uCloudlink Group Inc. Q4 FY2020 Earnings Call

Thanks everyone for joining us on our fourth quarter and full year 2020 earnings call today. Our 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 Inc. team. Zhiping Peng, is our Co-Founder and Chairman of the 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; Xinquan Xu, is our Chief Sales Officer. Our CEO will begin with an overview of our company and business highlights, which will cover section one of the earnings presentation posted on our IR website. And then our CFO, Yimeng Shi, will discuss our operational highlights and the financial results in section two and section three. 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 the details of the company's filing 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.

Okay, so I’m Chen. There are similar contents as the earnings presentation of the third quarter of year 2020. I will focus on page six, page nine, page 11, page 12 and page 13. Let’s move to page six which shows Navigation + Electronic Toll Pass concept applied to the data connectivity services market. The white coverage circle on the left-hand side chart are reliable data connection areas and the shadow areas are unreliable data connection. To solve such network connection concerns, it is not enough to just construct hardware of the network because network coverage requires time, resources and investment. There are always shadow areas with poor network coverage, even if mobile network operators invest in increasing infrastructure such as base stations. The right-hand side chart shows our solution for such problems via our cloud SIM technology. Through our PaaS and SaaS platform, we can help change unreliable data connections to more reliable data connections. Like installing Navigation + Electronic Toll Pass for traffic, navigation can automatically identify congestion and actively choose the better road and the electronic toll pass allows users to avoid long queues when switching among mobile networks and intelligently elevate data connectivity user experience. For example, if one operator has a bottleneck of coverage during peak time or less connection signal for a certain location, we can use our navigation to improve the coverage by intelligently switching to another operator network and provide better service coverage to users. Our business enables users and business partners to select and connect to the high-quality mobile network without any location. Our PaaS/SaaS platform also works like an electronic toll pass that enables faster and efficient operation management and a swift connection. By changing unreliable connection areas to more reliable connection areas, we can help elevate users’ mobile data connectivity experience and improve overall network efficiency, which also improves carrier return on investment (ROI). There are great potential application scenarios such as mobile network operators, data connection services, education, industry, games, remote working, industrial automation and autonomous driving, etc., which require better network connection. Please turn to page nine. So let’s take a look at our innovative Cloud SIM technology. The second and first are the same as before. I just confirmed our new concept for hyper-connectivity facilitate data traffic marketplace for each part. The definition of hyper-connectivity basically includes level one, which is the evaluation of the connection quality of various wireless-access networks. Level two which is network selection and optimization based on cloud SIM technology. And level three which is optimizing and acceleration of application routing. Such hyper-connectivity solution where net users application get better connection experience, which helps realize Navigation + Electronic Toll Pass. Our hyper-connectivity solution would redefine the mobile network user experience and facilitate data traffic marketplace. Data connectivity user experience is affected by various factors such as signal interference and routing, bandwidth and delay, and server location. We innovatively applied Navigation + Electronic Toll Pass concept over the mobile network to our users and business partners in the mobile data connectivity market via our hyper-connectivity technology through the PaaS and SaaS platform. We focus on establishing a stable, reliable, safe network connection with security for our business partners and users. uCloudlink's Hyper-Connectivity would aim to connect across all networks and technical systems across various SIM form factors such as e-SIM and soft-SIM, across various physical media such as Wi-Fi and various radio technologies etc. by countries and by regions. We will achieve the goal by identification, monitoring and optimization to further elevate user experience in the data connectivity market. Our Cloud SIM technology facilitates a valuable service to both users and carriers. As of December 31, 2020, we have 74 patents approved and 79 patents pending for approval globally. Let’s move to page 11, which shows that our Cloud SIM technology through PaaS and SaaS platform could help mobile network operators (MNOs) decrease their churn rate. The quality of mobile data connectivity is the major factor which influences users’ switching network operators. For example, according to China Academy of Information and Communications Technology (CAICT) research, the main reasons for China users’ mobile number portability, switch network operators are seeking better coverage, cheaper pricing and better data package. According to public information, certain mobile network operators in Mainland China had a net loss of over 10 million mobile network subscribers during 2020. As mentioned above, it always has shadow areas of unreliable connection and it cannot be fully solved by mobile network operators. We can elevate user experience such as operators’ unreliable connection and no connection areas to more reliable connection services level, which helps avoid the loss of such mobile network subscribers. With the cloud SIM technology through our PaaS and SaaS platform, such as the recent launch of our smart multi-network reselection technology, could facilitate mobile network operators improving network coverage and efficiency and elevate their service to users, which would help reduce churn rates, bringing add-on value to carriers to meet users’ requirements for better mobile data connection. By alliance with mobile network operators and the cooperation with mobile handsets manufacturers globally, we expect high growth potential in the data connectivity service markets. Let us move to page 12, which is the most important page. It shows the progress of the fourth quarter of year 2020 and updates the changes we made. Despite 2020 being a challenging year, we demonstrated resilience and agility amidst uncertainties during the COVID-19 pandemic, cumulating fourth quarter revenue of US$17.0 million in line with our quarterly budget. In the Chinese market, the establishment of a strategic partnership with Shenzhen Branch of China Unicom was an important development for our local business, which we expect will help us broaden our user base more quickly and efficiently. We further invested in Beijing Huaxiang Lianxin Technology Co., Ltd., which is one of the licensed mobile virtual network operators in China. As we look to proactively expand and enhance our PaaS and SaaS platform ecosystem and join new industry business partners in various aspects of IoT applications, we signed a milestone strategy cooperation framework agreement with China Vehicle Interconnected Transport Capacity Technology Co., Ltd. (CVITC). In the Japanese market, we cooperated with numerous partners and mobile network operators such as NTT to further develop local mobile broadband services and strengthen our existing relationships, which contribute to continuous growth momentum. In U.S. and Europe markets, we optimized our websites to enhance our GlocalMe brand e-commerce efforts as a part of our global expansion strategy. The recent launch of three GlocalMe products represents our efforts to offer more wide-ranging solutions in order to connect users worldwide. In the U.S., our GlocalMe brand had a 100% uptick in its traffic to its local e-commerce sites and set a new record high of monthly registered users in its APP during the fourth quarter of 2020. We expect that the widespread vaccination will help cross-border activities and international tourism recover, creating more new growth opportunities in 2021 with for example, our uCloudlink 2.0 business. Looking ahead, we continue to focus on our experience and one way we are developing is through our Navigation + Electronic Toll Pass service, our mobile network via our hyper-connectivity technology through our PaaS and SaaS platform. We are also looking to capture additional business opportunities, such as mobile network operators, mobile broadband, improving network coverage for carriers and also elevating user experience. In addition, we are targeting opportunities relating to network management, such as remote working and education and 5G opportunities for products and services. Our Cloud SIM technology, such as a multi-network reselection technology, will reduce the network crossing time to milliseconds. It is an accelerator of 5G cloud application and ready for commercial use. We believe our technology is highly compatible with various application scenarios, where high-quality connection is necessary. For example, internet of vehicles, autonomous driving, AR, VR, cargos and logistics and cloud computing. With hyper-connectivity, we are dedicated to crossing and connecting with all global networks and technical systems, improving the user experience by optimization of all layers including access, routing and application layers. We expect all other opportunities will further expand our PaaS and SaaS ecosystem. We continue to form alliances and strengthen cooperation with mobile network operators and mobile virtual operators and business partners globally to establish the leading technological position of our PaaS and SaaS platform during the 5G cloud era. So let’s turn to page 13. Recently we announced recent role changes for senior management. Shubao Pei, our Chief R&D Officer, assumed the role of Chief R&D Officer and Chief Supply Chain Officer replacing Zhongqi Kuang in the latter role. These changes took effect on January 27, year 2021. The move to restructure management roles was designed to better align senior leadership positions with the strategic development of our business, as we continue to improve operational efficiency, elevate supply chain management and deliver sustainable growth. I will now turn it over to our CFO, Yimeng Shi, who will go through the business and financial highlights section.

Thank you, Mr. Chen. Hello everyone. Let’s turn to page 15 for our business highlights. The data for the third and the fourth quarter of 2020 shows that the impact from COVID-19 is becoming stable. The left-hand side of the slide shows Daily Active Terminals (DAT) as of December 31, 2020. You can see from the middle of the slide showing DAT breakdown by uCloudlink 1.0 and 2.0 data connectivity services. In addition, our uCloudlink 2.0 Local Mobile data traffic is showing steady development and has been less impacted by COVID-19. Our uCloudlink 2.0 service accounted for around 67% of total DAT during the fourth quarter of 2020. Average daily data usage per terminal was 2.01 GB in December 2020. For the full year of 2020, average Daily Active Terminal were around 246,000, representing an increase of 31.3% from around 187,000 in 2019. We expect the launch of vaccines in 2021 will benefit our business. 5G and IoT are both drivers for uCloudlink 1.0 as well. Let’s turn to page 16 which shows global diversification of our business. 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 the fourth quarter 2020, we have 95% of total revenue from outside mainland China. During the fourth quarter 2020, Japan contributed to 47% of total revenue. The increase of percentage from other countries is mainly because of the expansion of our business and development in related markets such as the United States. After the investment in MVNO Huaxiang Lianxin and cooperation with MNO China Unicom Shenzhen, we believe the China market will regain its growth. Looking ahead, we expect all of these new opportunities such as our uCloudlink 2.0 business will further develop our business potential in 2021. We are also dedicated to our R&D with further investment in sales and marketing expansion capabilities to bring us sustainable growth in the future. Let’s turn to page 18. I will go through our financial highlights of the fourth quarter of 2020. For full year 2020 financials please refer to our earning release. Our total revenue decreased by 68.3% from US$53.7 million in the three months ended December 31, 2019 to US$17.0 million in the three months ended December 31, 2020. Revenue from services was US$9.0 million, representing a decrease of 63.3% from US$24.6 million for the same period of 2019. The decrease was primarily attributable to the decrease in revenues from international data connectivity service and the PaaS and SaaS services to a certain extent, mainly because of continuous and a prolonged impact of the pandemic of COVID-19. Service-related revenue as a percentage of total revenue increased from 45.7% in the fourth quarter of 2019 to 52.9% during the fourth quarter of 2020. On the other hand, our 2.0 local data connectivity service were less impacted by COVID-19. So far we have started our 2.0 local data connectivity service in Japan and we saw the continuous development of our 2.0 local data connectivity service during 2020. We will further expand to other potential markets such as the United States, Europe, Asia, etc. Revenues from PaaS and SaaS services were US$1.9 million, representing a decrease of 47.3% from US$3.5 million in the same period last year. This decrease was primarily due to the negative impact of COVID-19 on our partners that use our PaaS and SaaS services to provide international data connectivity services. In the meantime, the demand of our local data connectivity services business partners are relatively steady. Revenue from sales of products was US$8.0 million, decreasing by 72.5% from US$29.1 million in the same period last year. This decrease was primarily due to the continuous negative impact of COVID-19 pandemic. Our total revenue decreased by 43.4% from US$158.4 million in 2019 to US$89.6 million in 2020. Revenue from services decreased by 49.3% from US$91.1 million in 2019 to US$46.2 million in 2020. Revenue from sales products decreased by 35.5% from US$67.3 million in 2019 to US$43.4 million in 2020. Let’s move to Page 19, which shows the revenue breakdown of our two business segments, namely revenue from service and sales of products. During the fourth quarter of 2020, revenue from service and sales products accounted for 52.9% and 47.1% of total revenue respectively. We can see that the percentage of revenue from services increased compared with 45.7% in the fourth quarter of 2019. We will continue to improve and optimize our revenue structures to facilitate our business growth and performance. Let’s turn to page 20 for gross margins of our business. Our services gross margin and overall gross margin were increased to 41.2% and 31.4% in the fourth quarter of 2020 compared to 36.6% and 31.3% in the third quarter of 2020 respectively. It was mainly because we improved efficiency of revenue and cost structures during the fourth quarter of 2020. Also, the increase of our PaaS and SaaS revenue which has a higher gross margin contributed to the increase in our service gross margin during the fourth quarter of 2020 compared with the third quarter of 2020. The pandemic impacted our service gross margin and overall gross margin during the year 2020. To mitigate the prolonged impact and uncertainty of COVID-19, we reviewed comprehensively our costs during the pandemic. We will continue to work on measures to optimize our cost structure going forward. Let’s move to Page 21, which shows the breakdown of our operating expense, excluding share-based compensation and others. Total operating expense decreased 14.5% from US$16.6 million during the fourth quarter of 2019 to US$14.2 million during the fourth quarter of 2020. We took comprehensive mitigation measures such as risk and cost control, liquidity and cash flow management to offset the negative impact from COVID-19. Total operating expense as a percentage of total revenue increased from 31% during the fourth quarter of 2019 to 83% during the fourth quarter of 2020. This was mainly due to the decrease of overall revenue. We continued to dedicate to R&D with optimized efficiency in key project outputs to keep our leading position in the long run. Excluding share-based compensation and others, our R&D expense accounted for 27% of overall operating expenses during the fourth quarter of 2020. G&A expense accounted for 46% of total operating expenses during the fourth quarter of 2020, which consists of some one-off expenses like certain professional service fee of around US$1.4 million and writing down of accounts receivable of US$0.8 million. Let’s turn to page 22. Operating cash flow was negative US$5.5 million during the fourth quarter of 2020 compared to positive US$1.1 million during the fourth quarter of 2019. Our cash flow was normal with sufficient cash and cash equivalents as of December 31, 2020. Our CapEx was US$0.4 million during the fourth quarter of 2020 compared to US$0.9 million during the fourth quarter of 2019. Compared with the third quarter of 2020, the increase in CapEx during the fourth quarter of 2020 was mainly because of certain license fee for software. CapEx as a percentage of total revenue increased from 1.7% during the fourth quarter of 2019 to 2.2% during the fourth quarter of 2020. It was mainly due to the decrease of revenue. Let’s move to page 23. Net income during the fourth quarter of 2020 was negative US$12.4 million compared to positive US$2.1 million during the fourth quarter of 2019. Adjusted EBITDA was negative US$7.9 million during the fourth quarter of 2020 compared to positive US$2.9 million during the fourth quarter of 2019. Looking ahead, we are focused on improving and optimizing our revenue and cost structures with operational efficiency, elevating management systems, as well as standardizing and systemizing processes. We believe all of our business opportunities and optimizing efficiency measures will facilitate the delivery of our 2021 guidance. With that, let me conclude today’s presentation. Thank you, and we’ll start our Q&A session.

Good morning. Can you hear me? This is Ken from Tigress Financial Partners. Thank you for taking my question. I have two questions. The first question is about the international expansion of the business. Can you provide more colors on the recent partnerships, including your core wireless in the U.S., sure access and the HKM to expand the South East Asian business? And then my second question is regarding the future revenue mix. We would love to understand how you use the churn line with the future of global geographic revenue mix.

Certainly! I’m Chen. Let me address your question about our global business expansion. In Japan, similar to many other countries, our 1.0 business has been affected by the COVID-19 pandemic. Despite this, we have observed business growth as many local partners shifted to local operations. Traditionally, we have focused on international business in Japan, primarily working with business travel WiFi rental. Now, we are collaborating with local partners, including a multi-watch operator and a multinational operator. We expect to see a recovery in both international and local business as the pandemic situation improves. In the U.S., we are also focusing more on local business and working with rural area operators and providing educational solutions. We are witnessing growth in both online and offline sectors there. In Southeast Asia, particularly in Indonesia, we are expanding our local partnerships similarly. The same trend is observed in Europe, where our efforts are shifting towards local business. While we are preparing for international business, we anticipate a gradual recovery in that area by the end of this year, starting in Q3, with more significant recovery expected next year, especially in our established markets. Additionally, we are exploring new business opportunities, such as IoT in China and Japan, by partnering with local entities. Our main focus remains on local business with mobile broadband and vehicle companies.

So for the second question regarding the revenue mixture, I’ll answer the second question. To break down the revenue mixtures in the fourth quarter 2020, the total revenue was US$17 million, revenue from service was US$9.0 million, including this US$9.0 million, US$5.8 million from international data connectivity service and US$1.2 million from local data connectivity service, and also we had US$1.9 million from PaaS/SaaS platform service. For the whole year 2020, the total revenue was US$89.6 million, with US$46.2 million from service. Within this US$46.2 million, US$30.8 million revenue came from international data connectivity service, US$9.2 million from local data connectivity service and also US$5.7 million from PaaS and SaaS platform service. Additionally, we generated US$43.4 million for sales of products.

Okay, hi. This is Bob Shen. I would add some points for your two questions. First regarding your question about our international expansion. Yes, you are right. We are an international company, and we are dedicated to diversifying our revenue with our global business partners. As we did before, in order to elevate our local service trend, we are enhancing our e-commerce efforts in strategic key markets such as the United States, Europe, etc. We did a lot of efforts such as optimizing our websites and also streamlining our sales functions and teams in local markets. In order to continue to improve the overall user experience and overall satisfaction globally, for South East Asia, yes, you named some of our business partners we already have. We actually extended our cooperation and alliance with these business partners, and we are dedicated to collaborating with more new business partners. Therefore, we will release any new cooperation or alliance in our official IR news. Regarding your second question, yes, as our CFO mentioned, we will have diversification in our global expansion, but I want to mention that you can see from the chart that during the fourth quarter of 2020, our Mainland China revenue took around 5% of the overall revenue, which is the same as our third quarter of 2020. However, with our collaboration, such as with China Huaxiang Lianxin, we are exploring more new business models and collaborations with MNOs and mobile phone manufacturers, aiming to include all business partners such as MNOs and mobile phone manufacturers into our ecosystem globally. With this strategic alliance and collaboration in Mainland China, we expect that in 2021 our China revenue will improve.

Thank you.

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

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