Xunlei Limited (XNET) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and thank you for your patience. You've joined Xunlei's Fourth Quarter and Full Year of 2020 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to your host, Investor Relations Manager, Ms. Mengnan Gao.

Thank you. Good morning, and good evening. Thank you for joining Xunlei's Fourth Quarter and Full Year 2020 Earnings Conference Call. For our agenda today, Mr. Jinbo Li, our CEO, will provide a brief overview of our strategies and financial performance. After that, Mr. Eric Zhou, our CFO, will provide additional details on the financial results and wrap up with our revenue guidance for the first quarter of 2021. We'll be happy to take your questions after our management remarks. [Operator Instructions] Today's conference call is being recorded, and a replay of the call will be available on our IR website afterwards. Our earnings press release was distributed earlier today and is now also available on our IR website. Please note the discussion today will contain certain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigations Reform Act of 1995. Such statements are based on management's current expectations and current conditions and are subject to risks, uncertainties that difficult to predict, which may cause actual results to differ materially from those made in the forward-looking statements. Please refer to our SEC filings for a more detailed description of the risk factors that may affect our results. We do not undertake any duty to update any forward-looking statements, except as required under applicable law. During the call, I'll refer to our both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to comparable GAAP measures can be found in our earnings press release. Please note that all numbers are in U.S. dollars, unless otherwise stated. And with that, let me pass to our CEO, Mr. Jinbo Li, for prepared remarks.

[Foreign Language]

[Interpreted] Good morning, and good evening, everyone. Welcome to Xunlei's Fourth Quarter and Full Year 2020 Earnings Conference Call. Completing the year of 2020 with a strong fourth quarter, we're happy to share with you the company's recent developments and outlook.

[Foreign Language]

[Interpreted] The fourth quarter of 2020 was a quarter of accomplishments and progress. We beat the high end of revenue guidance with $50.3 million for the revenue, a 15% growth sequentially. In particular, we have steadily improved both gross margin and operational efficiency. As a result, we achieved profitability in the fourth quarter and ended the quarter with a higher cash position than previous quarter. I believe Xunlei is well positioned to cope with challenges and capturing growth opportunities.

[Foreign Language]

[Interpreted] Now I'd like to give you a recap of the financial highlights of the fourth quarter and full year of 2020. Our total revenue in the fourth quarter were $50.3 million, representing a 15% increase sequentially, which was driven by revenue increases across all business segments, especially revenues from our cloud computing and other IVAS services grew by 22% and sequentially as a result of the rising demand from our enterprise clients. Revenues for our subscription business reached $20.7 million after a number of operational optimization initiatives. Our online advertising business rebounded with 27.6% sequential increase. The overall gross margin expanded to 53.3% from 51.9% in the previous quarter, reaching a record high level for the past 3 years. On top of that, we achieved profitability in the fourth quarter with $4.6 million net profit. At the end of fourth quarter, our cash, cash equivalents and short-term investments reached approximately $255 million compared with $246 million in the previous quarter.

[Foreign Language]

[Interpreted] Let's take a look back at the year of 2020. Total revenues for 2020 were $187 million, a 3% year-over-year increase. Our revenue growth also came along with gross margin and bottom line improvement, demonstrating our solid execution of operational optimization. I believe these positive results will position us well for a strong start as we head into the new year.

[Foreign Language]

[Interpreted] The year of 2020 was a year of transition and progress. We started this journey with the establishment of short-term framework that's composed of 3 pillars, which were focusing on our core technological edge, enhancing operational efficiencies and upgrading organizational capabilities. Today, we are confident to say that our team has exceptionally achieved its goals with a business turnaround result for the fourth quarter of 2020, and I'm optimistic that we could carry the momentum into the future.

[Foreign Language]

[Interpreted] Now I'd like to review some of our recent progress for our major business segments.

[Foreign Language]

[Interpreted] Let's begin with our subscription business. We have lately made some strides in providing our subscribers with additional premium features, including cloud storage. Through enhancing user experience, our subscriber structure is moving towards one with increased fee-paying users. Meanwhile, our monetization capabilities continue to improve, resulting in expansion of our high-value subscribers and improve the retention rate. On top of that, by implementing disciplined cost control measures and operational enhancements, we improved gross margin for our subscription business.

[Foreign Language]

[Interpreted] Our revenue growth in the fourth quarter of 2020 was also driven by a rebound of our advertising business, a 27.6% increase quarter-over-quarter. They improved advertisement replacement (sic) [ placement ] by applying proprietary precision targeting algorithm from our partners. The sophisticated algorithm helped us better target customers and increase the effectiveness of the ads in our platform. As a result, we realized improved average advertising pricing per user and increased revenue.

[Foreign Language]

[Interpreted] Now turning to our cloud computing business. Our competitiveness is rooted in our capabilities in technological innovation and resource pooling. The strong growth in the fourth quarter made us one step closer to achieving economy of scale for profitability of our cloud computing services. We believe the demand from our enterprise clients remain high and will continue to grow. At the same time, our technological progresses have enabled us to expand with improved profitability.

[Foreign Language]

[Interpreted] At the end of 2020, our monthly sales benefits reached a record high. Revenue from bandwidth sales during 2020 grew by approximately 51-plus percent as a result of signing up new clients and increased demand from our existing clients. During the year, we furthered our efforts on expanding our nationwide network of shared cloud computing nodes and upgrading the capacities of the nodes by technological innovation to provide improved cloud computing solutions for commercial users. Although we are in a highly competitive market, we are committed to strengthening our competitive advantages by providing fast, reliable and secure service at a reasonable price through technological innovation. Our goal is to become a service provider of choice for our customers.

[Foreign Language]

[Interpreted] As one of our innovative businesses, we continue our endeavor in the blockchain space. During the fourth quarter of 2020, Xunlei and several leading Chinese universities and institutions were awarded a research project in the realm of blockchain fintech, a major research program sponsored by the Department of Science and Technology of Guangdong Province. The research project seeks to address a number of technological issues such as data security and user private protection in the application of blockchain technology. We intend to focus on research and development of blockchain technologies that can empower the real economy. So far, we have provided blockchain infrastructure and the technology support to companies in a number of industries, and we'll continue this for other applications. We believe blockchain has significant potential, even though it's still in nascent stage of our industry development cycle. We are treating our investment in blockchain as a real option and therefore, we'll adopt a proactive strategy.

[Foreign Language]

[Interpreted] In summary, last year, we grew revenue, improved gross margin and significantly reduced net losses. We made progress in research and development, and delivered superior value to our customers, which we believe will help drive our future corporate development.

[Foreign Language]

[Interpreted] Looking forward, I'd like to say that we have high expectations for 2021. As mentioned in our press release, we anticipate a couple of major events for this year. For example, the construction of our headquarters will be soon completed and will start to prepare for operations shortly outwards. The competition of this project -- completion of the project will significantly decrease our financial and operating risks and allow management to spend more time on growth or [indiscernible]. In addition, with our core competitiveness reinforced, we'll pursue business breakthroughs and expansion and set sight on selected overseas markets, aiming on becoming a leading player in selective vertical sales and achieving growth prospects. I look forward to sharing with you the latest development of this event in the coming days.

[Foreign Language]

[Interpreted] Having said that, I will now turn the floor over to Eric to review our financial results for the fourth quarter and full year of 2020 and provide guidance for the first quarter of 2021. Thank you.

Thank you, Jinbo. Hello, everyone, and thank you again for joining Xunlei's Fourth Quarter and the Full Year 2020 Conference Call. I will now go through the details of our financial results and wrap up with our revenue guidance for the first quarter of 2021. Total revenues for the fourth quarter of 2020 were $50.3 million, representing an increase of 15% from the previous quarter. The increase was primarily driven by the increase of revenues from each of our major product lines. Revenues from cloud computing and other IVAS combined were $25.9 million representing an increase of 22% from the previous quarter. The cloud computing revenue was $18.9 million, increasing 20.2% sequentially. The increased cloud computing and other IVAS revenues were primarily due to increased sales of our cloud computing services and the refinement of our operating models for the -- for our other IVAS services during the quarter. Revenues from subscriptions were $20.7 million, a 5.5% increase from the previous quarter. The number of subscribers was approximately 3.83 million as of December 31, 2020, compared with 3.75 million as of September 30, 2020. The average revenue per subscriber for the fourth quarter of 2020 was RMB 35.4, a slight decrease from RMB 35.9 for the previous quarter. Revenues from online advertising were $3.8 million, representing an increase of 27.6% from the previous quarter. The increase was mainly due to seasonality and optimized operations, primarily attributable to the application of precision targeting algorithm. Cost of revenues was $23.3 million, representing 46.4% of our total revenues, compared with $21 million or 48.1% of our total revenues in the previous quarter. The increase was mainly due to the increased sales of our cloud computing and IVAS services. Bandwidth cost in the fourth quarter of 2020 were $15.2 million, representing 30.2% of our total revenues, compared with $15.4 million or 35.1% of the total revenues in the previous quarter. The decrease was primarily due to increased capacity of our cloud computing nodes and improved bandwidth procurement. Gross profit for the fourth quarter was $26.8 million, representing an increase of 18.3% from the previous quarter. Gross margin was 53.3% in the fourth quarter compared with 51.9% in the previous quarter. The increase in gross profit and gross margin was mainly due to improved gross margin of cloud computing services and increased revenues of subscription and online advertising business, which had high gross margins than other product lines. Research and development expenses for the fourth quarter were $12 million, representing 23.9% of our total revenues, compared with $12.1 million or 27.6% of our total revenues in the previous quarter. Sales and marketing expenses for the fourth quarter were $2.8 million, representing 5.6% of our total revenues, compared with $4.2 million or 9.6% of our total revenues in the previous quarter. The decreased sales and marketing expenses were mainly due to fewer promotional activities and a reversal of expenses, which were previously accrued. General and administrative expenses for the fourth quarter were $7.9 million, representing 15.7% of our total revenues compared with $7.5 million or 17.1% of our total revenues in the previous quarter. The increase in general and administrative expenses was primarily due to increased employee welfare expenses partially offset by decreased legal fees due to reversal of provisions based on the progress of certain cases. Operating income was $4.1 million, compared with an operating loss of $1 million in the previous quarter. Net income was $4.6 million compared with a net loss of $1.5 million in the previous quarter. Non-GAAP net income from continuing operations was $4.8 million in the fourth quarter of 2020 compared with a net loss of $0.9 million in the previous quarter. The decreased net loss and non-GAAP net loss were primarily due to the increase in revenues of each business line and a high gross margin, as discussed above. Diluted earnings per ADS from continuing operations in the fourth quarter of 2020 was approximately $0.07 as compared with a loss of $0.02 in the third quarter of 2020. As of December 31, 2020, the company had cash, cash equivalents and short-term investments of $255.1 million compared with $246 million as of September 30, 2020. For the year of 2020, total revenues were $186.7 million, representing an increase of about 3% on a year-over-year basis. The increase in total revenues was mainly attributable to an increase in revenues from our cloud computing and subscription services. Revenues from cloud computing and other IVAS were $89.2 million, representing an increase of 6% on a year-over-year basis. The revenues of cloud computing services was $64.3 million, representing a 29.1% year-over-year increase. The increase in cloud computing and other IVAS revenues was mainly attributable to the increased sales of cloud computing services, as a result of our expanded service capacities and increased demand from our customers. Revenues from subscriptions were $84.3 million, representing an increase of 3.4% on a year-over-year basis. Revenues from online advertising were $13.2 million, representing a decrease of 15.6% on a year-over-year basis. The decrease was mainly due to a decreased demand for our online advertising by our mobile platform users during the first half of 2020. Cost of revenues was $92.6 million, representing 49.6% of our total revenues in 2020, as compared with $99.9 million and 55.1% of our total revenues in 2019. The decrease was mainly due to decreased sales of cloud computing products and revenue sharing costs for our live streaming products. Bandwidth cost as included in cost of revenues were $62.4 million, representing 33.4% of our total revenues, compared with $57.1 million or 31.5% of our total revenues in the previous year. The increase was mainly due to the increased sales of our cloud computing services. The remaining cost of revenues mainly consisted of costs related to the revenue sharing costs for our live streaming products and the depreciation of servers and other equipment. Gross profit for the year was $93.7 million, representing an increase of 16.1% on a year-over-year basis. Gross margin was 50.2% compared with 44.5% in the previous year. Research and development expenses for the year were $55.5 million, representing 29.7% of our total revenues, compared with $68.6 million or 37.8% of our total revenues in the previous year. The decrease was primarily due to the optimization of organizational structure, employee benefits and compensation. Sales and marketing expenses for the year were $18.1 million, representing 9.7% of our total revenues, compared with $31.8 million or 17.6% of our total revenues in the previous year. The decrease was primarily due to fewer marketing and promotional activities and the optimization of our organizational structure, benefits and compensation. General and administrative expenses for the year were $33.9 million, representing 18.2% of our total revenues, compared with $38.9 million or 21.5% of our total revenues in the previous year. The decrease was mainly due to the decreased rental expenses as a result of consolidation of offices, decreased legal and professional fees, and the optimization of organizational structure. Impairment of assets, net for the year was $5.1 million, comprising of a onetime write-off of certain receivables and prepayments in relation to our cloud computing business compared with a credit amount of $2.1 million in the previous year. Operating loss was $18.8 million, compared with an operating loss of $56.4 million in the previous year. The decrease was mainly due to the increase in total revenues, improved gross margin and the decrease in total operating expenses as a result of enhanced operating efficiency. Net loss from continuing operations was $14.1 million in 2020 compared with a net loss of $53.4 million in the previous year. Non-GAAP net loss from continuing operations was $11.8 million in 2020 compared with a loss of $48 million in the previous year. Diluted loss per ADS from continuing operations in 2020 was $0.21 as compared with a loss of $0.79 in the previous year. As of December 31, 2020, the company had cash, cash equivalents and short-term investments of $255.1 million compared with $265.3 million as of December 31, 2019. And finally, I'd like to turn to our guidance for the first quarter of 2021. We expect total revenues to be between $53 million and $56 million for the quarter. The midpoint of the range represents a quarter-over-quarter increase of about 8%. We conclude management's prepared remarks, and operator, we are ready to take questions.

[Operator Instructions] Your first question comes from the line of [ Jing Liao ], China SAFE Capital.

[Foreign Language]

[Interpreted] So the question is about corporate business development. So can management share some insights about some important aspects of the business development in year 2021?

[Foreign Language]

[Interpreted] So our goal in the new year is to do business breakthrough through product innovation. We believe that we are -- we have a compelling growth prospect and diverse application scenarios for our 2C business. To achieve this, we have made comprehensive and deep analysis for our users' behavior and demand to set product strategy. We are considering developing new social and entertainment products as our next move. Meanwhile, we will set sight around selected overseas markets for our incubated new products to pave way for growth.

[Foreign Language]

[Interpreted] For our cloud computing business, we still strive to achieve economies of scale and quality growth by technology-powered cost enhancements. Our resource pool is still expanding with more nodes and increased node stability through partnerships and technological innovation. Based on our current client base, we will also explore business activities in other vertical sectors in order to acquire more enterprise clients from various fields. Thank you for your question.

Your next question comes from the line of [ Chu Jiu ].

[Foreign Language]

[Foreign Language]

[Interpreted] So the question is about the short-form video business of the company. . So we think that short-form video sector is one of our business innovation this year. And we -- currently, we don't -- have made required disclosure about this product, but we will make required disclosure if possible in the future and communicate with the investor community. So our -- so it's based on our current product portfolios, we think that short-form video is still one promising sales and could generate synergies with our current product portfolio. Thank you for your question.

Your next question comes from the line of [ Trista Yang ] of CSFG.

This is Trista from CSFG Hong Kong. Firstly, I'd like to congratulate on a good quarter of yours. I have a question about Xunlei's headquarter building. What's the size of this buildings? And what is the total investment for this building?

[Foreign Language]

[Interpreted] The new 26-story headquarter building has approximately 65,000 square meters. And the total investment budget is about CNY 600 million, and it is located in the Nanshan District of Shenzhen, and we expect to complete the building in the near future and under budget. Thank you.

[Operator Instructions] Your next question comes from the line of Steve Chen of [indiscernible] Capital.

And my question is, given the kind of feasibility, do you project a profitability or turnaround of the full year fiscal year 2020/'21?

[Foreign Language]

[Interpreted] As we mentioned in the press release, we have high expectations for 2021, and we will continue to improve operating efficiency and at the same time, explore growth and explore growth opportunities, but we do not provide an annual guidance. We -- but we anticipate that this year will be a year of progress and accomplishments. Thank you for your question.

And also a follow-up question regarding the progresses on the blockchain side. So previously, you mentioned that there's a few projects like collaborations with certain university in Guangdong and also some progresses on those like security side. So do you expect the company will continue investing on the blockchain side and to echo in the current progresses of the blockchain and the cryptocurrency as a general?

What's your last question, Steve?

Would you... yes. Would you expect to keep investing in the blockchain business? And to actually echo and to stay actually in line with the current upbeat trend of the blockchain and the cryptocurrency as a general?

Basically, hey, shall we translate it into Chinese or probably not? Okay. Yes. probably some of us may know, Xunlei started to develop blockchain products in around 2017. And over the years, its blockchain technology and Xunlei's ThunderChain have been used for a number of applications, including a shared cloud computing, media products, charity fund, copyright publication, supply chain, et cetera. Last year, we launched a Blockchain as a Service platform, or BaaS, to further facilitate blockchain technology to serve the real economy. Our BaaS platform is a high-performance blockchain technology platform based on our infrastructure of our ThunderChain. And with one-stop blockchain service solutions, it is designed to free developers from complicated technical issues when deploying blockchain applications. And we believe there are still a lot need to be done to improve blockchain technology and to use it to serve real economy. A couple of months ago, Xunlei and several leading Chinese universities and institutions were awarded a research project on blockchain and fintech technology, which was sponsored by the Department of Science and Technology of Guangdong Province. The research project seeks to address a number of technical issues such as data security and user privacy protection in the application of blockchain. We will continue to invest in blockchain technology, research and capability. We also plan to explore other opportunities in the blockchain space, and we will be happy to share with you our progress in the coming days. Thank you for your question.

[Operator Instructions] As there are no further questions, I will now turn the call over to the management for the closing remarks.

All right, operator. We conclude today's conference call, and please feel free to contact us if you have any questions. Have a good day.

Thank you for your participation in today's conference. You may now disconnect. Good day.