Xunlei Ltd Q1 FY2020 Earnings Call

Good day, ladies and gentlemen. And thank you for your patience. You've joined Xunlei's First Quarter of 2020 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. We will have a Q&A session after a few management remarks. I would now like to turn the call over to your host, Investor Relations Manager, Ms. Charlene Lu.

Thank you, operator. Good morning and good evening. And thank you all for joining us today. We welcome you to this conference call to discuss Xunlei's first quarters of 2020 earnings. For our agenda today, Mr. Jinbo Li, our CEO, will provide a brief overview of the key strategy and financial performance. After which, Mr. Eric Zhou, our CFO, will provide additional details on the financial conditions, wrapping up with our financial outlook for the next quarter. We will be happy to take your questions after our management's remarks. Please be limited to two questions at a time so others can get their question in as well. 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. Before we get started, please note that the discussions 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 on the current market conditions and are subject to the 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. We do not undertake any duty to update any forward-looking statements except as required under applicable laws. During this call, we will refer to both GAAP and non-GAAP financial measures. A reconciliation of the non-GAAP to the 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.

Good morning and good evening, everyone. Thank you for joining us for our first quarter of 2020 earnings call. I'm very happy to rejoin Xunlei to be its Chairman and CEO. I look forward to having more opportunities to talk with you in the future. We are going through an unprecedented time and I'm proud of our employees' efforts during the past quarter. Now I would like to share our business goal, recent developments, and financial highlights of the first quarter of 2020. We began the year 2020 with steady revenue despite unfavorable economic conditions as a result of the COVID-19. Our revenues remain steady at $48.3 million, up about 10.1% compared to the fourth quarter of 2019. That is an increase of 17% compared to the same period last year. Further, the net loss was significantly reduced from $18.1 million in the fourth quarter of 2019 to a loss of $5.5 million this quarter. Amongst our product line, I would like to highlight the performance of our StellarCloud's service and membership subscription service. As part of our cloud computing and IVAS service, we are pleased to see the continual growth of revenue from our StellarCloud service. During the first quarter, our relationship with our corporate clients remained strong and demand for our CDN service tracked its previous chain of growth. The overall cloud computing and IVAS revenues dropped 14.2%, compared with the previous quarter and the decline is due to the decrease in live streaming revenues, other IVAS revenues, and the lack of cloud hardware sales this quarter. Our subscriptions revenues grew 18.1% quarter-over-quarter and grew 10.4% year-over-year to $23.4 million, contributing 48.3% of our revenues this quarter. Our subscriber base also increased from approximately 4 million to about 4.6 million compared to the previous quarter. As subscriptions revenue is an important source of our cash flow and a substantial part of our gross profit, we are very pleased with such growth. The growth was mainly attributable to the extended Chinese New Year holidays, but we will strive to retain as many of these new subscribers as possible. The overall revenue performance in the first quarter was within our expectations. Performance by business segments is also consistent with our overall strategy, which means that cloud computing service drives our growth and the traditional subscription business provides steady cash flows and profits. Our StellarCloud cloud computing service has experienced continual growth for the last several quarters and will remain one of the main growth drivers of the company. Going forward, while seeking growth and the scale of the business, we will also try to improve operating efficiency. Generally, subscription membership service has always been a core part of our business. Our subscriptions business brought in steady cash flow and a substantial amount of gross profit for the company, and 4 million subscribers are precious and integral to our brand value. As one of Xunlei's core competencies, it's critical that we focus our efforts on maintaining our leadership position in large-scale distributed edge computing capacity and continue to improve our service to boost the membership satisfaction. One of our main goals this year is to enhance the membership experience for our subscribers to retain our current members and widen our user base in order to build our subscription numbers. Several members of our new management team were integral in the initial creation of our subscription service product that launched Xunlei as the leader in the cloud acceleration business. Now, they are rejoining Xunlei and will bring in fresh perspectives and additional experience. We will leverage this experience to further what has made Xunlei successful with its traditional user base and create new features to attract more diverse users to generate synergy and expand our total user base. Ultimately, our goal is to expand the capabilities of our subscription service, especially on mobile phones. As more and more users move from PC to mobile services, we plan to expand our mobile subscription service through product innovation to bolster our user base and increase our membership numbers. In the future, we will continue to pursue blockchain technology innovation based on our ThunderChain infrastructure. As you may be aware, Xunlei recently acquired transaction leadership. Our goal is to fully uncover Xunlei's business potential and achieve profitability as soon as possible. One of Xunlei's core competencies is in our leading position in large-scale distributed edge computing capacity, which is the foundation of our cloud computing and subscription business. Going forward, we will concentrate on these core competencies and capitalize on our competitive advantage. Particularly, we will continue to expand our B2B business while improving profitability and at the same time expand our B2C product range and improve overall operating efficiency to ensure growth and continued operation of the company. With a strong balance sheet and abundant resources, we are optimistic about achieving these goals. Having said that, I will now turn the call over to Eric to reveal the financial results and the guidance for the second quarter of 2020.

Thank you, Jinbo. Hello, everyone, and thank you for joining us today. All subscription revenues increased substantially this quarter, but this increase was offset by the decrease in live streaming and cloud hardware sales revenue. Revenues from subscriptions were $23.4 million, up 18.1% from the previous quarter. The number of subscribers was approximately 4.6 million as of March 31, 2020, up from about 4 million as of December 31, 2019. The average revenue per subscriber for the first quarter of 2020 was RMB35.9, up from RMB35.1 for the previous quarter. Revenues from cloud computing and other IVAS combined to $21.2 million, representing a decrease of 14.1% on a sequential basis. The decrease was mainly due to decreased live streaming revenue and reduced cloud computing hardware product sales. Revenues from online advertising were $3.8 million, representing a decrease of 1.3% from the previous quarter. Cost of revenues was $24.4 million, representing 50.4% of our total revenues, compared with $30.3 million or 62.7% of our total revenues in the previous quarter. The decrease was mainly due to a write-down of our inventory of $3.2 million in the previous quarter and the decreased costs of cloud computing products and live streaming revenue sharing costs, which were in line with the decrease of such revenues. Bandwidth cost in the first quarter of 2020 was $18 million, representing 37.1% of our total revenues compared with $17.8 million or 36.8% of our total revenues in the previous quarter. The remaining cost of the revenues mainly made up the revenue sharing costs for our live-streaming business. Gross profit for the first quarter of 2020 was $23.8 million, up 33.1% from the previous quarter. Gross margin was 49.3% in the first quarter compared with 37.1% in the previous quarter. The increase in gross profit and gross margin was mainly due to the growth of our subscription business this quarter and decreased costs this quarter, as there was a ramp-up in a month of $3.2 million for Onething Cloud hardware inventory in the previous quarter. Research and development expenses for the first quarter of 2020 were $16.8 million, representing 34.8% of our total revenues, compared with $14.3 million or 29.6% of our total revenues in the previous quarter. The increase was mainly due to the costs associated with optimizing organizational structure, benefits, and compensation during the quarter. Sales and marketing expenses for the first quarter of 2020 were $6.7 million representing 13.9% of our total revenues compared with $11.1 million or 23.1% of our total revenues in the previous quarter. The decrease was mainly due to fewer marketing and promotional activities we conducted in the first quarter. General and administrative expenses for the first quarter of 2020 were $8.4 million, representing 17.5% of our total revenues, compared with $10.2 million or 21.2% of our total revenues in the previous quarter. The decrease was mainly due to less professional consulting expenditures. There was no impairment of assets in the first quarter of 2020 compared with a credit of $0.1 million in the previous quarter, which represented a net recovery of impaired assets. Operating loss for the first quarter of 2020 was $8.1 million, compared with an operating loss of $17.7 million in the previous quarter. The decrease in operating loss was primarily due to higher gross profits and less operating expenses incurred. The net loss was approximately $5.5 million in the first quarter of 2020, compared with a net loss of $18.1 million in the previous quarter. Non-GAAP net loss was $4.5 million in the first quarter of 2020, compared with a non-GAAP net loss of $17 million in the previous quarter. Diluted loss per ADS in the first quarter of 2020 was $0.08 compared with a diluted loss per ADS of $0.27 in the previous quarter. As of March 31, 2020, the company had cash, cash equivalents, and short-term investments of $255.7 million compared with $265.3 million as of December 31, 2019. And finally, I'd like to turn to our guidance for the second quarter of 2020. We expect total revenues to be between $42 million and $47 million for the quarter. The midpoint of the range represents a quarter-over-quarter decrease of about 7.9%. These estimates represent the management's preliminary view as of today and are subject to change; any change could be material. With that, we conclude our prepared remarks today. And I will now turn the call over to the operator for your questions.

Thank you. We have a question from Steve Chan from Stella Chan Group. Please go ahead.

The midpoint of the range represents a quarter-over-quarter decrease of about 7.9%. These estimates represent the management's preliminary view as of today and are subject to change; any change could be material. With that, we conclude our prepared remarks today. And I will now turn the call over to the operator for your questions. Thank you. We have a question from the line of Steve Chan from Stella Chan Group. Please go ahead.

Our hope is to continue collaborating with our employees and staff to grow our business. We aim to see growth and generate favorable returns for our investors for the rest of the year. With about six months remaining until year-end, we have many plans, but we will prioritize our core competitive advantages given the limited time. Our focus will be on increasing operating efficiency to boost revenues for both our shareholders and the company. By honing in on these competitive advantages and improving efficiency, we aim to achieve our goals for the remainder of the year. We plan to work closely with our employees to enhance the company's profitability, seeking more input and an entrepreneurial spirit from our staff. Shareholders will continue to support the company and its current business line.

Thank you. The next question please?

Thank you. The next question comes from Trista Yang of Noah Group. Please go ahead.

Hi, this is Trista from Noah, Hong Kong. I have a couple of quick questions. First, could you explain why Xiaomi exited from Xunlei? Will Xiaomi continue to cooperate with Xunlei in the future? Secondly, will Xunlei consider privatization or a dual listing on the Hong Kong Stock Exchange? Will the company buy back stock? Thank you.

I'll take up the question, okay. This is Eric. Regarding Xiaomi's exit price, as it was a private transaction among the shareholders, Xunlei was not involved with the details of the transaction. And we will continue to carry out our existing contracts and cooperation with Xiaomi and at the same time explore potential new opportunities. We hope to take advantage of respective strengths and expand our cooperation, as we have cooperated successfully with Xiaomi for several years and we are optimistic about continued cooperation in the future. And in terms of privatization and so far, the board of directors has not discussed this issue. Regarding the listing, it's not on our agenda. And regarding stock buybacks, we will closely monitor the development of the capital market. The company's cash position and capital needs and make an informed decision in a timely fashion. Thank you for your questions.

Thank you. We have the questions from Jang Zu. Please go ahead.

Okay. The question raised was from a small shareholder of Xunlei who mentioned that the company has been facing losses for several years. He asked if Mr. Li has any comments for the smaller shareholders concerning these losses.

Mr. Li would like to express gratitude to all minority stockholders for their ongoing support of Xunlei, even during our challenging times. He appreciates their belief in our growth. As the current CEO and one of the original founders, he is committed to pursuing substantial growth and profitability for the company moving forward. We aim to inspire the entrepreneurial spirit of our staff and collaborate to ensure our business generates higher returns in the future. Thank you for your question.

Thank you. At this time, there are no more questions from the line. I would like to hand the call back to the management for closing.

Okay. Thank you all for your participation today. And please contact us if you have any questions in the future. Have a good day.

Thank you, ladies and gentlemen. That concludes the conference for today. You may now disconnect your lines.