualLink 2.0 service accounted for around 68% of our total DAP during the second quarter of 2022. Average daily data used per terminal was 1.58 gigabit in June 2022. Based on 10 to page 18, which show global diversification of our business, We had around 99% of total revenue from outside mainland China. During the second quarter of 2022, Japan contributed to around 38.1% of total revenue. For other countries' revenue, the U.S. market had the largest contribution to our business with further development of our U.S. business. And we will continue to expand other markets, such as Europe, and Southeast Asia, et cetera. During the second quarter of 2021, we had 8.3% of the total revenue coming from mainland China. 52.6% of total revenue came in from Japan, and 39.1% of total revenue came in from other country and the regions. Let's turn to page 23. I will go through our financial highlights of the second quarter of 2022. Service-related revenue as a percentage of total revenue was 62.5% during the second quarter of 2022 compared with 48.5% during the second quarter of 2021. Revenue from international data connectivity service and local data connectivity service increased by 40.1% and 52.6% years over year, respectively. This increase in revenues from data connectivity service was mainly attributable to our gradual recovery of international travel and the continuous development of our local data connectivity service centers. Let's just move to page 21, which shows the revenue breakdown of our two business segments, namely revenue from surveys and sales products. Our total revenue decreased by 6.3% from $90.2 million in the second quarter of 2021 to $18 million in the second quarter of 2022. primarily due to a decrease in sales of data-related products and others. Revenue from service were $11.2 million, representing an increase of 20.7% from $9.3 million over the same period of 2021. The increase was primarily attributable to the increase in revenue from international data connectivity service and local data connectivity service. This is turned to page 22 for gross margins of our bonus. Our service gross margin increased to 56.2% in the second quarter of 2022 compared to 45.4% in the same period of 2021. And our overall gross margins was 44.1% in the second quarter of 2022, increased from 28.1% during the same period of 2021. The increase of our service cost margins during the second quarter of 2022 was primarily attributable to highest margin profile from international data connectivity service. Let's move to page 23, which shows the breakdown of our operating expenses. Excluding share-based compensations and others, excluding share-based compensation, operating expenses as a percentage of total revenue was 41% in the second quarter of 2022, compared with 61% during the same period of 2021. We had further streamlined our bonus operation, including optimizing labor costs, and our total operating expenses, excluding share-based compensation, decreased to $7.3 million in the second quarter of 2022 compared to $11.8 million in the same period of 2021. List of 10 to page 24. Operating cash flow turned positive during the second quarter of 2022 and it was $2.5 million compared to elective $6.1 million during the same period of 2021. This is primarily a result of our ongoing efforts to improve margins profile and control operating expenses. Our cash and cash equivalents and short-term deposits were $12.2 million as of June 30, 2022. Our CapEx was $0.2 million, compared to $0.3 million in the same period of 2021. Here's a view to page 25. The late loss during the second quarter of 2022 was $6.3 million compared to $8.2 million during the second quarter of 2021. Adjusted EBITDA was negative $1.1 million during the second quarter of 2022 compared to negative $5.5 million during the second quarter of 2021. As mentioned above, the company is working towards improving its bottom line results and financial With that, let me conclude today's presentation. Thank you, and we start our Q&A session.

Yes, thank you. As mentioned, at this time, we will begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw the question, press star, then 2. At this time, we will pause momentarily to assemble the roster. And today's first question comes from Vivian Zhang with Diamond Equity.

Good evening. This is Vivian Zhang from Diamond Equity. Thanks for taking my question and congrats on the progress you made this quarter. So my first question will be about the growth margin. We saw the growth margin on both services and sales of products increased significantly this quarter. So I would like to know what's the reason for the increase? Will you continue to maintain the growth margin at this level in future quarters? Thank you.

Yeah. Thanks, Vivian. Yeah, regarding the growth margins improvement in the second quarters, first of all, there's the growth margin on service. That's a massive improvement compared with the same period in the last years. As we explained in the earnings release, our revenue generated from the International Data Connectivity Service increased a lot compared with the last years. The gross margins related to the International Data Connectivity Service is much higher than like a local data community service. And that's a major contribution to our improvement on gross service, gross margins. As we expect, the international travel is in the recovery, and the most countries More and more countries open the door to the traveler. So we expect in the future, we have generated more revenue from international data community service. So we expect our service across the margin will keep this similar level and will be improved in the future once we have more revenue come from international data community service. And also the second contribution related to the product. Yes, our products gross margins are improving as well. That's mainly due to the mixed product selling related to high-end product selling, like 5G's related products sold to the market. And yeah, this year, this quarter, we deliver massive products, Fauci-related products to the market. And we expect that the trend will carry on in the following quarter and this year. Thanks.

Yeah, so I have some more comments about this point. In the R&D side, we also put a lot of effort to improve our margin, improve our algorithm, and the efficient of our data usage and combination. And this part also increased our margin capability. Another factor is that we now have some new design. some replacement of the, you know, to optimize the hardware to improve the profitability of our hardware and data connection together.

Okay, I see. For that, so my second question is that can you elaborate on the partnership you published in the second quarter and how shareholders should view this development? I mean the partnership with Tuya, SunGro and Ctrip.

So which two partner? Yeah.

Yes, I mean, yes, the partnership with the eTrip you published. Okay, yes.

Yes. Yes, last year we have signed a frank contract with Tuya about using our technology to improve, you know, the efficient and the quality in the IoT area. So it's just a friend, a contract, and it's just a starting point. We believe in the future we have more partners because to recognize our technology, because, you know, our hyper-con technology not only improve the coverage of the, you know, IoT device, but also lower the cost of operation costs. because multi-network can enhance the reliability of the IoT network connectivity. That's very useful to the IoT area. So we hope in the future we have more this kind of partner working with us. For example, as you understand in our presentation, so we already embed our service into the IP camera, IP loader, and also now apply into the autopilot. So we believe the basic need for better connection and lower the operation cost is the basic need of IoT application. That's for cooperation partners similar like Tuya, this kind of partner. That's just a start point, and now we have more partners in this area. That's for the first one. For the second one, we're working with the C3 Because you can see now the global tourism travel is recovering. Before the COVID-19, we already is a big partner working with C-Trip. So because we are their biggest channel and for mobile Wi-Fi hotspot rental in China via their channel. So now we are prepared for recovery of COVID-19. So now we are not only prepared for recovery in China, but in U.S., in Southeast Asia, we have more deep cooperation to prepare for the people recovering from the global travel scenario.

Okay, okay, got it. That helps. Thank you. Okay, that's all my questions. Again, congrats on the quarter.

Thank you. And once again, please press star and then 1 if you would like to ask a question. All right. At this time, I would like to return the conference to Jillian Zheng for any closing comments.

Okay. There are no further questions. Okay. Thank you once again for joining us. If you have further questions, please contact our investor relations or contact our investor relations firms at F2Growth.

Thank you. The conference has now concluded. Thank you for attending today's presentation. We now disconnect your lines.