Ucloudlink Group Inc. (UCL) Q2 2020 Earnings Call Transcript

Ucloudlink Group Inc. (NASDAQ: UCL) Q2 2020 earnings call dated August 17, 2020

Corporate Participants:

Bob Shen — Senior Investor Relations Manager

Chaohui Chen — Director and Chief Executive Officer

Yimeng Shi — Chief Financial Officer

Analysts:

Elisa Feng — Jefferies — Analyst

Presentation:

Operator

Good morning and good evening ladies and gentlemen, thank you for standing by and welcome to uCloudlink Group Inc. Second Quarter 2020 Earnings Conference Call. [Operator Instructions] After prepared remarks by the management team, there will be a question-and-answer session. [Operator Instructions]

I would now like to turn the call over to your host today, Mr. Bob Shen, Senior IR Manager of the company. Please go ahead.

Bob Shen — Senior Investor Relations Manager

Thanks everyone for joining us on our second quarter 2020 earnings call today. An earnings release is now available on our IR website at ir.ucloudlink.com, as well as via newswire services.

Here I give a brief introduction to our uCloudlink team. Zhiping Peng, is our Co-Founder and Chairman of Board of Directors; Chaohui Chen is our Co-Founder, Director and Chief Executive Officer; Zhigang Du, is our Director and Chief Operating Officer; Yimeng Shi is our Chief Financial Officer; Zhu Tan is our Chief Strategy Officer.

Our CEO will begin with an introduction of our company overview and business highlights, this will cover Section 1 and Section 2 of the earnings presentation posted on our IR website. And then our CFO Yimeng Shi, will discuss our financial results in Section 3.

Before we proceed, please note that this call may contain 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 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 are expressly qualified in their entirety by the cautionary 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, future events, changes in market conditions or otherwise, except as required by law.

Please also note that uCloudlink’s earnings press release and this conference call include discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. uCloudlink’s press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

I will now turn the call over to our Co-Founder and CEO, Mr. Chaohui Chen. Please go ahead.

Chaohui Chen — Director and Chief Executive Officer

Thank you everyone, let us turn to Page 4 of the earnings presentation, which shows our vision and mission. We are the world’s first leading mobile data traffic sharing marketplace with advanced cloud SIM technology, which enables consumers to enjoy mobile connections on any available network at any time. We also enable partners to be an over the top carrier worldwide solving coverage, roaming and utilization problems.

Our innovative cloud SIM technology sets the technological foundation of our marketplace. We are the pioneer of introducing the sharing economic business model into the telecommunication industry, creating a marketplace for mobile data traffic. Leveraging our innovative cloud SIM technology and architecture, we have an innovative solution that is already deployed at scale, enables the marketplace to be established without mobile data bottleneck supply, and enables dynamic device data traffic navigation across multiple network connections. We redefine the mobile data connectivity experience, allowing users to gain access to mobile data traffic allowance shared by network operators on our marketplace. So far, we have aggregated mobile data traffic allowances from 220 mobile network operators, we call MNOs in 144 countries and regions in our cloud SIM architecture.

Page 5 gives a high-level view of the data marketplace that we envision and which our technology enables. The left hand side of the slide shows the source of data from the market. With our Cloud SIM technology, we can simply buy SIM cards from carriers or their partners around the world, we call that first-hand mobile data. Our system can also utilize the unused data from end users, we call this second-hand mobile data.

The right-hand side of the slide shows the various users of data in the marketplace. This marketplace is valuable to both users and carriers, which enables an end-user device to connect any available network at anytime and anywhere. It also enables the carrier to easily share their network capacity, selling their traffic to worldwide users. They can then act as an over the top carrier worldwide to solve roaming, coverage, utilization problem and achieve better returning of investment. We have transformed the traditional telecommunication business model and we can do repackaging, redistributing, and enable dynamic allocation, recycling etc. to enable the end users to choose the optimized coverage, speed and price with flexibility.

Let us move to Page 6 and talk about 5G opportunities for us. As we know, 5G radio frequency band is higher, need four times to five times the number of base stations in order to get similar coverage as 4G. In the early stage, 5G coverage and the infrastructure are not sufficient to support roaming and there are significant incremental capex requirements related to spectrum and network equipment and infrastructure.

Our 5G-ready cloud SIM platform offers a ready-to-use solution for mobile network operators and smartphone manufacturers that enables roaming-free inter-carrier 5G network access domestically and internationally. As network operators start to roll-out 5G networks, mobile data traffic sharing between mobile network operators, via our cloud SIM architecture, can reduce capital spending and roaming agreements negotiation costs, ensuring low network latency for end user and expansive network coverage.

We will continue focusing our R&D investments on services and product development related to 5G as the advent of the 5G brings faster data connectivity speeds and more business opportunities. Our series of 5G products: such as MiFi, CPE and GMI GlocalMe Inside are expected to launch in the near-term. We will continue to keep our leading position and capture 5G business opportunities globally.

Page 7 shows the evolution of our Cloud SIM business models. At Stage 1, we directly face end-users; it is B2C retail model. We have proven the technology and proven the business is successful and

Profitable. We capture all revenues including those from hardware, service, data traffic and we also bear all costs. It took two to three years, but we are now the largest portable Wi-Fi service provider for international roaming for Chinese outbound travelers in 2018, according to Frost & Sullivan.

Stage 2 is B2B2C wholesale mode, where we can work with partner in different countries to use their brand, while copying our business model. It is faster than expanding by ourselves and requires less spending.

For Stage 3, PaaS/SaaS platform, our business partner can rely on our PaaS and SaaS platform for SIM and data traffic management, and focus on sales and marketing. Such specialization enable us and our business partner to operate more efficiently. In addition to 5G, we will continue investing our R&D efforts towards the further development and update of our PaaS and SaaS platform, which not only providing innovative and advanced platform service and functions to our business partner, but also has been effective in servicing and facilitating customers and business partner globally and contributing to our high potential for growth. Our new and advanced PaaS and SaaS platform can optimize the utilization efficiency of SIM card pool and improve the algorithms for better network quality with the improvement for OTT management capabilities.

As we migrate from Stage 1 to Stage 3, we are gradually becoming more platform-centric, allowing us to further expedite our global expansion by forming a global partner ecosystem.

Let us turn to Page 8 and take a look at the mechanism Cloud SIM technology. There are four critical advantages of our innovative Cloud SIM technology: Firstly, with our innovative cloud SIM technology, we can create a full marketplace including first-hand and second-hand of the data traffic with massive user base. Secondly, with Cloud SIM APP, the device or handset can dynamically connect to different networks by changing to a different SIM card in remote sites. Thirdly, it simplifies the relationship with the carrier just buy SIM cards from

Carrier and their channel, making supplementing easy. Fourthly, the physical SIM card has over 20 years’ history and it is secure, reliable, and mature. Acquisition is much easier and there is very low risk and barrier for SIM card supplement.

With these advantages, our Cloud SIM technology facilitates a valuable service to both users and carriers, enabling not just connected, but superior connection. Our Cloud SIM technology enable marketplace access to the superior connectivity globally and also brings us great business opportunities. As of June 30, year 2020, we have 54 patents approved and 65 patents pending for approval globally. During the second quarter of 2020, we had four new patents approved and two new patents now pending approval.

Page 9 shows our three growth strategies. uCloudlink 1.0 is international data connectivity service focuses on cross-border travelers and is keeping stable growth and high profitability, increasing its penetration and market share by launching more channels, more countries, more GMI GlocalMe Inside and providing better service quality than other roaming technologies.

UCloudlink 2.0 local data connectivity services focusses on local residents and solves challenges between carriers. It has started gaining faster growth to be a huge volume user number company. We are developing GMI GlocalMe Inside with handset vendor one by one, building local operation successfully with local partners country by country and catching local mobile broadband and IOT GMI GlocalMe Inside opportunities.

UCloudlink 3.0 is a full marketplace of data traffic in trials which is technologically ready.

Let us turn to Page 10. Recently we appointed Mr. Xinquan Xu as our Co-Chief Sales Officer. Mr. Xu possesses strong track record in managing the end to end product cycle from development to strategic global marketing of consumer goods such as mobile phone products, in addition to his extensive and deep cross-industry background and experience such as the internet, telecommunications, mobile phone industries. He previously held senior executive roles in various renowned corporations; including Huawei Technologies and JD.com. His appointment strategically elevates our sales, marketing and customer engagement initiatives to better meet the growing demand for our innovative high-tech services and products around the world. Our team became more stronger to capture the large global market opportunity.

Let us turn to the Page 12 for our business highlights. The left hand side of the slide shows Daily Active Terminals, we call DAT, as of June 30 2020. A certain portion of DAT and Data Usage Per Terminal are derived from our business partners. You can see from the middle of the slide showing the DAT breakdown by uCloudlink 1.0 and 2.0 data connectivity services. The decrease of total DAT during the second quarter year 2020 is mainly attributable to the decrease of our uCloudlink 1.0 services, due to COVID-19. We believe our uCloudlink 1.0 business will steadily recover and eventually exceed the performance before COVID-19 after international travel resumes. In addition, we believe the coming 5G and IOT are both a driver for uCloudlink 1.0 as well.

On the other hand, our uCloudlink 2.0 Local Mobile data traffic is showing high demand, fast growth, and has been less impacted by macroeconomics factors; such as COVID-19. Our uCloudlink 2.0 service continued to increase during second quarter year 2020 and account for around 74% of total DAT. Average daily data usage per terminal was 2.16 gigabyte in June year 2020.

From Page 13, we can see — we continued to diversify our business globally. Mainland China’s revenue as a percentage of total revenue continues to decrease as we diversify our global business. We continue to build our ecosystem with our business partners in various countries and regions. As of second quarter year 2020, we have 92% of total revenue coming outside mainland China. During the second quarter year 2020, Japan contribute to 56% of total revenue. We formed an alliance with one of the largest mobile network operators in Japan and will continue to expand our business and alliances with our partners globally. We continue to invest in R&D to keep our leading position and core competitiveness.

Looking ahead, we will dedicate to investing in R&D to keep our leading position and core competitiveness in the global connectivity service market and to enable the First Global 5G Connectivity Platform. Additionally, we will continue to build our Cloud SIM technology ecosystem with our business partners in various countries and regions; such as Japan, South East Asia, US, Europe, etc., aiming to further develop the world’s first and leading mobile data traffic sharing marketplace.

With that, I will now turn it over to our CFO, Yimeng Shi, who will go through the financial highlights’ section. Yimeng, please.

Yimeng Shi — Chief Financial Officer

Thank you, Mr. Chen. Hello everyone, let us turn to Page 15. The impact of the COVID-19 pandemic continued to rapidly evolve worldwide in the second quarter of 2020.

Our total revenue decreased by 41.5% from $35.9 million in the three months ended June 30 2019 to $21 million in the three months ended June 30 2020. Revenue from services were $9.9 million, representing a decrease of 53.5% from $21.3 million for the same period of 2019. The decrease was mainly attributable to the decrease of our 1.0 international data connectivity services revenue, which was impacted by prolonged international travel restrictions, due to COVID-19. Service-related revenues as a percentage of total revenue also decreased to 47% during the second quarter of 2020.

On the other hand, our 2.0 local data connectivity services was not impacted by COVID-19 and its revenue increased by approximately 14 times from $0.2 million in the second quarter of 2019 to $3.1 million in the second quarter of 2020, which partially offset the impact on our 1.0 international data connectivity services. So far, we have started our 2.0 local data connectivity services such as in China, Japan with a faster growth rate in Japanese market and we will continue to expand to more countries and regions such as Asia, the United States, Europe, etc, which have high growth potential.

Revenues from PaaS and SaaS services were $0.5 million, representing a decrease of 72.2% from $1.8 million in the same period last year. This decrease was primarily due to international travel ban due to COVID-19, but our 2.0 local data connectivity services demand was strong and not affected.

Revenue from sales of products were $11.1 million, decreasing of 24.0% from $14.6 million in the same period last year, which was primarily due to the decrease of our 1.0 international data connectivity services, due to COVID-19, but the performance and demand of our 2.0 local data connectivity services was strong and was not affected by COVID-19.

Our total revenue decreased by 10.1% from $60.6 million in the six months ended June 30, 2019 to $54.5 million in the six months ended June 30, 2020. Revenue from services decreased by 34.2% from $41.5 million in the six months ended June 30, 2019 to $27.3 million in the six months ended June 30, 2020. Revenue from sales products increased by 42.4% from $19.1 million in the six months ended June 30, 2019 to $27.2 million in the six months ended June 30, 2020.

Page 16, shows the revenue breakdown of our two business segments, namely revenue from services and sales of products, which have synergies between each other. During the second quarter of 2020, revenue from services and sales of products accounted for 47% and 53% of total revenue, respectively. The reduction of percentage of service-related revenue was mainly because of the decrease of our 1.0 international data connectivity services revenue.

Apart from this, Our PaaS/SaaS service acquired a certain number of business partners to — and a certain portion of revenue from sales of products was related to our PaaS/SaaS service. We focused on our service-related revenue, which is a key direction of our business development and we believe that our service-related revenue will be the main contributor to our overall revenue with strong growth potential.

Let us turn to Page 17 for gross margin of our business. Our services gross margin and overall gross margin decreased to 35% and 26% during the second quarter of 2020, compared to 51% and 35% during the first quarter of 2020 respectively. It was mainly because the decrease of our 1.0 international data connectivity services revenue impacted our services gross margin also on overall gross margin due to COVID-19. In addition, revenue from certain customer of our PaaS/SaaS service with a higher gross margin over other segment also decreased to certain extent.

Apart from above, to mitigate the COVID-19 impact, we took a hard look at our costs during the pandemic. Our costs include some fixed costs and variable costs, and we were able to reduce variable costs to a certain extent. We will continue to work on measures to optimize our cost structure going forward. We believe that our cost gross margin and overall gross margins will be improving as our 1.0 international data connectivity services recovers.

Page 18 shows the breakdown of our operating expense. Total operating expense decreased 33% from $15.3 million during the second quarter of 2019 to $10.2 million during the second quarter of 2020. We took cost control measures on our operating expense to offset the topline impact from COVID-19. Total operating expense as a percentage of total revenue increased from 43% during the second quarter of 2019 to 49% during the second quarter of 2020. This was mainly due to the decrease of overall revenue.

In the second quarter of 2020, we continued to invest in R&D to keep our core competitiveness in the long run. You can see from the right-hand side of the slides that our R&D expense accounted for 29% [Phonetic] of overall operating expense during the second quarter of 2020. G&A expense accounted for 41% of total operating expense with litigation fees included.

Let us turn to Page 19. Operating cash flow was negative $2.8 million during the second quarter of 2020, compared to positive $6.3 million during the second quarter of 2019. Our cash flow was normal with sufficient cash and cash equivalents as at June 30, 2020. Our capex was $0.2 million during the second quarter of 2020, compared to $0.4 million during the second quarter of 2019. Capex as a percentage of total revenue decreased from 1.1% during the second quarter of 2019 to 1.0% during the second quarter of 2020. It was mainly due to the decrease of uCloudlink 1.0 expenditures.

Page 20. Net income during the second quarter of 2020 was negative $41.6 million, compared to positive $0.3 million during the second quarter of 2019. Adjusted EBITDA was negative $3.1 million during the second quarter of 2020, compared to positive $1.2 million during the second quarter of 2019.

Looking ahead, we will continue to invest in R&D as it pertains to innovative technologies and expand our ecosystem with more cooperation with business partners globally. 5G is coming and create more opportunities for both our local and international business. We will continue to build and expand our Cloud SIM ecosystem and provide high-tech innovative products and Cloud SIM technology services to our customers and business partners.

With that Let me conclude today’s presentation. Thank you and we start our Q&A session.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] And our question today comes from Elisa Feng with Jefferies. Please go ahead.

Elisa Feng — Jefferies — Analyst

Hi, this is Elisa. Thank you management for your presentation. My question is regarding the revenue mix — geographic revenue mix. I think Mainland China’s revenue mix has been dropping, and Japan and overseas has been increasing. So I was wondering what do you predict for the trend line for future geographic revenue mix for China, will they continue to drop?

And my second question is regarding US-China relationship impacting our overseas business, so how do you accept [Phonetic] this relationship impact to our business?

Yimeng Shi — Chief Financial Officer

Yes, it’s Yimeng Shi. Let me answer your questions. For geographic distribution in second quarter, the China Mainland contributed 8% of total revenues. And the Japan’s market contributed 36% of total revenues. This typically is for the second quarter’s performance. We believe the market in China Mainland is massive, and the percentage of revenue of Mainland China will be increased to some extent when the COVID-19 is recover and the international travel has been started. So thus, we believe the 8% is mainly cannibalization from China Mainland. We’re not decreasing further to more extent and in futures. Yes, this typical 8% contribution from the second quarter, yes. For the US and China relationship, so far we are very generative from our US markets was growing in the second quarter. And we believe there is the demand from the US market for either international travel and all for local mobile broadband service is growing and higher potentials in the futures.

Bob Shen — Senior Investor Relations Manager

Hi, this is Bob Shen. Let me add some points to your question. First, your question is regarding our percentage for diversified our business. I would say that it is good — it’s good trend that we saw our business gradually increasing globally, which is in line with our expectations. Let me show you examples, let’s say, couple of years ago, for example in 2017, the revenue coming from Mainland China is over 60%. And for the Japanese market is only around 12%. Now, the situation gets changed, the Mainland China’s revenue is 8% and the Japanese over China became the single largest market globally. I would say that this is in line with our business strategy, because we are first — we are a global company and our business is internationally diversified which is good to our business.

And secondly regarding the US and China relation, although, we cannot forecast the US and China relationship going forward in next couple of years. But internally, we — first, as we mentioned, we are global company with our business very diversified internationally. So apart from US, we are also investing — also expanded to Asia, Europe, etc to diversify our business. So, we hope that US and China relationship gets better and gradually recover, but we also focus our business apart from US. So, as I mentioned, our business is globally diversified so that will be our business strategy and that will minimize the risk from US section.

So, I hope we answered your questions.

Elisa Feng — Jefferies — Analyst

Yes, thank you very well. You answered it very well. If I may another question, can I have some maybe guidance on the gross margin for the next few quarters?

Yimeng Shi — Chief Financial Officer

We will disclose that when we have the more clear explanations of the business in the coming quarters. And so far, we disclosed the top line guidance. And in the third quarter, the top line revenue guidance will be $21 million to $22 million.

Chaohui Chen — Director and Chief Executive Officer

Sorry, you mean the gross margin right, gross margin for the next several quarters?

Elisa Feng — Jefferies — Analyst

Yes.

Chaohui Chen — Director and Chief Executive Officer

Okay, okay. Yes I think right now our margin for second quarter 2020 gross margin is around 35%, but this is lower than actually — because we are impacted by COVID-19, as our CFO just mentioned, we believe that the gross margin will continue to increase in the next couple of months. Because, first, we hope that our 1.0 international data connectivity service will recover.

And secondly, I think our PaaS and SaaS section will recover well as, if the international travel ban on some or any good news from like vaccine of the COVID-19, if comes out. So, we expected and we believe that our gross margin and our service gross margin will continue to increase in the next couple of months.

Elisa Feng — Jefferies — Analyst

Great. Got it. Thank you management team for answering my questions.

Chaohui Chen — Director and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] And as there are no further questions, I’d like to turn the call back over to management for closing remarks. And I would like to turn the call back over to management for closing remarks.

Bob Shen — Senior Investor Relations Manager

Thank you, once again for joining us today. If you have further questions, please feel free to contact uCloudlink Investor Relations through the contact information provided on our website over the TPG investor relationship.

Operator

[Operator Closing Remarks]

Bob Shen — Senior Investor Relations Manager

Thank you.

Chaohui Chen — Director and Chief Executive Officer

Thank you.

Yimeng Shi — Chief Financial Officer

Thank you.

Duration: ?? minutes