uCloudlink Group Inc.

Thanks everyone for joining us on our third 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; Xinquan Xu, is our Chief Sales 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 and 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 uCloudlink's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as an audited and 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.

Yes, I'm Chaohui Chen. So let's turn to Page 4 our similar contents also earnings presentation of our second quarter of year 2020.

I will now repeat in detail and I will pass through quickly. Please turn to Page 4, this is of our vision and mission.

So our company basically I think we are working for let people and consumer connection anytime anywhere for the best network so this is our mission and vision. So on Page 5, so we use the Cloud SIM technology, so to be the world's first and leading mobile data traffic sharing marketplace because our technology is e-vital to build these marketplace, also please turn to the Page 6, is about our Cloud SIM instant switching technology, so in the Q3 we launched in Q3 and this technology is becoming the engine of the 5G Cloud Era.

So accelerating 5G Cloud computing [indiscernible] early. For the Page 7, is about evolution of our Cloud SIM business model normally which has three business models in stage one with you and always to assist the business of our own and the flow of technology and the business model means our partner and agenda, we are coping this business model worldwide.

[Indiscernible] some of our partner, so they are very become mature and wherein technology and also is very expert about our PaaS/SaaS management. We go to the PaaS/SaaS model.

So let's see model in a three-stage, for the Page 8, is about our innovation Cloud SIM technology. So you can look it here for the information, for the technology.

So Page 9, is our, is we have very clear growth strategy across our business model. We have three business models for different stages.

So in history, we have very perceptible uCloud in 1.0 business. uCloud in 1.0 is focused on the international roaming service.

So we provide global local medium service for our users who travel outside. And uCloud in 2.0 business is about the local business, local mobile app, local 4G, 5G.

This business, well local business. Nonetheless, we will go to you know uCloud in 3.0.

3.0 is a full marketplace including we tune the app the fourth hand and second hand marketplace worldwide. So let's, from Page 4 to Page 9 is similar like quarter two.

So please turn to Page 10. So this is about our strategic investments and 5G opportunities for our business.

Page 10 is the most important page which shows the progress of the third quarter of the year 2020 and updated change we made. The COVID-19 pandemic continued to linger longer and steeper than anticipated.

So this negative impact on international tourism and consequently our third quarter year 2000 [ph] results. However, we expect international travel will recover with the launch of the COVID-19 vaccine and the effective testing and achieving.

Our uCloud in 2.0 local data connectivity service continued to be a very important business for us. The sales of mobile Wi-Fi terminals and service was steady and during the second quarter and the third quarter of the year 2020, so online and off line distribution channel with our business partner.

So from the quarter two and quarter three, offset of mobile Wi-Fi 2.0 business becomes stable. So mobile network operator, we call MNO, the major player in the local data connectivity service market and our uCloudlink 2.0 business has great potential through Global Alliance and cooperation with the mobile network operator and business partner globally.

We have already established an alliance ecosystem with wireless mobile network operators such as NTT in Japan, one of the major mobile network operators in Mainland China, and certain region wireless carriers in United States. We further invest in Beijing Huaxiang Lianxin Technology Co, Ltd, that's the MVNO, one of the licensed mobile virtual operator, MVNO in Mainland China.

We believe the alliance with the mobile network operator and mobile virtual network operators will further increase the scale of users connected to our platform as we leverage from carriers huge number of service subscribers. We will continue to develop strategic alliance with more mobile network operators, mobile virtual network operators and local business partners such as in Europe, in United States, Asia, et cetera.

As we pursue enhancement of our PaaS and SaaS platform ecosystem, and provide superior data connectivity service to carriers and business partners. 5G provides great opportunities for us.

We can help carriers to improve their coverage, connectivity service and investment efficiency in 5G networks. The recent launch of our instant switching network technology of uCloud or Cloud SIM accelerates 5G Cloud Era such as autopilot, AR/VR in the cloud computing.

Our whole series of 5G Mobile Wi-Fi, CPE and the flow coming in sign in back into the various trend of 5G reality mobile phone under development for commercial trials in near future. We believe that is a great potential for application for low device in 5G mobile four band connectivity service due to low network latency and expensive network coverage for end users.

We also believe it can facilitate to interpret the leading technology position of our PaaS and SaaS platform in the early stage of 5G. In order to elevate our local service train, we are enhancing our E-commercial efforts in specific key markets with high growth potential, such as the United States, Europe, optimizing our website and streamlining our SaaS functions and team in order to continue improving the user experience and overall satisfaction.

The recent launch of our instant switching network technology, we call uCloudlink, we call Cloud SIM 2.0 which greatly reduce across mobile network switching time for more than 30 seconds in Cloud SIM 1.0, 30 seconds to 2.0 milliseconds. Also contribute to establishment of our leading position.

Our Cloud SIM technologies such as instant switching network technology is both highly compatible with and brings unique advantages to various Internet of Things, IoT applications, these scenarios such as Internet of Vehicles, autopilot, cargos, logistics, and other car equipments. We are cooperating with business partner in various aspects of IoT applications such as cargo vehicles and cross-border railway transportations, where we see high potential for our business.

We make progress with one of the famous China railway transportation companies. I believe all these efforts and progress we have three more opportunities in the future, especially for the next year growth.

Please turn to Page 11. This is our new appointment of CSO and restructuring of senior management team.

Recently, we appointed Mr. Xinquan Xu as our Chief Sales Officer and President of Marketing and Sales.

Mr. Xu possesses strong track record in developing strategic global marketing of consumer goods such as mobile phones products, in addition to his extensive and deep cross-industry background and experience such as the Internet, telecommunications, mobile phone industry.

He previously had senior executive roles in various of renowned corporations including Huawei Technology, JD.com Incorporations. Zhu Tan assumes the role of the Vice President of Marketing and Sales.

Wen Gao, assumes the role of the Chief Strategy officers. These changes took effect on September 25, 2020.

The move to learn restructure management role was designed to better align senior leadership positions with the strategic development of our business, as we continue to improve operational efficiency, explore marketing opportunities and deliver sustainable growth. Yes, please turn to Page 13.

This is about our business performance and operating highlights. So the data of the second and the third quarter of the year 2020 shows the impact from the COVID-19 is becoming stable.

The left hand side of the slide shows daily active terminal DAT as of September 30, 2020. A certain portion of DAT and the data usage per terminal derived from our business partners.

You can see from the middle of the slide shows DAT breakdown by uCloudlink 1.0 and 2.0 data connectivity service. The decrease of the total DAT during the third quarter year 2020 is mainly attributable to the decrease of uCloudlink 1.0 service due to COVID-19.

We expect the launch of the vaccine in China and other countries and regions will benefit our business. 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 steady development and has been less impact by COVID-19. Our uCloudlink 2.0 service accounted from around 74% of the total DAT during the third quarter of year 2020, average daily data usage, per terminal was 2.13 gig in September year 2020.

Please turn to Page 14, is about our business and revenue, increase and diversify globally. Page 14 shows global diversification of our business.

Mainland China, the revenue as a percentage of total revenue continued to decrease as we diversified our global business. We continued to be our ecosystem with our business partners in various countries and regions.

As the third quarter of year 2020, we have 95 of the total revenue come from outside Mainland China. During the third quarter of, quarter year 2020 just has continued to contribute 50% of the total revenue.

After the investment in mobile virtual network operator Huaxiang Lianxin in China, and cooperation with the Chinese mobile network operators, we believe China market share we gain growth. Looking ahead, we expect the launch of vaccines from clinical Phase 3 to the market in China and other countries and regions will lead to the recovery of International traveler and the benefit to our business accordingly.

We expect all of these new opportunities such as uCloudlink 2.0 business will further develop our business potential in year 2021. We are also dedicated to our R&D in traditional, a new, innovative technology with further investment in sales and marketing to bring us greater prospectors for sustainable growth in the future.

I will now turn it to our CFO, Yimeng Shi, who will go through the financial highlight section. Please.

Thank you, Mr. Chen.

Hello everyone. Let's now turn to Page 16, our total revenue decreased by 59.2% from $44.1 million in the three months ended September 30, 2019 to $18 million in the three months ending September 30, 2020.

Revenue from service were $9.8 million representing a decrease of 60.8% from $25.1 million for the same period of 2019. This decrease was primarily attributable to the decrease in revenue from international data connectivity service and the PaaS and SaaS service to certain extent, mainly because of continuous and a prolonged impact of pandemic or COVID-19.

Service related revenue as a percentage in terms of revenues increased from 46.9% in the second quarter of 2020 to 54.7% during the third quarter of 2020. On other hand, 2.0 local data connectivity service was not impacted by COVID-19.

And it is revenue increased by around three times from $0.7 million in third quarter 2019 to $2.5 million in the third quarter of 2020, which is partially offset the decrease of our 1.0 international data connectivity service. So far, we have started our 2.0 local data connectivity service in China and Japan.

We will expand to all the potential markets such as Asia, the United States, European, et cetera. Revenue from PaaS and SaaS service were $1.5 million representing a decrease of 30.3% from $2.1 million in the same period last year.

This decrease was primarily due to the negative impact COVID-19 from our partner that used our PaaS/SaaS service to provide international data connectivity service. In the meantime, the demand of our local data connectivity service, business partner are not affected.

Revenue from sales products were $8.2 million decreasing of 57.1% from $19 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 30.7% from $104.7 million in the nine months ended September 30, 2018 to $72.5 million in the nine months ended September 30, 2020. Revenue from service decreased by 44.2% from $56.6 [ph] million in the nine months ended September 30, 2019 to $37.1 [ph] million in the nine months ended September 30, 2020.

Revenue from sales products decreased by 7.1% from $38.1 million in nine months ended September 30, 2019 to $35.4 million in the nine months ending September 30, 2020. Let us move to Page 17, which show revenue breakdown of our two business segments, literally revenue from service and sales products.

During the third quarter of 2020, revenue from service and the sales products accounted for 55% and the 45% of total revenue respectively. Compared with the second quarter of 2020, we can see that percentage of our revenue from service increasing are then that we have more business partner which transfer to local data connectivity business connected to our PaaS/SaaS platform.

The increasing demand from our partner of our PaaS/SaaS service also shows up the sales of Terminals. Let’s now turn to Page 18, for gross margins of our business.

Our service gross margins and overall gross margins were increased to 36.6% and 31.3% in the third quarter of 2020 compared to 35.1% and 26.1% in the second quarter of 2020, respectively. It was mainly because we improved the efficiency of revenue and the cost structure during the third quarter of 2020.

The pandemic impacted our service gross margins, and also the overall gross margins. To mitigate the prolonged uncertainty of COVID-19, we reviewed comprehensively at our cost during the pandemic.

We will continue to work on measures to optimize our cost structure going forward. Let us move to Page 19, which shows a breakdown of our operating expenses.

Excluding share based compensation and others, total operating expenses decreased 17.5% from $14.3 million during third quarter of 2019 to $11.8 million during the third 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 expenses as a percentage of total revenue increased from 32% during the third quarter of 2019 to 75% during the third quarter of 2020. This was mainly due to the decrease of overall revenue.

Compared to the second quarter of 2020 the increased operating expenses in the third quarter 2020 was mainly because of bad debt provision due to the deferred payments of a couple of customers caused by the pandemic and a special bonus for certain systems. We continue 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 expenses accounted for 24% overall operating expenses during the third quarter of 2020. G&A expenses accounted for 44% of total operating expenses, with $1.3 million of account receivables bad debt provision included.

Let’s now turn to Page 20. Operating cash flow was negative $0.4 million during the third quarter of 2020 compared to positive $0.3 million during the third quarter 2019.

Our cash flow was normal with sufficient cash and cash equivalents as at September 30, 2020. Our CapEx was $0.14 million during the third quarter of 2020 compared to $1.2 million during third quarter of 2019.

CapEx as a percentage of total revenue decreased from 2.7% during the third quarter 2019 to 0.8% during the third quarter of 2020. It was mainly due to the decrease of uCloudlink 1.0 expenditures.

Let us move to Page 21. Net income during the third quarter 2020 was negative $9.7 million compared to positive $3.8 million during the third quarter of 2019.

Adjusted EBITDA was negative $1.0 million during the third quarter of 2020 compared to positive $4.6 million during the third quarter of 2019. Looking ahead, we are cautiously optimistic.

We continue to increase investment in R&D and sales marketing such as e-commerce and promotional campaign in key markets. With the intention of opening more new business opportunities globally, we will continue to improve and optimize our revenue cost structure with increasing operational efficiency, together with the abovementioned business opportunity to facilitate our business growth and performance in the future.

With that, we conclude today's presentation. Thank you and we’ll start our Q&A session.

Operator?

Hi, this is Aaron. Thank you management team for taking my questions.

I had two questions. The first question is about the international side of the business.

So how does this pandemic change your international strategy and how did you think about the pace of the recovery in the outbound travel? And my second question is about the 2.0 local data connectivity services business.

So how this business performed sequentially in China post the COVID-19 outbreak versus prior to COVID-19 and any use of metrics you can share? Thank you.

I’m Chaohui Chen, CEO of the uCloudlink. For 1.0 as I mentioned before, it is impacted by the COVID-19.

Currently, you can see the second wave and third wave its heavy impact of business global traveler. So that's good news, that’s bad news.

But for good news I think we now can see release of a vaccine from China and from U.S. now has become more clear.

So, I believe, next year in some distance in terms, in some condition and more possibility I think we are recovering from the COVID-19. So, we expect the next second half years of the COVID-19 will gradually become better because of the vaccine and the control.

So, that is our expectation for 1.0 we believe from the second half of next year COVID-19 impact will reduce and global travel will gradually recover. You can see, recently like Hong Kong and Singapore and some bubble travelling already happened.

I think that's the good news for us. So, I think 1.0 of course, it is dependent on COVID-19 control and vaccine.

So, that’s our, judgment from the senior team from uCloudlink. For 2.0 business, so because in China, 2.0 in other countries is [indiscernible] control in China is widening control for telecom business.

So, when this why we invest, in Huaxiang Lianxin, who is the mobile watch operator and also is why we are working with the key player in local, in the domestic market with the mobile one of the mobile network operators, because that's why we can get, we can overcome the barrier from the regulation, that is one. Another, we can faster growth from the currently existing user subscriber from the incumbent carrier or mobile watch operator.

So, that's our consideration. You can see from the next quarter our business in China local, not only in the past our Chinese business many came from international.

So local from next quarter, we believe because of the progress with the mobile watch operator and the mobile network operator working with them, we can regain the growth for Chinese local business.

Hi, Aaron. This is Bob Shen.

Let me put more comments on your two questions. First, regarding your first question of the international travel, I think we heard more better good news besides the vaccines, research progress.

For example, we looked into some reports regarding the international travel and shows that the international price began gradually to increase from third quarter now compared to the second quarter of 2020. And also you can see that the hotel occupancy rate has been increasing, which means that international travel has gradually become warm, we can see that.

And also you can see, also see the news that more and more and the country and the regions they are trying to open cross-border activities. They are trying to open the airport for example, Hong Kong and Singapore, they are trying to build a travel bubble.

If that bubble travel bubble has been established for people from Hong Kong to travel to Singapore then they do not need to do any quarantine. So which is also good news for international travel.

I think we believe more and more travel bubbles will be established and eventually, more and more countries will open their cross-border activities. So that will benefit our 1.0 International business.

Secondly for your second question regarding our local business in China, I think, apart from the alliance with MNOs and MVNOs also because our 2.0 local business have very wide aspects. For example, we also have global meetings with GMI which is embedded in various brands of mobile phone handsets.

We are in the process of negotiating with more, such as the 5G related of mobile phones and the development and for commercial trials in the near future. So later on, we will have more brands of our famous mobile phone manufacturer, handset manufacturer to cooperate with us which we will publish PR news if that is being confirmed.

And also regarding the 5G, I want to also mention here, because our four series of 5G mobile Wi-Fi, which we also call me MiFi, but formerly we call mobile Wi-Fi and also our customer pretty much his equipment, which is called a CPE and GMI also just mentioned, all these products are in the development for commercial trials in the near future. So all these good news will help to develop a further, faster and better our business in Mainland, China.

So we believe that our China market will regain growth and we expect next year 2021 will be a new milestone for our business.

Thank you.

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

Thank you.

Thank you.