Xunlei Limited (XNET) Earnings Call Transcript & Summary

Welcome, ladies and gentlemen, and thank you for your patience. You've joined Xunlei's 2022 Third Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the call over to the host, Investor Relations Manager, Ms. Luhan Tan.

Thank you, and good morning, everyone, and thank you for joining Xunlei's 2022 Third Quarter Earnings Conference Call. On the call with me today are Eric Zhou, Chief Financial Officer; and [ Li Ou ], Senior Vice President of Finance. Now you can find our earnings press release on our IR website, which is intended to supplement our prepared remarks today. For today's agenda, I will first read our prepared opening remarks by our Chairman and CEO, Mr. Jinbo Li, on highlights of our third quarter operations. Then Mr. Eric Zhou, our CFO, will go through the details on the financial results and wrap up with our revenue guidance for the fourth quarter of 2022. We'd like to welcome any questions from you after the management's remarks. Today's call is recorded, and you can replay the call from our Investor Relations website. Before I get started, I would like to take this opportunity to remind you that the discussion today will contain certain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations under current market conditions that are subject to risks and uncertainties that are 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. Xunlei assumes no obligations to update our forward-looking statements, except as required under applicable laws. On this call, we'll be using 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. With that, the following is prepared statement by Mr. Jinbo Li, Chairman and CEO of Xunlei Limited. Good morning, everyone. Thanks for joining us today. Despite the macro headwinds we've been facing for some time, we delivered solid third quarter results with revenue exceeding the top end of our revenue guidance and net income also grew sequentially. And this is the third profitable quarter this year, and we expect to end the year with full year profitability, assuming no extraordinary events or onetime write-offs, which we do not foresee as of this earnings release. I believe the third quarter results demonstrated our ability to focus on and execute our strategies and showing the resilience of our products and services in a challenging environment. I'd like to share with you some of the major highlights from the third quarter. Generally speaking, the results of our major business lines, namely member subscription, cloud computing and live streaming and other Internet value-added services sitting either within or exceeding our expectations. Although the results when reported in U.S. dollar were partially offset by the impact of devaluation of RMB against the U.S. dollar. Specifically in third quarter of 2022, we realized $88.3 million in total revenue with a 12.8% quarter-over-quarter increase and revenue exceeded the high end of our revenue guidance range. Meanwhile, our net income increased to $8.3 million in the third quarter from $6 million in the second quarter, which is the third consecutive profitable quarter of this year. Delivery profits 3 quarters in a row amidst a challenging macro environment clearly demonstrated the successful execution of our business strategies and the resilience of our business model. I feel very thankful to our employees and management for their dedication and efforts on keeping operations on track during a period of COVID-19 resurgence and carrying on our products and services to serve our users and clients without interruption. As one of our major business growth drivers, our cloud computing business in the third quarter of 2022, its revenue reached a record level of $29.1 million. In addition, Shenzhen Onething, the operator of cloud computing business and a wholly owned subsidiary of Xunlei was ranked #4 with a 12.2% of market share in public edge cloud service market in 2022 according to a study by International Data Corporation. Our subscription business delivered essentially stable performance and generated approximately $25 million in revenue, down 1.7% compared to last quarter, mainly due to the impact on currency devaluation and a slight decrease in the number of subscribers, partially offset by higher average revenue per user. It's reported in renminbi. The third quarter subscription business would have been up slightly versus the prior quarter. The average revenue per subscriber reached RMB 39.1 in the third quarter compared to RMB 37.8 in previous quarter as the average proportion of premium membership rose to 35.3% of total subscribers from 34% in the previous quarter. We will continue to improve product features to enhance user experience and at the same time, explore additional marketing channels to reach a broader user base. Our live streaming and other Internet value-added services was the fastest-growing business line in the third quarter of 2022, accounted for approximately 38.8% of our total revenues in third quarter, surpassing cloud computing and membership subscription, which accounted for approximately 33% and 28.3%, respectively, of our total revenues. In the third quarter, our live streaming and other Internet value-added services reached a record level of $34.2 million in revenue with a 39.4% quarter-over-quarter increase. We expanded the presence of our products and services in more countries, hired additional local teams and deepened our brand recognition in this new market. However, we expect a continued appreciation of the U.S. dollar against other currencies. If it happens, will dampen our financial performance in overseas markets. We will closely monitor the dynamics of global economies, through political tensions and regulatory policies and importantly execute our international growth strategy. We have high hope that in a foreseeable future, Xunlei's growth will be driven by the products and services that have broader user recognition and larger market potential and rely less on our traditional products and services, and this is an ongoing transition, and we look forward to sharing with you our development in the coming quarters. To conclude, we anticipate future growth for the fourth quarter of 2022 sequentially and year-over-year, and that we expect to be on course to achieve full year profitability. However, we will stay vigilant about the current macro dynamics which could significantly impact our operations. To ensure sustainable development, we are steadily entering selected international markets to strengthen our product portfolio and address geographic market risk. We have seen incipient but encouraging progress in this regard. With a healthy balance sheet, clear strategic focus and effective execution as well as an improved product portfolio, we believe we are well positioned to navigate this volatile macroeconomic and geopolitical environment and capture long-term opportunities. Now I'd like to turn the call to Eric to review some of the financial numbers.

Thank you, Luhan. Good morning, and good evening, everyone. We are pleased to have you join us today to discuss our third quarter results. I will now go through the details of our financial results and wrap up with our revenue guidance for the fourth quarter of 2022. Total revenues were $88.3 million, representing an increase of 12.8% from the previous quarter. The increase in total revenues was mainly attributable to increased revenue generated from our large streaming business. Revenues from cloud computing were $29.1 million, representing an increase of 2.7% from the previous quarter. The increase of cloud computing revenues was mainly due to the increased demand from our major customers for our cloud computing service, partially offset by the devaluation of exchange rate of RMB against the U.S. dollar. Revenues from subscriptions were $25 million, representing a decrease of 1.7% from the previous quarter. If we project in RMB, the subscription revenue would have been up slightly. The number of subscribers was 4.37 million as of September 30, 2022, compared with 4.46 million as of June 30, 2022. The average revenue per subscriber for the third quarter was RMB 39.1 compared with RMB 37.8 in the previous quarter. The higher average revenue per subscriber was due to a larger percentage of users who opted for our premium membership. Revenues from live streaming and other IVAS were $34.2 million, representing an increase of 39.4% from the previous quarter. The increase of live streaming and other IVAS revenues was mainly driven by the rise in the number of paying subscribers of our live streaming products, which were launched in 2021 as well as our enhanced monetization capability. Cost of revenues were $52.8 million, representing 59.9% of our total revenues compared with $44.3 million or 56.6% of the total revenues in the previous quarter. Bandwidth costs as included in the cost of revenues were $25.3 million, representing 28.6% of our total revenues compared with $25.5 million or 32.6% of the total revenues in the previous quarter. The remaining costs of revenues mainly consisted of costs related to the revenue-sharing costs for our live streaming business and depreciation of servers and other equipment. Gross profit for the third quarter was $35.2 million, representing an increase of 4.4% from the previous quarter. Gross profit margin was 39.9% in the third quarter compared with 43.1% in the previous quarter. The increase in gross profit was mainly driven by the increase in gross profit from our live streaming business. The decrease in gross profit margin was mainly due to the increased portion of live streaming revenue to total revenues, which has a lower gross profit margin. Research and development expenses for the third quarter were $16.2 million, representing 18.3% of our total revenues compared with $60 million or 20.4% of our total revenues in the previous quarter. Sales and marketing expenses for the third quarter were $5.8 million, representing 6.6% of our total revenues compared with $5 million or 6.4% of our total revenues in the previous quarter. The increase was primarily due to higher market expenses during the third quarter, driven by our continued user acquisition efforts. G&A expenses for the third quarter were $8.2 million representing 9.3% of our total revenues compared with $12 million or 15.4% of our total revenues in the previous quarter. The decrease was primarily due to the decreased share-based compensation expenses since fewer restricted share units were vested during the quarter. Operating income was $5.1 million compared with $0.7 million in the previous quarter. The increase in operating income was primarily attributable to the increase in gross profit of live streaming business and less share-based compensation expenses accrued during the third quarter. Other income was $4.7 million compared with other income of $7 million in the previous quarter. The decrease was primarily due to reversal of certain payables due over 3 years with low payment probability recognized in the second quarter, but no similar items in the third quarter. Net income was $8.3 million compared with $6 million in the previous quarter. Non-GAAP net income was $9 million in the third quarter of 2022 compared with $9.8 million in the previous quarter. The increase in net income was primarily driven by the increase in operating income as discussed above. Diluted earnings per ADS in the third quarter of 2022 was approximately $0.12 as compared to $0.09 in the second quarter of 2022. Moving to liquidity. As of September 30, 2022, the company had cash, cash equivalents and short-term investments of $251.7 million compared with $259.9 million as of June 30, 2022. The decrease in cash and cash equivalents was mainly due to the impact of foreign exchange rates, spending on Xunlei's headquarters building under construction and share repurchases. Turning to ongoing stock repurchase program. In March, Xunlei announced that its Board of Directors authorized the repurchase of up to $20 million of its outstanding common stocks over the next 12 months. As of September 30, 2022, we have spent approximately $4.3 million on buying back Xunlei's stocks. Regarding Xunlei's research and headquarters building under construction, now it is in the final stage for interior decoration and preparation, and we expect the new building to commence operations by the end of this year. And finally, moving to our guidance for the fourth quarter of 2022. The company estimates total revenues to be between $90 million and $95 million, and the midpoint of the range represents a quarter-over-quarter increase of approximately 4.8%. These estimates represents management's preliminary view as of the date of this press release, which is subject to change and any change could be material. Now we conclude our prepared remarks for the conference call. Operator, we are ready to take questions.

[Operator Instructions] Our first question comes from [ Jiao Ming Li ], private investor.

[Foreign Language]

This question is of the recently Tencent and China Unicom jointly dispatched a new company, and they're focusing on [ streaming ] and edge computing and is wondering if the joint venture business has any overlap with Xunlei's business. And if so, will there be any impact on Xunlei? We think to some extent, the joint venture demonstrated China's comprehensive layout of the cloud computing industry and it may bring great confidence to the entire industry under the current economic environment. And so far we haven't seen any details of the joint venture, and we really can't tell whether there will be any overlapping in business or if they would be our direct competitors. But from our perspective, within edge computing has great opportunities. We will adopt measures to embrace the changing competitive landscape. And so far, we haven't seen any impact on us yet. As one of the Tier 1 companies in edge public clouds, we intend to collaborate closely with all the players in the industry including [ carriers ], edge cloud computing firms, as well as all upstream and downstream value chain firms. And together, we can build a better ecosystem for edge computing. And in the long term, we will do our best to achieve win-win results for all 6 of the industries, as we believe the market is huge and has also further potential.

[Foreign Language]

[Foreign Language]

Basically, he asked based on our performance for the last quarter and the growth of each business line, and we want to have an understanding of the outlook of the company's business and particularly its profitability, and he wants to know whether the gross profit margin will continue to decline in the future. And we believe the gross profit margin will continue to decline as our live streaming business is expected to continue to grow and account for a larger percentage of the total revenues. Our live streaming product has a lower gross margin than our traditional subscription business. But we do expect that in the longer term, the overall gross margin will gradually stabilize to a certain level. Thank you.

[Foreign Language]

Our next question comes from [ Zhi Ning Song ] with Accenture.

[Foreign Language]

The caller asks that he sees that our subscription business has been relatively stable for the last several quarters. And he would like to know if we will have a breakthrough in this business. And this is a good question. And we hope our products and services as well as the number of subscribers will remain stable at a relatively higher level and continue to improve. We are exploring new potential opportunities and strive to add more convenient, efficient and reliable functions on top of our existing subscription service. In addition, we are also exploring additional marketing channels to try to reach a broader user base. Thank you.

[Foreign Language]

[Foreign Language]

Thanks for asking. And his question is, since our live stream product has become the fastest-growing business and the largest growth driver of Xunlei. And he would like to know the [ quotient ] of this business. And he also wants to know if we complete a transition for Xunlei's business model. This is good question. Since we launched our live streaming business in 2021, we have seen significant growth and our recent fast-growing operating results met our initial expectations. We are expanding our presence in more countries, buying more local talents and deepening our brand recognition in these new markets. As for whether we will make a transition, we are open to all possibilities in the future, and we will closely monitor the industry development and then back our overseas growth strategies accordingly. We are optimistic that in the future, Xunlei's growth will be driven by the products and services that have broader user recognition and large market potential, and rely less on our traditional products in the previous years. I believe this is an ongoing endeavor, and we look forward to sharing with you our progress in the coming quarters. Thank you.

[Foreign Language]

Our next question comes from [ Georgios Kaisarios ] with Royalston Holdings Ltd.

The share repurchase program, you have about 4 million shares repurchased. I mean not shares, in value. But that doesn't seem to be reflected in the -- unless I'm reading something wrong, in the total number of shares issued and outstanding. Can you share some light on exactly how that's calculated? Or why the total shares outstanding are not going much lower?

Firstly, I don't exactly know why the number is not what you saw. First, this number is the accumulated number. There is the dollar amount since we started program. And secondly, so far, it's been done according to a 10b5-1 program. And because it's going on based on a predetermined formula by our [ brokerages ], and we really don't have control yet. But that said, the window opens, the trading window opens, we may look at all options. But if you need to know the specific discrepancy, if you see it, we may discuss it offline because I need to look at the numbers and know exactly what you meant.

Okay. I have a second question, if you may. Most of your income is in other income. Is this like account receivables that you had written off years ago when you're putting them back on the books? Is that what it is, if I understand correctly? And second, do you anticipate this other income to continue as in the last 2 quarters?

The other income, basically the 2 major items in the other income section, we have like the -- some income from our bank deposits. We also have some income in the -- or sometimes lost due to the exchange gains or losses. And for the last quarter, we also had some, as you mentioned, the reversal of some of the accounts payable, which later we deemed it's not needed. And the second, we really don't extend or provide any guidance on the net income for the coming quarters. But based on our progress so far and particularly the performance of the last 3 quarters and based on, also, our revenue guidance, we're still optimistic that for the full year, we are going to have net profit. Thank you.

[Operator Instructions] Our next question comes from [ Sarah Jin ], a private investor.

[Foreign Language]

Thank you. Basically, she has a question regarding the blockchain, particularly our digital collectible assets business, and she wants to know our plan for the future and for this business. We think this is still a new and emerging industry. And in rare cases the development of a new industry will be uneventful. Regarding our products, our blockchain business, we basically experienced the things -- experienced what some of the other companies have experienced. And we are still operating the -- our enterprise digital collab search platform and also actively cooperate with creative and cultural organizations, [ new teams ] and IP owners. At the same time, we are exploring more opportunities for cooperation. And so far, our investment in blockchain business is very limited. And it accounts for an insignificant part of our portfolio, and we treat it as a real option and may adjust our strategy in the future based on the development of the industry. And as for the outlook of the blockchain industry, I believe that different people or different companies may have different opinions. And even for an industry giants like Facebook, we see it will need trials and make adjustments to its strategies. But again, we think it's a nascent industry and follow opportunities and challenges as well. Thank you.

[Foreign Language]

[Foreign Language]

She is asking, basically, we discussed before that we want to control our cost and she would like to know [ going ] forwards so far in this regard. And this is a good question. Basically, overall, our cost remained relatively stable and is up slightly because we also grow our business. You see, we are exploring additional products and also adding to a diverse geographic market, which all require capital investments and expenses. So we want to strike the balance between growth and preserving capital. And so far we -- our strategy is try to grow our business with a reasonable CapEx or expenses. We want to maintain a strong balance sheet, at the same time try to grow our business. Thanks for your question.

[Foreign Language]

[Foreign Language]

It's a good question. They are different ways of using cash. Basically, she asks whether we -- how we are going to use the cash we have and whether we are going to distribute any dividend. And there are different ways of using the cash. And for instance, we can distribute dividends. We can buy and buy back stocks, and we can also use cash to expand our market. And so far, we have chosen to reinvest the cash into our companies. And for a couple of reasons, first, we still feel we have very good growth opportunities. And if we go beyond our existing business, we see there are quite a lot of opportunities out there. And so far, our initial exploration has been successful, and so we feel we can get high returns for our investment than distribution cash. Second reason we do it is there are some practical restrictions if we are distributing cash. For instance, we might have to pay taxes when we distribute, they try to, the image -- spend the money overseas, and on the company level, and also some investors may pay taxes on the money they receive. So it may not be a better decision for the time being, particularly when we have growth opportunities.

[Foreign Language]

That said, paying dividend could be an option in the future, but for the time being, we feel we can use the cash for more productive purposes. Thank you.

[Foreign Language]

And I'm not showing any further questions at this time. I would now like to turn the call back over to Eric Zhou for any further remarks.

Thank you, again for your time and participation. If you have any questions, please visit us at our website at ir.xunlei.com. or send e-mails to our Investor Relations. Have a good day. Okay, we conclude today's conference call. Thank you very much.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.