uCloudlink Group Inc. (UCL) Q3 2021 Earnings Report, Transcript and Summary

00:03 Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome the uCloudlink Group Incorporated Third Quarter twenty twenty one Earnings Conference Call. At this time, all participants are in a listen-only mode. After prepared remarks by the management team, there will be a question-and-answer session. [Operator Instructions] Today's conference call is being recorded. 00:29 I would now like to turn the conference over to your host today, Mr. Bob Shen, Deputy Investor Relations Director of the company. Please go ahead.

00:38 Thanks everyone for joining us on our third quarter twenty twenty one earnings call today. The earnings release is now available on our IR website at ir.ucloudlink.com, as well as via newswire services. I will give a brief introduction to our uCloudlink's NASDAQ UCL team. 01:00 Zhiping Peng is our Co-Founder and Chairman of Board of Directors; Chaohui Chen is our Co-Founder, Director, and Chief Executive Officer; Yimeng Shi is our Chief Financial Officer; Zhu Tan is our Vice President of Marketing and Sales. 01:20 Our CEO will begin with an overview of our company and business highlights, which will cover Section 1 of the earnings presentation posted on our IR website. Our CFO, Yimeng Shi, will then discuss our operational highlights and the financial results as presented in Section 2 and Section 3. 01:41 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 nineteen ninety five. 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. 02:23 All forward-looking statements are expressly qualified in their entity 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. 03:20 I will now turn the call over to our Co-Founder and CEO, Mr. Chaohui Chen. Please go ahead.

03:30 Great. Yes, there are similar content as the earning presentation of the second quarter of year twenty twenty one and during this call we will outline the major recent development and highlights. Let's move to the page thirteen. uCloudlink 1.0 is international data connectivity services and had a strong track record of high gross margins and profitability with ongoing growth potential. 04:07 In a long term as international travel restriction continue to abate over time and gradual recovery of international travel benefit our international data connectivity business. Even for the new challenges of the COVID-19 pandemic recently we still are confident in a positive trend of international travel because of more and more magazine and vesting come into use. With the gradual recovery of international tourism we saw increase of 1.0 business revenue in the third quarter of the year twenty twenty one year-over-year and a quarter-over-quarter with continuous users demand in various markets. 04:58 For example, our US market has a year-on-year increase of order demand of 1.0 business during the third quarter of the year twenty twenty one. We expect our 1.0 business will not just be a simple recovery, but growth with new developed -- with innovative technology and products. We saw positive development of our 1.0 business from our daily active terminals as international travel users increased quickly in various markets. 05:38 We intelligently repackage to minimize data traffic unit cost. Data package cost of single operator across mobile network operators, mobile virtual operators have large price difference and we repackage it from wholesale to retail. We have the largest SIM card pool and we acquire data packages at wholesales local price from operators to partners. 05:55 Further, we provide high-quality data connection services and elevate user experience of users and business partners through multi-networks reselection and combination, which shows our difference. uCloudlink 1.0 business monetization model includes retailing To C rental or selling to end user, wholesale To B, for business partner and our PaaS and SaaS services, such as CRM, billing management, devices selling and rental management, et cetera. For wholesale To B, we can be reseller or provide commission services to our business partners. 06:53 We allowed our business partners share data traffic pool through our PaaS and SaaS platform and charge commission fee. We believe that COVID-19 pandemic has negatively impacted our 1.0 business, it has created opportunities for potential growth, including increasing demand for mobile data such as traveling, tracking, vaccination digital passports, and COVID-19 test reports. Also, we see fewer competitors in the market after COVID-19 pandemic. 07:34 Let's move to page fourteen. uCloudlink 2.0 business is local data connectivity services and become a new driver of growth during year twenty twenty. Our new Hyperconn technology contributed to further development and growth of our uCloudlink 2.0 business and we expand the business scope of our local data connectivity services. Our Hyperconn technology is widely accepted by mobile network operators, business partners in various industries with growth potential. Such as with local partner in China, US and Japan. 08:21 Our 2.0 basically shows greater resilience with proven high demand and growth potential during the pandemic, and experience less negative impact overall. uCloudlink 2.0 business monetization model is similar to that of uCloudlink 1.0 business with massive potential local user base. We have operators inclusive with this soft data connections through our partner in the SaaS platform by alliance with more mobile network operators and mobile handset manufacturers which will be able to impact more GlocalMe Inside, GMI in smartphones, such as 5G smartphone. 09:11 we would accelerate the arrival of 5G Cloud era and the applications such as AR, VR, cloud computing and the Autopilot, et cetera. The high quality of 5G application data connection will also bring users high requirement and awareness of data connectivity quality. Further, we make progress through hyper connectivity solution with mobile and fixed broadband business, both MBB and FBB under various appreciation scenario such as home broadband, especially our mobile and fixed broadband business corporation with one of the major mobile network operator in China has been successful and expand to more provinces. 10:03 The increase in total revenues is a strong indication that uCloudlink with addition to growth in the short-term due to our continued efforts in expanding our platform service business. And in the long term, as we believe let international travel restrictions will be lifted in the future. We had increase in revenue from our 1.0 and 2.0 businesses in the third quarter of year twenty twenty one compared to the second quarter of twenty twenty one and we saw faster business development through online and offline channels in our US market. 10:48 We launched a new branded technology Hyperconn, which allows for us to target IoT opportunities by leveraging 5G mobility to ensure superior network connectivity. Our strategy is to use this technology to introduce innovative product and services into the market. Such new product will accelerate -- further development of our 2.0 business. Our new tablets equipped with Hyperconn and cloud SIM technology have been promoted in new industries such as education. Our strategy to expand our network and strengthen our collaborations with local partner allow our new 5G Hyperconn product to enter a barrier of a new industry, which require reliable high-quality data connections, including education, emergency services, live broadcasting e-commercials, Walkie and Talkie and other IoT applications. 12:06 Our Hyperconn related products and services have been distributed by our offline retail channel and e-commercial platform and our product have receive positive feedback and the hardware recognize and value by increasing number of users and business partners across a wide spectrum of industries. 12:33 Let's move to page fifteen. Based on our innovative cloud SIM and Hyperconn technology we continued to develop and broaden our scope with new products and services, such as our SaaS developed terminals and third party device. For example, after we unveiled our new Hyperconn technology and product in June year twenty twenty one, we launched our Hyperconn technology solution and products to the market in the third quarter of the year twenty twenty one, such as Numen, the world’s first HyperConn 5G mobile Wi-Fi device; and Genie, a tablet device. 13:21 We have positive feedback for our Numen and Genie and we continue to cooperate with more business partners, our IP camera, IPC has come pre-testing and expected to launch for commercial in the near future. Going forward, we will launch more and more innovative products and services with our HyperConn through embedding our GlocalMe Inside, GMI, we continue to further expand our PaaS and SaaS ecosystem with users and business partners globally. Our Hyperconn technology solution is highly compatible with various application scenarios and smart hardware such as 5G mobile phone, tablet, CPE, et cetera. 14:16 Our Hypercom technology solution also facilitate us to enter new industries requiring high quality and reliable data connection, such as online education, emergency response, electric power industrial, et cetera. We believe our PaaS and SaaS ecosystem will continued to expand as we keep investing in R&D and launching innovative products and services to market and elevate data connectivity services such as data connection for Internet of Everything. 14:56 I will now turn over to our CFO, Yimeng Shi, who will go through the business and financial highlights in the section.

15:08 Thank you, Mr. Chen. Hello, everyone. Let's turn to page seventeen, data for the third over twenty twenty one shows that impacts from COVID-19 is becoming stable. The left-hand side of the slide shows Daily Active Terminals, DATs as of September thirty, twenty twenty. Average daily active terminals in the third quarter were two hundred and fifty six thousand and one hundred and twenty four, representing an increase of one point five percent from two hundred and fifty two thousand and two sixty five in third quarter of twenty twenty. 15:50 Our uCloudlink 2.0 service accounted for around sixty seven percent of total DAT during. third quarter of twenty twenty one. Average daily data usage per terminal was one point eight gigabyte in September twenty twenty one. 16:09 Please turn to page eighteen, which shows global diversification of our business. We had ninety six percent of the total revenue from outside Mainland China. During third quarter of twenty twenty one Japan contributed to forty seven percent of the total revenue and it continue to be the single largest market for our business. 16:32 For other country's revenue, the U.S. market had the largest contribution to our business for the further development of our US business and we will continue to expand other market, such as Japan, China, Europe and Southeast Asian, et cetera. During third quarter of twenty twenty we had five percent of revenue coming from Mainland China, seventy six percent of total revenue came from Japan and thirty nine percent of total revenue came in from other countries and regions. 17:12 Let's turn to page twenty. I will go through our financial highlights of the third quarter of twenty twenty one. Service related revenue as a percentage of total revenue was fifty four point two percent during third quarter of twenty twenty one, compared with forty eight point five percent during second quarter of twenty twenty one. Revenue from PaaS and SaaS service increased eighty one point six percent from one point five million dollars in the third quarter of twenty twenty to two seven million dollars in third quarter of twenty twenty one. This increase was primarily due to the expansion in number of our business partner that use our PaaS and SaaS service to provide local data connectivity service. 18:03 Revenue from PaaS and SaaS as a percentage of total revenue also increased to thirteen point eight percent during third quarter of twenty one compared with eight point one percent during the third quarter of twenty twenty. 18:18 Let's move to page twenty one which shows the revenue breakdown of our two business segments, namely revenue from service and sales of products. Our total revenue increased by seven point four percent from eighteen million dollars in third quarter of twenty twenty to nineteen point three million dollars in third quarter of twenty twenty one. Revenue from service were ten point five million, representing an increase of six point four percent from nine point eight million dollars for the same period in twenty twenty. This increase was primarily due to higher revenue PaaS, SaaS service, partially offset by a decrease in revenue from data connectivity service. 19:06 Let’s turn to page twenty two for gross margins of our business. Our service gross margin increased to forty three point five percent and our overall gross margin decreased to twenty eight point three percent in the third quarter of twenty twenty one, compared to thirty six point six percent and thirty one point three percent during third quarter of twenty twenty, respectively. The decrease of overall gross margin is mainly because of product mix, the rising material cost due to global supply chain concerns during this third quarter of twenty twenty one. 19:46 The increase of service gross margin during the third quarter of twenty twenty one is primarily due to increase of our PaaS, SaaS revenue which has a highest gross margin over other revenue. 20:00 Let's move to page twenty three, which shows the breakdown our operating expenses, excluding share bases compensation and others. Excluding share based compensation, operating expenses as a percentage of total revenue is maintained at sixty one percent in the third quarter of twenty twenty one compared with sixty five percent during the third quarter of twenty twenty and it will continue to improve our operation efficiency of our business in the future. 20:32 Let’s turn to page to twenty four. Our CapEx was zero point three million dollars during third quarter of twenty twenty one compared to zero point one four million dollars during the third quarter of twenty twenty. CapEx as a percentage of total revenue increased from zero point eight percent during third quarter of twenty twenty to one point four percent during third quarter of twenty one. 20:59 Let’s move to page twenty five. Net loss during in the third quarter of twenty twenty one were seven million dollars compared to nine point seven million dollars during third quarter of twenty twenty. Adjusted EBITDA was negative five point four million dollars during third quarter of twenty one compared to negative five million dollars during third quarter of twenty twenty. 21:24 With that, let me conclude today's presentations. Thank you. And we start our Q&A session.

21:47 Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Vivian Zhang with Diamond Equity. Please go ahead.

22:14 22:14 Hello. Good evening. This is Vivian from Diamond Equity Research. First, congratulations on the results. I have two questions. So first thing is that, we know your new technology Hyperconn and its related products, including the tablets were launched like several months ago. So my question is, how does that impact the revenue? Can you provide any data related to the sales of this part? 22:47 My second question is regarding the PaaS and SaaS services. We see the revenue increased a lot this quarter. So can you provide color on how you develop new business partners and keep expanding in this area. Thanks.

23:17 [indiscernible] So let me answer the first question for tablet. So tablets, we launch the tablet in the third quarter. So in Hyperconn we launched the product in September -- launched the product in September. So actually I think -- I think the [indiscernible] with delivery along totally in the third quarter, how many devices yeah. [Multiple Speakers] Since September we delivered eighteen thousand devices for tablet. So we continue to have more order in the first quarter for tablet, mainly used in Japan and the United States. 24:42 So for second question [indiscernible] can you answer for the PaaS and SaaS revenue.

24:48 Yes. Regarding this PaaS and SaaS revenues the weight of the SaaS revenue has been improving and since -- compared with last years. This relates our platform centric strategy in uCloudlink’s local connectivity as a service. So when we deliver more and more terminal or device to our business partner worldwide that procures data package from local carriers, they still need to rely on our platform system, PaaS, SaaS platform to provide Hyperconn and cloud SIM solution and service to the users. So this PaaS, SaaS service is our core strategies for our business in past one years and also in the future as well. 25:57 We expect the weight of PaaS, SaaS service well be increasing in line with delivered more terminal to our business partner and a more and more daily active terminal -- active and used by our users as well. So that's very important for our business as this SaaS service has higher gross margins. And most SaaS revenue come into account where we have a lot to improve our profitability overall and also have a lot of performance on cash flow as well. Thank you.

26:41 Hi, Vivian. This is Bob Shen. And I want to add some point for our new tablet. Yes, as you know that our new tablets comes equipped with our innovative technology enable it to seamlessly connected to available network like mobile broadband and DD, plus fixed broadband networks at all times. 27:10 For example in the Japanese market our new tablet facilities us to enter and cooperate with our business partners in the education industry, such as the online education. This is just one example of our recent development of our Hyperconn technology solution and new products. And as we always mentioned that, our new technology such as Hyperconn technology solution pave the way for our further quick development of our 1.0 and 2.0 businesses.

28:00 That makes sense. Thank you, Bob. Thank you, Chen and Shi.

28:10 [Operator Instructions] Our next question will come from Lisa Thompson with Zacks Investment Research. Please go ahead.

28:17 Hello, and congratulations on returning to revenue growth. It's great to see. My first question goes to the last sentence of the press release, only because we had this conversation, and you said there's no way you would settle with SIMO. So now that you settled with SIMO, how much money do you think that will save you next year as far as expenses of not having any more litigation?

28:55 Yes. This is Yimeng, I’ll answer your questions Yes. So we disclosed settlement agreements with the SIMO [indiscernible] And that's -- from this segments, we see there is a reductions of litigation expenses in third quarter of twenty twenty one. And we see that this saving on litigation expenses will be quite significant. 29:38 You might know, in the past couple of years from twenty eighteen we enrolled this long litigation process with SIMO. And that's very significant litigation expense, more than seventeen million dollars in the past three years -- more than three years. So I think we -- that's where we don't think we will have this kind of significant expenditure in litigation in the futures. So that's -- I think that's a big improvement in terms of expenditure control in the future as we see. So this will be reflected in our performance in following periods this year and next year. Thank you.

30:48 So this is my question. So how much less would you have to spend next year then you spent this year? Just so I can have it in my model somehow?

31:01 For comparable basis, we can discuss the specifics as projection for this categories expense after this call. Yes, we will have this additional discussion in this figure okay?

31:23 So --but it is in the millions of dollars for this year?

31:32 Yes, this year is more than -- we spend litigation expense more than millions. It's a couple millions dollars related litigation expenses.

31:43 Okay. And then out of curiosity, did any money change hands in your settlement agreement?

31:52 Just with -- [indiscernible] that’s expenses in house related with the withdrawal of cash.

32:05 So they didn't pay you anything and you didn't pay them anything?

32:09 No. No settlement, doesn't withdraw all the case.

32:16 Okay. All right, Good. In your guidance that you gave you're guiding to be sequentially down in revenues from this quarter to next quarter. Where is that coming from? What do you think will be less next quarter -- this quarter?

32:39 We discussed the guidance for fourth quarter seventy point five million to eighteen million dollars. That's from reason of those expirations in the assumptions supply chain, global supply chain constraint is just still carry on and we need to prepare this to deliver orders in this curious chance supply chain constraints. So we disclose that guidance and we will achieve that -- we will try to achieve that guidance. And so -- but we believe -- we believe the orders is still coming for the next years. And we – but we did manage it, there is a risk of supply chains and constraints. Mr. Chen, do you have some color for the latest products.

33:41 Products will go down and the rest of the business will still grow.

33:54 That's the expectation. Yes. Mr. Chen do you have some comment on that?

34:01 So yes, to comment for litigation. So we are in a good position. We don't think it’s valuable for us to waste the money in litigation. That's the major consideration. So that’s for first question. Second, because of the constrain of the supply chain so we have more order volume than we can deliver. So that's delivery challenging for us in the next quarter.

34:32 And is that for all the products or any particular ones?

34:38 I think all the products. So because major you can see -- all are in supply including the chipset even the [indiscernible] everything in the surprising.

34:56 Okay. And so, are you now thinking in twenty twenty two let’s say you're tablet delivery is going to be lower than you thought because of this?

35:08 I don't think so, because tablet is going up, it depends on COVID-19. So if COVID-19 is still the serious, I think February will go up So because we have more product launch, we have headcount. We have more key product like [indiscernible] and we have more product come up. So including high end and middle end, also you can see a [indiscernible] we have more GlocalMe Inside, join brand product such as [indiscernible] IP Camera, we have more product. I think next year we will launch more product and will bring more order.

36:08 All right. And that reminds me of the other question. Could you talk a little bit about the IP camera? I don't think that's been mentioned, are you going to be working with partners to sell that? Who are you selling it to? And what countries?

36:28 Because our Hyperconn is more and more accepted by [indiscernible] camera company. So we have a news release months ago. We working with one big OEM IP camera company [indiscernible] who has bigger market share in China and worldwide. So his company really like our solution, because we embed our software into their camera, for the outdoor camera. 37:08 So this outdoor camera don't need SIM card, when the technology change the user do not need to come up and change the SIM impact. That's very challenging for users. So for -- and we can get the best and the best -- avoid traffic for the data. That's why we have more and more corporation for this IoT company like IP camera and also the power smart companies.

37:45 Okay. So you're just going to be selling them software, because they're just going put it in their cameras with their name on it?

37:56 Yeah. I think they service our solution in many -- in many brand. So, we will bring in a joint brand to sell IPC. That’s one of the choice. We will bring this joint branding in our online and offline shop, but also we will embed our software into their camera to other partners. And we can get more revenue share and provide partner better connection for users.

38:32 So, would revenues show up in product sales or in PaaS, SaaS or in other? How does that works?

38:50 Both, if joint branding, we sell camera, then we get hardware and data revenue. But if just partner only layout customer, we only get revenue for data in PaaS, SaaS.

39:06 Alright, Great. That sounds good. Are you going release a product anytime soon with a press release?

39:15 Yeah. Next quarter we will -- because third quarter is finished testing. First quarter we available, launching.

39:27 Okay, great. Look forward to seeing it. Thank you. That's all my questions.

39:44 [Operator Instructions] As there are no further questions, I would like to turn the conference back over to the management team for any closing remarks. Please go ahead.

39:53 Thank you once again for joining us today. If you have further questions, please feel free to contact uCloudlink’s Investor Relations through the contact information provided on our website group Investor Relations.

40:13 The conference call has concluded. You may now disconnect your line. Thank you.