uCloudlink Group Inc.

Good day, and welcome to the UCloud Link Group, Inc. second quarter 2023 earnings conference call. All participants will be in listen-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 touchtone phone. 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. Please go ahead.

Thanks, everyone, for joining us on our second quarter 2023 earning call today. The earnings release is now available on our IR website at ir.uclaulink.com and via new web services. I will give a brief introduction to our UCLOLINK management team. Mr. Ji Pingpeng is our co-founder and chairman of the board of directors. Mr. Chao-Hui Chen is our co-founder, director, and chief executive officer. Mr. Yi-Meng Xu is our chief financial officer. Mr. Chao-Hui Chen, our co-founder and CEO, will begin with an overview of the company's recent business highlights, which will cover the earnings presentation posted on our IHAR website. Mr. Yi Mengshi, our CFO, will then discuss companies' operational highlights and financial results. Before we proceed, please note that this quorum contains 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 achievement 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 entity by the contrary with the factors and details of the company's filings with the SEC. The company does not assume any obligation or 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 earning price release and this conference call include discussions of the non-audited gap financial information and the non-audited non-gap financial measures. Eucolink's press release contains a reconciliation of the non-audited non-gap measures to the non-audited most directly comparable gap measures. I will now turn the call over to our co-founder and CEO, Mr. Cha-Hui Chen. Please go ahead.

Thank you, Julien. And good morning, everyone. Thank you for joining us on our second quarter year 2023 earnings call today. We appreciate everyone's time. We were pleased to have achieved positive cash flow from operations for a fifth consecutive quarter. During the quarter, we reported strong top-line growth with total revenues of U.S. dollar 22 million at 21.9% increase from the prior year period and the average daily active terminals continues to increase and once again reached a record high over 310,000. During the second quarter of the year 2023, Revenues from uClouding 1.0 international data connectivity services business, we call uClouding 1.0 business, increased by 32.5% year-over-year to U.S. dollar 9 million. And the average daily active terminals from uClouding 1.0 business increased by 57.7. percent year-over-year, primarily as a result of the recovery in international travel. While our bound travel from China remains somewhat limited in the first half of the year 2023, Chinese tourists utilizing Longming Membrane services still have contributed an increasingly considerable amount to our international data connectivity services. Our unique 5G portable Wi-Fi terminals and the various data traffic packages from 4G to 5G are widely recognized by the market for the ability to elevate the user's experience across a broad audience. which will enable us to maintain our leading positions in the global long mean market. I'm pleased to share a few recent developments in our 1.0 business. In July, year 2023, we launched the Glocomi SIM card. This SIM card is backed by our patent cloud SIM technology, which allows our customers to freely purchase and use multiple global data plans as needed. As of lunch, this global meeting covers 10 major destination countries, including Japan, the United States, Australia, and we expect to gradually expand its availability to additional countries and regions. In addition, we are launching a pilot sales of GPS tracking enabled roaming portable Wi-Fi terminals that we believe will be the smallest one in the world. The innovative product range covers portable Wi-Fi, GPS tracking enabled roaming terminals, and the local SIM card. expanding U-Clouding 1.0 business portfolio of offerings, through which we help global users achieve a leading zero-loaning experience in various application scenarios to satisfy their cross-border data demands, driving competitive advantages that enhance our business performance. optimistic about the prospects of uClouding 1.0 business and believe that this higher margin business will continue to serve as a key growth drive into the future. uClouding 2.0 local connectivity services business, we call uClouding 2.0 business, maintains continuous development which report U.S. 2.2 million in revenues, up by 23.1 percent from U.S. dollar 1.8 million in the second quarter of the year 2002. During this quarter, our upgraded customer premise equipment, CPE, was tested commercially. This product enabled a seamless transition between fixed and mobile networks. serving as a substitute for traditional fixed-line broadband, suitable for home and office internet connection use. We are confident that the upgraded CPE will allow us to further gain the market share in the fixed broadband we call FDB market. What I discussed just now outlines our data connectivity services business. I would like to highlight uCloud Link's PaaS and SaaS solutions, which is a line of business where we see great potential. On the IoT side, uCloud Link's IoT module will begin to be commercially embedded into the devices of major mobile network operators in Japan. within years 2023, making a significant expansion into IoT application scenarios. Adding to the Embed IoT module, the GPS tracking enabled roaming portable Wi-Fi terminals and upgraded CPE. This offering will generate recurring pass and start services revenues apart from data connectivity services revenue and set of products. We look forward to applying our PaaS and SaaS solution to provide additional services, including customer management services, emergency and security communication services, and GPS tracking services. Among the others, expanding our user base and application scenario, and contributing to the growth of our revenues. During the quarter, we continue to prepare for the full initial. initiation of our one-stop comprehensive marketplace APP, a centralized platform application that allows users to assess our full portfolio of services. We believe that we are approaching the launch of one-step marketplace APP, which will enable us to attract more users and customers beyond their users beyond the users of portable Wi-Fi step by step. We remained confident in our team's capabilities to launch the APP in the near term. In conclusion, we were pleased with the progress we have made in our growth initiatives, as well as the improved financial results we have achieved in the first half of the year. We are pleased to be at the forefront of the innovation and expect to continue expanding our portfolio of offerings based on our innovative cloud-themed technology and the HypoCon solutions, which demonstrates our strong research and development capability, laying a solid foundation for future growth. For the third quarter of year 2023, Ukraine expects total revenues to be between U.S. dollar 23.5 million to U.S. dollar 24.5 million, representing an increase of 29.1% to 34.6%, compared to the same period of year 2022. we will continue playing a significant part in integrating high-quality data connectivity experience into various life scenarios. And we believe that our solutions truly enable our customers and users to live a more convenient and intelligent life, from connected to be better connected. I will now turn the call over to our CFO, Mr. Yim Chi.

Thank you, Mr. Chen. Hello, everyone. I will go over our operational and financial highlights for the second quarter of 2023. Average daily active terminal, DAT, measures the trend of customer usage over the period, reflecting our ongoing business performance. In the second quarter of 2023, The average daily active terminal was 318,778, of which 7,386 owned by the company and 311,392 owned by our business partners, up by 9% from 2018. 92,432 in the second quarter of 2022. The average DAT for our Eucalypt 1.0 and Eucalypt 2.0 donors accounted for around 46.4% and 53.6% of total DAT, respectively, during the second quarter of 2023. Average daily data usage per terminal was 1.59 gigabytes. in June 2023. Total revenue for the second quarter of 2023 were $22 million, representing an increase of 21.9 percent from $18 million in the same period of 2022. Revenues from service were $14.1 million, an increase of 25.2 percent from $11.2 million in the same period of 2022. Revenue from service as percentage of total revenue was 64.1%, up from 62.5% during the same period of 2022. During the second quarter of 2023, as a percentage of our total revenue, Japan contributed 43%, North America contributed 29.5%, mainland China contributed 11.6%, and other countries and regions contributed the remaining 15.9% as compared to 38.1%, 39.2%, 1.4%, and 21.3% in the same period of 2002 respectively. The revenue from mainland China increased significantly primarily due to the recovery of international travel from the Chinese tourists United Roaming Man Brand Service. Overall gross margins was 44.9% in the second quarter of 2023 as compared to 44.1% in same period of 2022. Gross margins on service was 58% in second quarter of 2023 as compared to 56.2% in same period of 2022. Excluding share basis compensations, total operating expenses were $7.3 million or 33% of total revenue in the second quarter of 2023 as compared to $7.3 million or 41% of total revenue in the same period of 2022. Reliability loss significantly to $0.9 million in the second quarter of 2023 compared to a late loss of $6.3 million in the second quarter of 2022. Adjusted EBITDA loan gap improved to $2.1 million during the second quarter of 2023 as compared to negative $1 million in the same period of 2022. We achieved positive operating cash flow, $3.4 million during the second quarter of 2023 as compared to $2.5 million in the same period of 2022. We successfully achieved positive cash flow from operation for a third consecutive quarter, accumulating operating cash flow of $13.9 million through the five periods. In the second quarter of 2023, we continue to improve our financial performance, and we believe that we are well positioned to executive on our growth initiative. Without operator, let's open up for Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster.

Our first question comes from Theo O'Neil with Litchfield Hill Research.

Please go ahead.

Thank you very much. My first question is about product sales in the quarter. They were up sequentially from the first quarter, quite a bit. Is there a particular reason for that? Strength in Q2 versus Q1?

So your question regarding the second quarter revenues compared with the first quarter of this 2023, that's your... Yes, but only for products, not services.

Just the product strength growth was strong in Q2 versus Q1. I was just wondering if there was something going on in Q2 for products that was different from Q1.

Yeah, so I think there are two reasons that this happened. One is because of COVID-19 is all over the world, including China, Japan, Southeast Asia. So the first quarter, just before China, the first quarter just opening. So everything is no fast growth. And that's the first reason, because COVID-19 is over. And the second is the worldwide of our customers prepare for the summer season. So these two reasons met the equipment growth.

OK. My next question is about the GPS tracker-enabled portable terminal. Having a GPS tracker inside the terminal, is that to prevent theft, or does the GPS info feed into the SIM card selection?

Sorry, can you repeat your question?

The GPS tracker-enabled portable terminals. There's a GPS tracker in there. Is that to prevent the terminal from being stolen, or does the information from the GPS feed into the SIM card selection?

Yes. We just newly launched a new product in the second quarter. So I think it's a smaller volume launch. And it's very small, very tiny, about 40 grams. The weight is down 40 grams, like smaller than a business car. Smaller than a business car. So it's convenient. It's small. It's portable Wi-Fi and multi-function with GPS tracking, SOS function. Why we launched this kind of product? This is because we try to let the people understand not only for connection. Because our marketing network, Cloud Theme Technology and HyperCon, will enable people to get the best coverage. So this technology not only we can apply into the connection for better connection but also because of better connection we can enable people to find lost goods much easier because we get better coverage. all the GPS information is easily to be, via our 4G, sent back to the server and let the people can find the loose material or the people who lost and easy to SOS for get that sent. So that's the reason we are now expanding our business from clinicians to people who need better coverage and need this checking and the health requirements.

Oh, thank you very much. That completes my questions. Thank you.

Again, if you'd like to ask a question, please press star then 1. Our next question comes from Vivian Zeng with Diamond Equity Research. Please go ahead.

Hello, this is Vivian with Diamond Equity Research. Congratulations on the nice quarter. I have two questions for you. First one is about operating expenses. Because in the quarter, the research and development expenses decreased by like over 30%. Well, sales and marketing expenses increased over 40 percent. So can you explain why this happened? Does this mean that the company's spending will be focused more on the marketing side?

Yes. Yeah, you have the figures tell us how we managed our telecom relevant costs. and also the other business-driven expenses as well. For INDs, we are managing tightly on the increased headcount. Even this year, we expect the business activities increasing and the revenue will grow. We're managing this program under the tight cost of control measures. So R&D's headcount is not increasing as revenue growth expectations. But on the other side, as you saw, our sales market sector is expensive compared with last year's periods, increasing. This came from two drivers. One is the sales guide, the headcount sales guide, increasing. increases compared to last year. As we explained in the ER, Roaming Man branch service contributes a lot of revenue for Chinese out-of-bounds tourists. So our headcount for the China maintenance business increased. But all this headcount increase is in our budget. reflecting our growth, and we control our budget in line with growth activities.

Let me add two more comments. I think our cue to the major revenue here comes from our traditional product, but especially for our 5G product, that's quite popular. because we are the only one currently launching 5G worldwide connection. This is quite popular and generate good revenue. But more than the traditional product, in the second quarter we launched three new products. That means our R&D capabilities is very stronger. So we can, in one quarter, launch three new products. And these new products are at the end of the second quarter. And I think in the next two quarters and the next year will help us win more revenue and users. These three products, I think you can see, is about our global mixing. First and second is our high reliable CPE, upgraded CPE, and then can enable the enterprise office and home to get a high reliable network to secure their fixed network, no job, so for disaster recovery. So the last one we just launched. smallest car size, you know, checking and the product. And this can go to the daily life of the people. So all these three new products, I think, demonstrate our R&D has a very strong capability. Even during the last 24 years, we still can launch our new product in the second quarter. So I believe this new product I just mentioned can, in the following quarter and the next year, will generate more revenue and users for us. Thank you.

Okay, okay, I understand. So next question is that could you elaborate on what drove the company's revenue growth in China? and your products and growth strategy there, because I see the proportion of our revenue from China increased a lot this quarter. Can we expect this growth momentum to continue? Thank you.

Yes, we disclosed the third quarter's guidance. The growth rate will be go to 30% around compared to the same period of 2022. We expect that there's a peak season for summer holiday, and the same for Chinese outbound tourists. So summer holiday is a peak time for our year, for this year. So we expect the growth momentum came from international travel, this pick-up time. So that's the main driver for our growth revenue in the third quarters. And also we'll contribute our improving our service gross margins and contribute to our a stronger financial position in terms of operating cash flow and adjusted late income.

Yeah, so I still have more to comment. We can see the report from the government. The first half years of China outbound tourist, only recover 30%. So you can see it's a smaller compared year before COVID-19, only 30% recovery. So people, the government forecast during the next holiday, like National Day, will be go to the 50% around this figure, almost another bigger growth. Another reason we understand because of the visa issue and the passport issue during the COVID-19. So we haven't seen a big increase from the Chinese people. Even this smaller percentage already gives us a good revenue. We believe that once the visa problem and the passport problem and the opening of the boundary become more... become more – I think at least this barrier was overcome. I believe that in the third quarter and fourth quarter, we will get a much better revenue from the China market for loaming membranes.

Okay, that helps. Thank you.

Our next question comes from with Great Wall Securities. Please go ahead.

Hi, this is from Great Wall Security. And I have a question about the because we see the revenue of this part like doesn't have obviously increased compared to the first quarter so I want to know the maybe the the process of the patents are service development at this time yeah yeah yes so you see we in the second quarter to attend history our

Service revenue segment increases significantly with a mix of the three main types of service revenues. International Roaming Connected Service, Local Connected Service, and Post-Source Service. Among the three categories, Roaming Service is the increased number one in terms of growth rate. And PASOS is in third place in terms of growth rate. As we report, our daily act terminal in the second quarter reached a historical record high of over 310,000. So that's our foundation to reflect our growth foundation activity is growing. Why is Podsoft's revenue growth rate in third place? It depends on our monetized business models. We have three main business models. One is the B2C retail business model, and the second is B2B2C wholesale business model. And the third one is Podsoft's platform. So it depends if our business partners choose which business model is suitable for them. So you have people that choose B2B2C, wholesale business model in roaming sectors. So we will have more roaming service generated from this commercial term. Sometimes we don't double charge. wholesale packets to the partner and platform. But overall, our activity is growing in nine hours gross total. And as we discussed as well, we launched three products in this quarter, and Columbia, Simca, and this is the smallest Wi-Fi, portable Wi-Fi with the GBC truck function and IoT modules delivered to the main operator of the mobile network operating in Japan. So this IoT module delivery most will generate more part-source service in the future to our account. And for this other function like GPS tracker will also generate platform service, pass-off service to account as well in the future. So the momentum for pass-off revenue growth is still strong. But we manage our performance in terms overall of three main categories of service sector.

Yeah, I think because we launched a new product and a new service, I think we are expanding our past SaaS revenue. We are traditional. It comes from the connection services and the data volume. But now we're expanding to the new area, like I just mentioned, GPS tracking, high resolution and high availability tracking. So that's our unique services. Also, in the future, about SOS in the high percentage for emergency services. So all these types of high-reliable CPE, high-reliable loader, even the data data usage is quite smaller, but people buy for, you know, buy for emergence. So they buy for, I think, like insurance for the high-quality connection. I think this kind of the services more be aware by the people, more easy understanding rather than the connection. And this type of the services will generate more, you know, PAS and SAS services revenue in the future.

Oh, yes. Yeah. I got it. Okay. Thank you very much.

This concludes our question and answer session. I would like to turn the conference back over to Jillian Zeng for closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact the Youth Law Links Investor Relations through the contact information provided on our website or contact our IR Relations Service at the group. We look forward to speaking to you again on our next quarter. Thank you.

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