uCloudlink Group Inc.
Q2 2020 Earnings Call Transcript

Published: 17 Aug 2020

[Operator:]

Good morning, and good evening, ladies and gentlemen. Thank you for standing by and welcome to you uCloudlink Group Inc. Second Quarter 2020 Earnings Conference Call. At this time, all participants will be in listen-only mode. After prepared remarks by the management team, there will be a question-and-answer session. Today's conference call is being recorded. I'd 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:]

Thanks everyone for joining us on our second quarter 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; Zhu Tan, is our Chief Strategy Officer. Our CEO will begin with an introduction of our company overview and the business highlights. This will cover section one and section two of the earnings presentation posted on our IR website. And then our CFO, Yimeng Shi will discuss our financial results in 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 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 you uCloudlink's earnings press release and this conference call include discussions of an audited GAAP financial information as well as an audited and in depth financial measures. uCloudlink's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directory comparable GAAP measures. I will now turn the call over to our Co-Founder and CEO. Mr. Chaohui Chen. Please go ahead.

[Chaohui Chen:]

Thank you everyone. Let me now 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 the one Cloud SIM technology, which enables consumers to enjoy mobile connections on any available network at anytime. We also enabled partners to be an over-the-top carrier worldwide to encourage roaming and the utilization problems, our innovative Cloud SIM technology that the technological foundation of our marketplace. We are the pioneer of introducing the sharing economic business model into 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 deploying at scale, enabled the marketplace to be established with our mobile data bottleneck supply and enabled dynamic device data traffic navigation across multi-network connections. We redefined 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 everyday mobile data traffic allowance from 220 mobile network operator, we call, MNOs in 144 countries and regions in our Cloud SIM architecture. Page 5 is a high level view of the data marketplace that we envision and wish our technology enable. 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 carrier or their partners around the world; we call it firsthand mobile data. Our systems can also utilize the unused data from end user; we call it 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 carriage utilization problem and achieve better returning of investment. We have transformed the traditional telecommunication business model and we can do with packing, with distributing and enable dynamic allocation recycling et cetera to enable the end user which chose to optimize carriage fixed and price with flexibility. Let us move to Page 6 and talk about 5G opportunities for us. As we know, 5G radiofrequency band is higher meet 4 to 5 times the number of base stations in order to get similar carriage as 4G. In the early stage, 5G coverage and the infrastructure are no sufficient to support roaming and there are significant incremental CapEx requirements related to spectrum and network equipment and the infrastructure. On 5G ready Cloud SIM platform offers a ready-to-use solution for mobile network operators and the smartphone manufacturers and that enables roaming free inter-carrier 5G network access domestically and the internationally. As network operators start to rollout 5G networks, mobile data traffic sharing between mobile network operators via our Cloud SIM architecture can reduce capital spending and roaming agreements negotiation cost, ensure low network latency for end users and expand network coverage. We will continue focusing on our R&D investments on service and product development related to the 5G as the advent of 5G brings faster data connectivity speeds and more business opportunities. Our series of 5G product such as MiFi, CPE and the GMI [indiscernible] are expected to launch in the near-term. We will continue to keep to our leading position and test 5G business opportunities globally. Page 7 shows the evolution of our Cloud SIM business model. At Stage 1, we directly face end users to place B2C retail model. We have proven that technology and the proven the business successful and profitable. We test all the revenues including those from hardware service, data traffic and we also [indiscernible]. It took two to three years, but we are now the largest portable Wi-Fi service provider for international roaming for Chinese outbound traveler in year 2018, according to Frost & Sullivan. Stage 2 is B2B to C wholesale model, where we can work with partner in different countries to use their brand while copying our business model. It is far less spending by ourselves and is far less spending from a Stage 3 we call a PaaS and SaaS service model. 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 enables us and our business partner to operate more efficient. In addition to 5G, we will continue investing in our R&D efforts towards further development and update of our PaaS and SaaS platforms, which not only providing innovative and advanced platform service and the functions to our business partner, but also has been investing 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 algorithm 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 globally or our global expansion by forming a global partner ecosystem. Let’s turn to the Page 8 and take a look -- let me turn to Cloud SIM technology. There are four critical advantages of our innovative Clout SIM technology. Firstly, with our innovative Clout SIM technology, we can to create a full marketplace including the firsthand and the secondhand of the data traffic with the massive user base. Secondly, with Clout SIM up ATT [ph], the hence or handset can dynamically connect to the different networks by changing to a different SIM cards in remote sites. Thirdly, it simplifies the relationship with the carrier just by SIM cards from a carrier and their channel [indiscernible]. Fourthly, the physical SIM card can have over 20 years history, and it is cure, reliable and mature. Our condition is much easier and there with lower risk and the barrier SIM cards payment. With these advantages, our Cloud SIM technology facilities a valuable service to both users and carriers, enabling no just connected, but superior connection. Our Cloud SIM technology enabled marketplace assessed for superior connectivity globally and also bring us the great business opportunities. As of June 30, 2020, we have 54 patents approved and 65 patents pending for approval globally. During the second quarter of the year 2020, we have four new patients approved and two patents now pending approval. Page 9 shows our clear 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, let me add along in technologies. uCloudlink 2.0 local data connectivity service focuses on local residents as solved challenges between carriers. It has started gaining faster growth to be a huge volume user numbers companies. We are developing GMI GlocalMe Inside with handset vendor one by one, building low cost operations successfully with local partner country by country and catching local mobile app or band and IoT GlocalMe Insidd opportunities. uCloudlink 3.0 is a full marketplace of the data traffic, is in trial and will -- which is technologically. Let us turn to the Page 10. Recently, we appoint Mr. Xinquan Xu, Victor 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, Inc. His appointment strategically elevates our sales, marketing and consumer engagement initiatives to better meet the growing demand for our innovative high-tech services and products around the world. Our team become more stronger to catch the large global market opportunities. Let's now 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 terminal revised 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 decrease of our uCloudlink 1.0 services due to the 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 the IoT are both 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 left in [indiscernible] by macroeconomic factors such as COVID-19. Our uCloudlink 2.0 services continued to increase during the second quarter year 2020 and account for around 74% of total DAT daily data usage per terminal was 2.16 gigabit in June 2020. From Page 13, we continue to diversify our business globally. Mainland China's revenue as a percentage of total revenue continued 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 2020, Japan contributes to 56% of total revenue. We form an alliance with one of largest mobile network operator in Japan, and we are continuing to expand our business and alliance with our partners globally. We continue to invest in R&D to keep our leading position and cost competitiveness. Looking ahead, we will dedicate to investing in R&D to keep our leading position and cost competitiveness in 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, Southeast Asia, United States, Europe, et cetera coming to further divest the world's first and leading mobile data traffic sharing market. With that, I will now turn it over to our CFO, Yimeng Shi, who will go through the financial highlight section. Please.

[Yimeng Shi:]

Thank you, Mr. Chen. Hello everyone. Let's now 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 month ending June 30, 2019 to $21 million in the three months ended June 30, 2020. Revenues from service were $9.9 million representing a decrease of 53.5% from $21.3 million for the same period in 2019. The decrease was mainly attributable to the decrease of our 1.0 international data connectivity service revenue, which was impacted by prolonged international travel restrictions due to COVID-19. Service related revenues as a percentage total revenue also decreased to 47% during the second quarter of 2020. On the other hand, our 2.0 local data connectivity service 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 service. So far, we have started our 2.0 local data connectivity service such as in China, Japan, with a faster growth rate in Japanese markets. And we will continue to expand to more countries and regions such as Asia, United States, Europe, et cetera, which have high growth potential. Revenue from PaaS and SaaS services were $0.5 million, representing a decrease of 72.2% from the $1.8 million in the period last year. This decrease was primarily due to international travel bans due to COVID-19, but our 2.0 local data connectivity service demand was strong and more effective. Revenues from sales of products were $11.1 million, decreasing of 24% from $14.6 million in the same period last year, which was primarily due to the decrease of our 1.0 international data connectivity service due to COVID-19. Performance and demand for our 2.0 local data connectivity service was strong and was not affected by COVID-19. Our total revenue decreased by 10.1% from $60.6 million in the six months ending June 30, 2019 to $54.5 million in the six month ending June 30, 2020. Revenues from service decreased by $34.2 million from $41.5 million in the six months ended June 30, 2019 to $27.3 million in the six months ended June 30, 2020. Revenues from sales products increased by 42.4% from $19.1 million in a six month ended June 30, 2019 to $27.2 million in the six months ending June 30, 2020. Page 16 shows the revenue breakdown of our two business segments, namely revenue from service and sales of products, which have synergy between charges. During the second quarter of 2020, revenues from service and sales of products coming for 47% and 53% of total revenue respectively. The reduction of the same service related revenue was mainly because of the decrease of our 1.0 international data connectivity service revenue. Apart from this, our PaaS and SaaS service acquired a certain number of than as planned to and a certain portion of revenue from sales production was related to our PaaS and SaaS service. We fixed on our service relative revenue, which is a key direction to 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's now turn to Page 17 for gross margins of our business. Our service gross margins and the 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 1.0 international data connectivity service revenue impact, our service gross margins also our overall gross margin due to COVID-19. In addition, revenue from certain customers of PaaS/SaaS service was higher gross margins over other segments also decreased to a certain extent. Apart from above, to mitigate the COVID-19 impact, we took a hard look at our costs during the pandemic. Our cost increased on fixed costs and the variable cost, and we were able to reduce variable cost to certain extent. We will continue to works to make sure to optimize our cost structure going forward. We believe that our cost gross margin and overall gross margins were a bit improving of our 1.0 international data connecting service recovers. Page 18 shows breakdowns of all our operating expenses. Total operating expenses decreased 33% from $15.3 million during the second quarter of 2019 to $10.2 million during the second quarter 2020. We took close control measures on our operating expenses to offset the top line impact from COVID-19. Total operating expenses as a percentage of the total revenue increased from 43% during the second quarter 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 right hand side of the slide that on our R&D expenses accounting for 24% of overall operating expenses during the second quarter 2020. G&A expenses accounted for 41% of the total operating expenses with mitigation fee included. Please turn to Page 19. Operating cash flow was negative $2.8 million during second quarter 2020 compared to positive $6.3 million during second quarter 2019. Our cash flow was normal with sufficient cash and the cash equivalent as June 30, 2020. Our CapEx was $0.2 million during second quarter of 2020 compared $0.4 million during the second quarter 2019. CapEx as a percentage of total revenue decreased from 1.1% during the second quarter 2019 to 1.0% during second quarter of 2020. It was mainly due to a decrease of recording uCloudlink 1.0 expenditure. Page 20, net income during the second quarter 2020 was negative $41.6 million compared to positive $0.3 million during second quarter of 2019. Adjusted EBITDA was negative $3.1 million during second quarter 2020 compared to positive $1.2 million during 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 corporations with business partners globally. 5G is coming and will create more opportunity 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 service to our customer and business partner. With that, we will conclude today's presentation. Thank you and we'll start our Q&A session.

[Operator:]

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

[Unidentified Analyst:]

Hi. This is Alyssa [ph]. Thank you, management for your presentation. My question is regarding 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 project for the trend line for future geographic revenue mix for China, will it continue to drop? And my second question is regarding U.S.-China relationship impacting our overseas business. So how do you assess this relationship impact to our business?

[Yimeng Shi:]

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 U.S. and China relationship, so far we are very generative from our U.S. markets was growing in the second quarter. And we believe there is the demand from the U.S. market for either international travel and all for local mobile broadband service is growing and higher potentials in the futures.

[Bob Shen:]

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 U.S. and China relation, although, we cannot forecast the U.S. 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 U.S., we are also investing -- also expanded to Asia, Europe, et cetera to diversify our business. So, we hope that U.S. and China relationship gets better and gradually recover, but we also focus our business apart from U.S. So, as I mentioned, our business is globally diversified so that will be our business strategy and that will minimize the risk from U.S. section. So, I hope we answered your questions.

[Unidentified 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:]

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:]

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

[Yimeng Shi:]

Yes.

[Bob Shen:]

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.

[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:]

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:]

This concludes the earnings conference call. You may disconnect your lines this time. Thank you and have a good day.