Xunlei Ltd Q4 FY2020 Earnings Call

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. At this time, all participants are in a listen-only mode. There will be a Q&A session after the management remarks. 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 of 2020 earnings conference call. Our agenda today Mr. Jinbo Li, our CEO will provide a brief overview of our strategies and financial performance. After that Ms. 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. Please limit 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. Please note that 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 and 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. We do not undertake any duty to update any forward-looking statements except as required under applicable laws. During the call, I’ll refer to our 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.

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. The fourth quarter of 2020 was a quarter of accomplishments and progress. We achieved 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 the previous quarter. I believe Xunlei is well-positioned to cope with challenges and capture growth opportunities. Now, I would like to give you a recap of the financial highlights of the fourth quarter and full year of 2020. Our total revenues in the fourth quarter were $50.3 million, representing a 15% increase sequentially, which was driven by revenue increases across our business segments. Revenues from our cloud computing and other IVAS services grew by 22% sequentially as a result of the revenue demand from our enterprise clients. Revenues for our subscription business reached $20.7 million due to a number of operational optimization initiatives. Our online advertising business rebounded with a 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 three years. On top of that, we achieved profitability in the fourth quarter with a $4.6 million net profit. At the end of the fourth quarter, our cash, cash equivalents, and short-term investments reached approximately $205 million, compared with $246 million in the previous quarter. 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 position us well for a strong start as we head into the New Year. The year of 2020 was a year of transition and progress. We started this journey with the establishment of a short-term framework to compound three pillars, which were focusing our core technological edges, enhancing operational efficiencies, and upgrading organizational capability. Today, we are confident to say that our team has exceptionally achieved these goals with the business turnaround evident in the results for the fourth quarter of 2020. And I’m optimistic that we could carry the momentum into the future. Now, I’d like to review some of our recent progress in our major business segments. Let’s begin with our subscription business. We have recently 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 an increase in our high-value subscribers and improved retention rates. On top of that, by implementing disciplined cost-control measures and operational enhancements, we improved our margins for our subscription business. Our revenue growth in the fourth quarter of 2020 was also driven by a rebound in our advertising business, with a 27.6% increase quarter-over-quarter. We improved advertisement placement by applying proprietary precision-targeting algorithms from our partners. The sophisticated algorithms helped us better target customers and increase the effectiveness of the apps on our platform. As a result, we realized improved average advertising pricing per user and increase our revenue. Now, turning to our cloud computing business, our competitiveness is rooted in our capabilities, technological innovation, and resource pooling. The strong growth in the fourth quarter brought us one step closer to achieving the economy of scale for profitability in our cloud computing services. We believe the demand from our enterprise clients remains high, and we will continue this growth. At the same time, our technological progress allows us to expand while improving profitability. At the end of 2020, our monthly sales benefits reached a record high. Revenue from bandwidth sales during 2020 grew by 51%, as a result of signing up new clients and increased demand from our existing clients. During the year, we saw that our efforts in expanding our nationwide network and shared cloud computing nodes and upgrading the capacities of the nodes through technological innovation provided improved cloud computing solutions for commercial uses. Although we are in a highly competitive market, we are committed to continuing to showcase our competitive advantages by providing fast, reliable, and secure service at a reasonable price through technological innovation. Our goal is to become the service provider of choice for our customers. As one of our innovative businesses, we continue our endeavors 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 and 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 privacy protection in the application of blockchain technology. We intend to focus on the research and development of blockchain technologies that can empower the real economy. So far, we have provided blockchain infrastructure and technical support to several companies in various industries, and we’ll continue this for other applications. We believe blockchain has significant potential, even though it’s still in the nascent stage of industry development. We are treating our investment in blockchain as a real option; therefore, we’ll adopt a proactive strategy. 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 company development. 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 building will be completed soon, and we’ll start to prepare for operations shortly afterward. The completion of this project will significantly enhance our financial and operating metrics and allow management to focus more on growth opportunities. In addition, with our core competitiveness reinforced, we’ll pursue business breakthroughs and expansion and target selected overseas markets. We aim to become a leading player in selective vertical sales and achieve growth prospects. I look forward to sharing with you the latest development numbers and events in the coming days. 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 of 2020 conference call. I’ll 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 operating models for our other IVAS services during the quarter. Revenues from subscription 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 was RMB35.4, a slight decrease from RMB35.9 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 algorithms. Cost of revenues was $23.3 million, representing 46.4% of our total revenues, compared with $21 million or 48.1% of the total revenue in the previous quarter. The increase was mainly due to the increased sales of our cloud computing and IVAS services. Bandwidth costs in the fourth quarter of 2020 were $15.2 million, representing 30.2% of our total revenue, 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 from subscription and online advertising businesses, which had higher 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 that 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 revenue 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 a reversal of provision 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 from each business line and a higher gross margin, as discussed above. Diluted earnings per ADS from continuing operations in the fourth quarter of 2020 were 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 revenue 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 were $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 due to 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 decreased demand for our online advertising from 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 the 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 costs 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. 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 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 decreased rental expenses as a result of the consolidation of offices, decreased legal and professional fees, and the optimization of organizational structure. Impairment of assets, net of recoveries for the year was $5.1 million, comprising a one-time 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 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, and 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.

Your first question comes from Jing Liao of Sinosafe Capital. Please go ahead.

So the question is about corporate business development. Can management share some insights about key aspects of business development in 2021?

Our goal in the New Year is to achieve business breakthroughs through product innovation. We believe that we have strong growth prospects and various application scenarios for our consumer business. To reach this goal, we have conducted extensive analysis of our users’ behavior and demand to develop our product strategy. We are looking into creating new social and entertainment products as our next step. Additionally, we will target specific overseas markets for our new products to facilitate growth. For our cloud computing business, we continue to focus on achieving economic subscale and product growth driven by technology in the computing sector. Our resource pool is still growing with more nodes and enhanced node stability through partnerships and technical discussions. Based on our existing client base, we will also investigate business opportunities in other areas to attract more enterprise clients from diverse sectors. Thank you for your question. Now, let's move on to the next question.

Your next question comes from Chu Jiu. Please ask your question.

The question is about our short form video business. We believe that short-form video is one of our innovations this year, and we don’t have any updates on this project right now. However, we will share necessary updates in the future and engage with the investor community. Based on our current product offerings, we think short-form video is a promising area that can create synergies with our existing products. Thank you for the question.

Your next question comes from the line Trista Yang of VSFG. Please ask your question.

Hi, this is Trista from VSFG, Hong Kong. I’d like to congratulate you on a good quarter. I have a question about Xunlei headquarters building. What’s the size of this building and what is the total investment for the building?

Nice question, Trista. We will try to complete our headquarter building first, which is approximately 65,000 square meters. The total investment budget is about CNY 600 million, and it is located in the Nanshan District of Shenzhen. We expect to complete the building in the near future and on budget. Thank you.

Your next question, please state your first and last name and the company you’re calling from. Your line is now open. Your next question comes from the line of Steve Chen of Stellar Chain Capital. Please ask your questions.

Thanks for taking my call. My question is, given the current feasibility, do you project profitability or a turnaround for the fiscal year 2021?

As we mentioned in our press release, we have higher expectations for 2021, and we will continue to improve operating efficiency. At the same time, we will explore growth opportunities, but we do not provide annual guidance. However, we anticipate that this year will be a year of progress and accomplishments. Thank you for your question.

Thank you. And also a follow-up question regarding the progress on the blockchain side. Previously, you mentioned a few projects, like collaborations with certain universities in Guangdong and some progress on the security side. Do you expect the company will continue to invest in the blockchain side and align with the current progress of blockchain and cryptocurrency generally?

Yes. Some of us may know that the targeted development of blockchain products began around 2017, and over the years, blockchain technology has been utilized for various applications, including shared cloud computing, media products, charity funds, copyright publications, and supply chains. Last year, we launched a blockchain-as-a-service platform to enable blockchain technology to support the real economy. Our platform is a high-performance blockchain technology platform that leverages our capabilities and offers comprehensive blockchain service solutions designed to simplify deployment for developers. We believe there is still much to improve in blockchain technology to enhance its utility for the real economy. A couple of months ago, Xunlei and several leading Chinese universities and institutions received a research project on Blockchain and Fintech technology, sponsored by the Department of Science and Technology of Guangdong Province. This project aims to tackle several technical challenges such as data security and user privacy protection in blockchain applications. We will continue to invest in blockchain technology, research, and capabilities. We also plan to explore additional activities in the blockchain space, and we look forward to sharing our progress in the coming days. Thank you for your question.

Thank you.

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.