uCloudlink Group Inc.

Hello and welcome to the UCloudLink Group, Inc. Third 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 third quarter 2022 earnings call today. The earliest release is now available on our IR website at ir.euclolink.com as well as our Newswire service. I will give a brief introduction to our Euclolink management team. Zhi Ping Peng is our co-founder and chairman of the board of directors. Chao Hui Chen is our co-founder, director, and chief executive officer. Yimeng Shi is our chief financial officer. Zhu Tan is our then 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 in our IR website. Our CFO, Yi Mengshu, will then discuss our operation highlights and financial results as presented in Sections 2 and 3. Before we proceed, please note that this court may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Security Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown ways. 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 entity by the cautionary risk factors, and details of the company's filings 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 EuclidLink's earnings press release and this conference call includes discussions of the non-audited GAAP financial information as well as the non-audited non-GAAP 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. Chao-Hui Chen. Please go ahead.

Thank you, Julian. Page 4 to page 12 are similar contents as the earning presentation of the second quarter of year 2022. We here encourage you to review in the third quarter of year 2022 earning presentation uploading to our investor relationship website with some latest updates. Hence, I will focus on our most recent developments in the third quarter. Let's move to page 13. Euclid 1.0 is our international data connectivity services business, which has had a strong track record of high growth margins and profitability with ongoing growth potential. During the third quarter of the year 2022, our 1.0 business revenues increased by 30.1% compared to the same period of year 2021. The revenue of our 1.0 business in our Japan and Southeast Asia market increased significantly and in mainland China market recovery slightly during the third quarter of year 2022, year over year. International travel restrictions around the world continue to abate over time across our major international market, with North America openly followed up by Europe and later Southeast Asia. One of our key markets, Japan, has also recently announced the lifting of restrictions for foreign travelers effective this October. Consequently, the number of average daily active terminal for the 1.0 business has increased during the third quarter of year 2022. Compare the third quarter of year 2021. Average daily activity terminal for the one point of business has increased by 25%, showcasing the accelerated recovery of the demand of the uCloud's high-quality international data products and services. Currently, we are providing reliable and high-quality international data connectivity services in more than 140 countries, powered by our PaaS and SaaS platform. enabling single operator entry point to assess more than 300 global mobile network operators available network. Going forward, I will remain positive that our one point of business will continue to be the key growth driver of our revenues as well as bottom line results. Let's move to page 14. uClouding 2.0 is our local data connectivity services business and has become a new driver 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 convergence and data connections, the cooperation with intelligent hardware manufacturers to implement glaucoma insight, et cetera. In the past quarter, we have continued to strengthen our presence in our existing markets, including Japan, North America, South Asia, where We help operators and business partners improve their data connectivity services and solve data connection problems through our PaaS and SaaS platforms based on our patent technologies, including the Cloud Theme and the Hypercom technology solution. As we shared in our last quarter, we take pride in our ability to adapt ourselves to the evolving market by introducing and upgrading innovative products to address various 2.0 business applications scenarios. Our 2.0 business revenue report a 38.7% increase during the third quarter of year 2022 compared to the same period in prior years. Our customers are able to realize reduced operating costs and improve data connectivity experiences 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. For example, uCloud is cooperating with a global leading cloud platform provide better connectivity services for this smart ramping. During the third quarter, we have extended efforts into upgrading our current portfolio of offerings to provide a better connecting experience for IoT customers and prepare these products and solutions for more diverse application scenarios. 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 the local partners. Let's move to page 15. New clouding positions itself as a pioneer technology solution provider in the data connectivity market. Based on the 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 and empower the building of our path and south ecosystem and in our research and development team to address diversified needs to our customers post to us. We are more than pleased to announce that we maintain a positive operating cash flow for the second consecutive quarter during the third quarter of year 2022. And we successfully achieved a positive adjust net income, non-GAAP, for the first time since the global outbreak of the COVID-19 pandemic in the second quarter of year 2020. Our total revenue reached US dollar, 18.2 million US dollar, during the third quarter of the year 2022. And for the first quarter of year 2022, we expect we would further improve our total revenue to be between U.S. dollar 19 million and U.S. dollar 22 million, representing an increase of 8 percent to 25 percent compared to the same period of year 2021. We expect this improvement will allow us to build a more solid financial and operational position to fuel better results in the future. We believe that connected to better connection, uClouding is a significant driving force in the transformation of increasingly advanced information elements. We are committed to build a more connected future for more customers and users, and we strive to make a positive impact in serving the global user community. I will now turn it over to our staff of Yimen Shi, who will go through business and financial highlights.

Thank you, Mr. Chen. Hello, everyone. I will quickly go over our business highlights for the quarter ended September 30, 2022. Let's turn to page 17. Average daily active terminal for the third quarter were 297,501, of which 1,522 owned by the company and 295,979 owned by our business partner, representing an increase of 16.2% from 256,124 in the third quarter of 2021. Our EuclidLink 2.0 service accounted for around 65% of the total DAT during the third quarter of 2022. Average daily data usage per terminal was 1.71 gigabyte in September 2022. This is October 2018, which shows global diversification of our business. We had around 98% of the total revenue from outside mainland China. During the third quarter of 2022, Japan contributed to around 35.1% of our total revenue. For other countries' revenue, the North American market had the largest contribution to our business, reflecting the further development our North America business, and we will continue to expand other markets such as Europe and Southeast Asia, et cetera. During the third quarter of 2021, we had 3.7 percent of total revenue coming from mainland China, 46.6 percent of the total revenue coming from Japan, and 49.7 percent of total revenue coming from other countries and regions. Let's turn to page 20. I will go through our financial highlights of the third quarter of 2022. Service-related revenue, or the percentage total revenue, was 69.2% during the third quarter of 2022 compared with 34.2% during the third quarter of 2021. Revenue from international data connectivity service and local data connectivity service increased by 30.1% and 38.7% year-over-year, respectively. This increase in revenue from data connectivity service was mainly attributable to the gradual recovery of international travel and the continuous development of our local data connectivity service business. Let's move to page 21, which shows revenue breakdown of our two business segments, namely revenue from service and sales products. Our total revenue decreased by 5.7% from $19.3 million in the third quarter of 2021 to $18.2 million in the third quarter of 2022, primarily due to the decrease in sales of certain terminal and data-related products. However, revenue from service worth $12.6 million represented an increase of 20.5%. from $10.5 million from the same period of 2021. This increase was primarily attributable to the increase in revenue from international data connectivity service and the local data connectivity service. This turns to page 22 for gross margins of our bonus. Our service gross margins increased to 57.9 percent in the third quarter of 2022. compared to 43.5 percent in the same period of 2021. And our overall gross margins were 47.7 percent in the third quarter of 2022, increased from 28.3 percent during the same period of 2021. The increase of our service gross margins during the third quarter of 2022 was primarily attributable to higher margin profile from the United Data Connectivity Service. Let us move to page 23, which shows the breakdown of our operating expenses. Excluding share basis compensation and others, excluding share basis compensation, operating expenses as a percentage of total revenue was 40% in the third quarter of 2020, compared with 61% during the same period of 2021. We had to further streamline our business operation, including optimizing labor costs. And our total operating expenses, excluding share-based compensation, decreased to $7.3 million in the third quarter of 2022, compared to $11.8 million in the same period of 2021. Let's turn to page 24. Operating cash flow maintained positive for the second consecutive quarter during the third quarter of 2022, and was $1.2 million US dollar compared to elective 5.7 million US dollar during same periods of 2021. This primarily a result of our ongoing efforts to improve our margin profile and control operating expenses. Our cash equivalent and short-term deposit were 12.5 million US dollars as of September 30, 2022. 0.1 million US dollars compared to 0.3 million US dollars in the same period of 2021. Let's just move to page 25. Net loss during third quarter of 2022 was 4.6 million US dollars compared to 7.0 million US dollars during third quarter of 2021. Adjusted EBITDA long gap was positive during the third quarter of 2022 compared to the negative $5.4 million during the third quarter of 2021. I will successfully achieve a positive adjusted net income long gap and adjusted EBITDA long gap for the first time since the global outbreak of COVID-19 pandemic in the second quarter of 2022. As mentioned above, the company is working towards improving its bottom line results and financial position. In October, we announced the early redemption of the convertible departure due to our increasing confidence in the improved financial positions. We are confident in the company's capability to execute the strategies to further enhance our financial and operations position. With that, let me conclude today's presentation. 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're 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. 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 morning. Congrats on that quarter. So my first question is that what's the reason why the company can continue to generate positive operating cash flow for the second consecutive quarter? How will this affect the company?

Yeah. This is Iman. She's answering the questions. Yes. This second quarter, we maintain the that's positive operating cash flow following the second quarter of 2022. The main reasons came from the two. First, our margins profiles have been improving quarter over quarter, as we illustrate on our presentations. was service gross margins and overall gross margins reached the highest levels. So that contributes to our gross profit amount increased significantly. And the second point is we have maintained and controlled our operations significantly. We streamline our business operations, and as we demonstrate, our operating expenses have been decreased significantly compared to the same periods last year. So that's the two main contributions to our second year. second quarter's positive cash flow. And we expect this trend, the positive cash operating cash flow, will be achieved in the fourth quarter of this year. So we believe our financial position has been improving and support our growth in the future.

Yeah, by the way, our international business recovery So this is a high-margin business. Also have to get more high-margin business.

Okay, got it. So can you share with us what measures have you taken to control costs and achieve positive adjusted net income and the EBITDA?

Yes, the similar reasons as our positive operating cash flow. The gross margin overall, gross margin improved a lot, and our operating expenses have been decreased at the same time as well. So we combine combinations together so we will achieve a positive adjusted net income. and the positive adjusted EBITDAs. So we expect this improvement will be carried on in the fourth quarter and the next year as well. So the company's financial position will be improving on this basis.

Okay, can you elaborate on the, like, what specific measures you've taken, like, to decrease the operating expenses? Because we saw that operating expenses decreased a lot, but what measures have you taken?

Yeah, there's, as we, in the ER's release, we, the main decreasing amounts came from the headcount, headcount-related costs. The numbers of our headcounts have been reduced compared with the same period last year. So we report that the headcounts numbers in the presentations is around 300. So compared with last year, the number of headcounts has been – our efficiency operations have been improved. This number of headcounts could support us to achieve the year-end outlook and also could achieve our growth in the next years as well.

Okay, got it. So my last question is that compared with the Japanese and Chinese markets, the proportion of revenue from North America has increased a lot this year. So can you share with us the growth of the North American markets and what are the drivers for the growth there?

Yep. So I'm here speaking. So North American is, you can see in our data, our North American market increased quite a lot from last year about several million to this year we forecast more than 10 million. That's a big increase. There are several reasons. One is U.S. recovery from the COVID-19. So the requirement for the international traveler become more and more popular. That's one reason. And the second reason is U.S. market, the coverage of network is not as good as in China and Asia. So people need a better coverage and less the traffic jams in local network. So that's increased, especially for 5G, the coverage is improved. So we launched the world's first 5G solution, MiFi solution in the United States. That's getting popular in this market. And the third, the local market including IoT and including the local requirement for the better coverage. So it's getting more and more, I think more and more industry and people need a better coverage for providing a better service. So these are three key reasons that are, you know, because our product can provide the coverage compared to other products. So we win more and more market share in this market.

Okay, got it. So can you share with us, like, who are the main competitors of you in the North American market?

Yeah, they are in different areas. We have different, you know, competitors. There are some competitors like Skylum. They have similar technology, but we can provide much wider product line and much better quality because we come from the telecom industry and we understand the quality is how important to the market. So we invest a lot in our product. That's why we are currently the only one vendor who can provide a global 5G service no other product can provide. That's a case. The other case is our product, you know, it's a best seller for the cloud theme technology in the Amazon market. You can see our, you know, market share there. And also our customers understand our quality product patent is in a leading position in this market. are quickly, you know, exploring the U.S. market and market share increase very quickly.

Okay, I see. Thank you. That's all my questions.

Again, if you have a question, please press star then 1. This concludes our question and answer session. I would like to turn the conference back over to Jillian Zhang for any closing remarks.

Okay. Thanks, everyone, for joining us. If you have any questions, please contact Euclid Links Investor Relations through the contact information provided on our website or contact our investor relations firm on the equity group. Thank you, everyone.

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