uCloudlink Group Inc.

Hello and welcome to the uCloud Link third 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 touch-tone phone. Please note, this event is being recorded. I would like now to turn the conference over to Jillian Xiong. Please go ahead.

Hello, everyone, and thank you for joining us on EuclidLink's third quarter 2023 earnings call. The earnings release and our earnings presentation are now available on our IR website at ir.euclidlink.com. Joining me on today's call are Mr. Zhi-Ping Peng, our co-founder and chairman of Board of Directors, Mr. Chao-Hui Chen, our co-founder, director, and chief executive officer, and Mr. Yimeng Shi, our Chief Financial Officer. Mr. Chen will begin with an overview of our recent business highlights. Mr. Shi will then discuss our financial and operational highlights for the third quarter of 2023. They will all be available to take your questions in the Q&A session that follows. Before we proceed, please note that this call 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 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 contrary statements, 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. filter events, chance in market conditions, or otherwise, except as required by law. Please also note that Eucolink's earnings press release and this conference call include discussions of non-audited gap financial information and non-audited non-gap financial measures. Eucolink's press release contains a reconciliation of the non-audited non-gap measures to the most directly comparable non-negative gap measures. I will now turn the call over to Mr. Chen. Please go ahead.

Thank you, Jillian, and good morning, everyone. Thank you for joining us today. We appreciate everyone taking time. We delivered another strong set of results during the quarter, highlighted by a 31% year-on-year increase. in total revenues to U.S. dollar, 20.9 million U.S. dollar, and a six consecutive quarter of positive cash flow from operations. Average daily active terminals, our key operational metric, increased once again to a new all-time high of over 320,000. This was a well-run performance across our entire business. During the quarter, we continued to consolidate and develop our uClouding 1.0 international data connectivity services, driving an excellent performance in this segment. Total revenues from uClouding 1.0 international business increased 42.7 percent year-on-year to U.S. dollar 11.4 million. The recovery of the international travel is creating significant tailwinds for this business, with growth from Japan and mainland China as significant growth drivers during the quarter, while Chinese outbound travel remains soft. Chinese international travelers during the peak summer holiday season increasingly chose to use our Longming Man brand services and are accounting for a growing share of our international data connectivity services. Because of that, revenues from mainland China increased to 7.2% of our total revenues during the quarter. as compared to 2.4 percent during the same period last year. This strong performance was enabled by the continuous development of our technology, products and services offerings, and value-add services. During the quarter, we consolidated our leading position as a 5G long-mean solution provider cover our 5G portable Wi-Fi terminals, 5G terminal packages, and parallel user experience they provide. One of our most popular mobile Wi-Fi devices is now equipped with an artificial intelligence services system, especially provided for Chinese cross-border travelers. means that our products are not just data traffic connectivity terminals, but also intelligent travel assistance. We launched a Glocomy SIM card, which currently offers coverage across 10 high-demand travel destinations, and a GPS tracker-enabled portable Wi-Fi terminal that we believe is currently the smallest of its kind in the world. In addition, we pilot an eSIM solution in October year 2023, which will enable us to satisfy a wider range of data connectivity needs from our customer side. Taken together, we believe our high-margin uClouding 1.0 business will remain a key driver of our business as a long-term recovery of international travel continues. We are confident that our expanding and upgraded portfolio of products and services will help us and our business partners achieve further market share gains and enhance our leadership in the international data looming business. We are working on expanding from data connection to more daily life application scenarios by enriching our portfolio offerings. Our Internet of Things IoT solutions are a key part of this strategy, and during the quarter, third-party devices utilizing uCloud's cloud-themed technology powered by IoT solutions went to the market in Japan. Besides embedding our IoT module in the third-party devices, we also expect to cooperate with major IoT module manufacturers on integrated cloud-themed technology. We also continue to conduct commercial testing of our high-performance 5G customer-premise equipment, CPE, which we expect to launch in the near future. The upgraded CPE provides home and office Internet connection that simulates between the fixed and mobile networks, making it a reliable substitute for traditional fixed broadband offerings. We believe this new offering will foster new clouding positions in the fast-growing market for home and office Internet connectivity, helping us expand our user base and gain additional market share in the fixed broadband market. In addition, we launched retail sales of our GPS-enabled portable Wi-Fi terminals in Hong Kong during this quarter, which marks the beginning of our new efforts. to provide more daily life services. We believe these GPS-enabled devices will become an indispensable assistance in consumers' daily lives, offering an easy way to keep track of personal belongings, monitor the location of family members, including elderly relatives, kids, and pets. As I mentioned before, our offerings include CloudSIM products, the Glokomi SIM card, and an eSIM solution, and we plan to launch various hyper-connectivity solutions compatible with CloudSIM, SoftSIM, and eSIM technology in the future. To sum up, we believe our new offerings open up a new range of application scenarios for our solutions and hold significant long-term growth potential. Many of these solutions are designed to generate not just revenue from sales products and data connectivity services, but also past and past revenue that recur on a monthly, quarterly, and annual basis. Our team is working diligently to expand our offering to serve a broader customer base and a wider variety of use cases. We also believe that we are well positioned to create a mobile data traffic sharing marketplace that redefines the mobile data connectivity experience. All of our efforts are geared towards enforcing the competitive advantages that will facilitate the development of this marketplace, our growing user base, our extensive relationship with global mobile network operators, and our innovative technologies. We will continue building out our offerings and working toward our objective of enabling everyone to enjoy a more intelligent and convenient life through reliable and high-quality data connections. For the fourth quarter of year 2003, UCLowling expects total revenues to be between U.S. dollar 22 million and U.S. dollar 26.2 million, representing an increase of 12.2 percent to 33.7% increase compared to the same period of year 2022. I will now turn the call over to Mr. Shi.

Thank you, Mr. Chen. Hello, everyone. I will now walk you through our operational and financial highlights for the third quarter of 2023. Average daily active terminal, BAT, measures customer usage trends and reflects the overall performance of our business. In the third quarter of 2023, our daily active terminal was 325,078, up by 9.3% from the same period of last year and composed of approximately 12,000 owned by the company and 313,000 owned by our business partners. The equally 1.0 and equally 2.0 burners accounted for around 50.4 percent and 49.6 percent of total DAT respectively during the third quarter of 2023. Average daily data usage per terminal was 1.56 gigabytes in September 2023. Total revenue for the third quarter of 2023 23.9 million US dollars representing an increase of 31 percent from 18.2 million US dollars in the same period of 2022. Revenue for service were 16.6 million US dollars, an increase of 31.9 percent from 12.6 million US dollars in the same period of 2022. Revenue from service as percentage of total revenue was 69.7%, up from 69.2% during the same period of 2022. During the third quarter of 2023, as a percentage of total revenue, Japan contributed 44.2%. North America contributed 26.3%. Mainland China contributed 17.2%. and other countries and the regions contributed the remaining 12.3 percent as compared to 35.1 percent, 41.5 percent, 2.4 percent, and 21 percent respectively in the same period of 2022. Revenue from mainland China increased significantly, primarily driven by Chinese travel using roaming man brown service as a key increasingly resumed outbound international travel. Overall gross margin was 51.2 percent in the third quarter of 2023 as compared to 47.7 percent in the same period of 2022. Gross margins on service was 35.9 percent in the third quarter of 2023 as compared to 37.9 percent in the same period of 2022. Excluding share-based compensations, total operating expenses were 8.7 percent million U.S. dollars or 36 percent of total revenue in the third quarter of 2023 as compared to 7.3 million U.S. dollars or 40 percent of total revenue in the same period of 2022. We record net income of 3.5 in the third quarter of 2023 as compared to a late loss of $4.6 million in the third quarter of 2022. Adjusted EBITDA loan gap improved to $4.1 million during the third quarter of 2023 as compared to $0.9 million in the same period of 2022. We achieved positive operating cash flow of $2.8 million during the third quarter of 2023, as compared to $1.2 million during the same period of 2022. We successfully achieved positive cash flow from operation for six consecutive quarters, accumulating operating cash inflow of $16.7 million through the previous six quarters. In sum, our financial performance continued to improve during the third quarters, and we believe that we are well positioned to execute on our strategies growth initiative. With that, operator, please open up for Q&A.

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 keys. 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 from Diamond Equity Research. Please go ahead.

Hello, this is Vivian Jiang with Diamond Equity Research. Congrats on the strong quarter. Here are my questions. First, could you elaborate on what drove the margin expansion in the quarter, particularly margin on product sold? Was it a price increase or product mix? And is this trend sustainable? Thanks.

I'll answer your first question regarding the improvements on gross margins. As you see, the overall gross service margin improved a lot compared to the same period last year. The major contributions came from the sales of the products. So, there's improvements on the sales products that contribute overall for this quarter's gross margins. For service gross margins, it's a similar level, a little bit fluctuation compared with the same period of last year's. So, looking forward, as we can expect, The recovery in international travels resumes in the following years. So, we are in the international connective service gross margin is one of our highest gross margins in our categories. So, we expect that the service gross margins will keep this to a similar high level in the fourth quarter of this year. And for sales products, it depends on the mixed product selling to the customer. That's within the sales products gross margins will be carried on depending on the mixed product selling. Thank you.

Okay, got it. Thank you. My second question will be about the newly launched product. Can you share with us more information about the portable Wi-Fi terminal and how you expect this new product to drive the company's growth?

Yeah. So, you know, first, I think it's launched 5G this year, 5G product this year. in the last quarter, in Q2, so quite successful. This is the world's leading first 5G global roaming, free roaming, high-performance Wi-Fi. This helped us achieve quite a good market share because currently this is almost the only one portable Wi-Fi available in this market for global loaning. That's first. Second, we launched a small business card size portable Wi-Fi. This portable Wi-Fi can enhance our market position in the international business. because we can combine our big Wi-Fi and small Wi-Fi together, provide more flexibility to meet the various needs of the family package. For example, several family members, they can use one package for big device, or you can independently use the smaller device. So that means get more attractions and give users more flexibility. That's a second product we launched in the third quarter. Another product, for example, we provide artificial intelligence into our Wi-Fi. That means, you know, for Chinese travelers, they are hard to use, like China GPT. Like China GPT in China is difficult because it needs a foreign number to register, et cetera. This barrier is there. With our solution, we're working with the service provider to provide artificial AI into our MiFi. And then our users travel from China to outside the world. They can use the China GPT so freely. So I think that can enhance our service ability. So we also provide SIM card business because many people, even the portable Wi-Fi can provide the best connection, but some users still want to use a simple solution, not willing to carry an extra device. For this scenario, we provide the SIM card business for them, and our SIM card business download the different countries' portfolios, and also, combined with our cloud theme, enable these devices. Only with the theme card, they can free roaming in more than 10 countries. I believe in the following quarter, we will be providing more countries. And this will meet more customer need for more convenience for people who are not willing to bring extra device. So I think all, by the way, also our solution now can integrate more services in the future. Like in our G40, integrate more, like artificial, like car calling, and these kinds of services can help. Chinese and foreigners more easily, more convenient during their travel. So all this is a product for our one-point operations. And also we launched 4G and 5G CPE. 4G already in the world, the first high reliable, you know, CPE. help the fixed network become more reliable. No matter the fixed network, how reliable? There are some periods in the years, there are some broken, some dropped. We can use the multi-mobile network to enhance, to guarantee, provide the most strong backup or disaster recovery for fixed network. That's our quite unique solution for fixed mobile broadband. And this also helps us to consolidate always the better connection brand and the services. And the final one, we also launched our cloud thing into the IOT. So it was like in Japan announced. And also the more and more module and understand our value. for the cross-carrier, and also the global roaming free. And this can provide all of these smart devices, international and locally, get the best reliable connection. That's basically for smart, intelligent devices. These market share solutions get more and more attraction for the end users. So all these five new products and solutions, I believe, not only can enlarge our market share in 1.0 business. You can see we already win the market share compared with before COVID-19. Our market share for MeFi rental business in China is higher than year 2019. So even in China, the recovery of the international business is soft. It's not as quick as we expect. around 30% of recovery so far, but we still achieved a big market share and good result. Thank you. That's my answer.

Okay, okay. That makes sense. Thank you so much for the detailed information. That's all my questions. That's all.

The next question will come from Theodore O'Neill of Witchfield Hills Research. Please go ahead, Theodore. Thank you.

Thank you very much, and congratulations on a strong quarter. My first question is about the growth rate of terminals versus data. So the terminal growth rate was strong at 9.3% in the quarter, but the total data consumed was less than 1%. Should those two things be related? Does it have any meaning that one's much larger than the other?

Hi, thanks for the other questions. Let me first explain a bit for the two metrics. Yeah, you mentioned the metrics is the daily active terminal, right? The daily active terminal, we achieve the a new highest of over $320,000. Compared with last year, this figure is increased by about 9.3 percent. It seems not a very significant growth, but the revenue generation is quite strong compared with this growth rate in terms of daily active terminal. Daily activity is a very important operation matrix. We give our hints whether our user or partner uses how much of the terminal to generate revenue. So the revenue generation is quite reliant on the usage of our terminals to provide better connections. So that's a strong indication of how revenue generation and growth in the future. So that figure tells us in the future, in this labor, 320,000 of the daily active terminal support our generated revenue in a very fast growth pace. So that's why we are develop more new products to satisfy customers' requirements. So more products as described by our CEO, Mr. Chen. So this new product will belong to the market and will support our more active terminal in the market. So our growth will be, our revenue, service revenue will grow as well when we The data-active time-lapse are gross.

Okay. Okay, I understand. The next question is about the IoT. Okay, so in your prepared remarks, you're talking about the expanding number of third-party devices powered by IoT solutions in Japan during the quarter. Is there any particular end-use application for this IoT, or is it broad-based?

Yeah, our IoT, I think for Japan case, is achieved by a partner. They applied this solution for the end user, so for the loader, try to enhance the, you know, the reliable of the network connectivity. Potential is big, so that's the first phase launch. And we believe that we are launching a more bigger scale in the future. And that's for the IoT in Japan case. And also, I just mentioned we embed our solution into the module manufacturer. That means our, you know, cloud-based technology embed into the module manufacturer achieve progress. And I think as more and more module provider embed our BroCoMe inside, so I believe this smart module and all the extra SIM cards put inside, and we provide better connection, more network connection, and worldwide connection for this smart device. It's become more and more a strong need, I understand, for this smart device. For example, like the smart car, like this smart charger, power battery, smart power battery, they are worldwide, shipped to the worldwide, but they need to be monitored. and their performance. So I think we provide these best connections and also very competitive connections. And that's why I believe in this path and in the next year and the following years we will achieve a big number of connections.

And my last question is about cash balance. You're building a good-sized cash balance here. I wonder if you have plans for acquisitions or dividend or similar?

Yeah, you see, as we announced, we achieved a positive cash flow for operations for a six consecutive quarter. And so that accumulates operating cash inflow of $16.7 million through the previous six quarters. So our cash balance now is over $20 million. So that's, yeah, we achieve in terms of gross rates is quite good. We expect we'll keep this trend to generate more cash flow from operations. to further improve financial positions. We want to have enough cash balance to support the company to grow and expand in the future. So far we don't have the target. to allow us to do some acquisitions, this kind of thing. So we still focus our performance to generate more cash flows to enhance our position. That's my answer to the question.

Thank you very much. I think, yeah, I believe so. I think our business, 1.0 and also the following new product launch, I believe we will generate more revenue of cash. That's a good business. So our first step is try to make the company more stronger, more healthy. First step. And the second, also we consider any potential opportunity in the future. So we're just in the consideration. But I think the first step is make the company more stronger, more healthy. That's our preferred thinking.

Okay. Thank you very much. That completes my questions.

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

Well, thank you once again for joining us today. If you have further questions, please feel free to contact Euclid Links Investor Relations through the contact information provided on our website or contact our investor relations firm, Christensen Advisory. We look forward to speaking to you all again on our next quarterly call. Thank you.

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