Xunlei Ltd Q1 FY2021 Earnings Call

Good day, ladies and gentlemen, and thank you for your patience. You have joined Xunlei's first quarter of 2021 earnings conference call. At this time, all participants are in a listen-only mode. There will be a Q&A session after the management's remarks. I would now like to turn the call over to your host, Investor Relations Manager, Ms. Mengnan Gao. Please take over, ma'am.

Thank you. Good morning and good evening. Thank you for joining Xunlei's first quarter of 2021 earnings conference call. For our agenda today, Mr. Eric Zhou, the CFO, will first read the prepared remarks by Mr. Jinbo Li, Chairman and CEO of Xunlei. After that, he will provide additional details on the financial results and wrap up with our revenue guidance for the second quarter of 2021. We will 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 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 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 this call, we will refer to 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 CFO, Mr. Eric Zhou, for prepared remarks.

Thank you, Mengnan. Hi everyone. I am Eric Zhou, CFO of Xunlei Limited. Thanks again for joining Xunlei's first quarter of 2021 earnings conference call. The following is a prepared remark by Mr. Jinbo Li, our Chairman and CEO.

Good morning and good evening everyone. Welcome to Xunlei's first quarter of 2021 earnings conference call. We delivered robust financial and operating results in the first quarter due to our solid execution on the product innovation strategy with solid growth of subscription and cloud computing service revenues and the enhancement of key operating metrics, which contribute to the double digit growth rate of the bottomline. In the first quarter, our strong emphasis on strategic execution as well as operational enhancements drove steady and high-quality growth in revenue and net income, following a turnaround performance in the previous quarter. The total revenues in the first quarter of 2021 was $53.3 million, a 5.9% growth sequentially. The net income increased to $6.8 million, a 45.4% growth quarter-over-quarter, which was mainly due to the higher gross margin and optimized operations. It gives us confidence in our ability to uncover Xunlei's value and monetize future growth. The solid first quarter result demonstrated our efforts on business breakthroughs and innovation when entering the year of 2021. We have been building on our competitive strengths gained over the years and doubling down our efforts to improve our product offerings to our users. We will always be looking for new ways to create more value for our customers through user experience enhancement and technological innovation. Now I would like to share some color on our main business segments. First, let's take a look at our subscription service. We saw subscription revenues increase by 6.9% sequentially, which was mainly driven by the user base expansion. We believe our product initiatives to optimize user experience started to pay off, which was reflected through the expanded user base and their willingness to pay for value-added services. At the end of the first quarter, our subscription services reached 4.05 million subscribers, and the average revenue per user in the first quarter was RMB35.5. At the same time, we also saw some signs of the revival of our improved user activity and retention rate on our platform, which also benefited our monetization efficiency and revenue growth in advertising and other online games businesses. This result demonstrated the strength of our subscription services. We are confident that we still have room to continue to develop our subscriber base and further explore the potential of users' lifetime cycle value if we remain focused on providing users with top-notch experience and creating value for them. We think the potential and the resilience of our subscription business also resides in the scalability of the service, which can be demonstrated by the growth potential of the user base and the breadth of service offerings. We believe user experience is very important to scale our subscription business. Therefore, we will continue our efforts in this regard and upgrade our user experience in downloading, cloud video playing, and cloud storage. In this way, we will be able to strengthen customer loyalty and retain more fee-paying users. On top of that, we will strive to provide additional value-added products and services and deliver top-notch user experience to increase the subscribers, which will in turn lead to more venues for monetization. Now turning to our cloud computing business. We captured the growth momentum for our cloud computing business and achieved 10.9% revenue growth quarter-over-quarter. It was noted that we expect the demand from our existing and new clients will be growing as people's entertainment and social activities are more and more video-based. We trust our continuing investment in technological innovation will open new opportunities in cloud computing for us, which is driven by the acceleration of the digital transformation trend in our society. As a result of our performance in the quarter discussed above, we have updated our second quarter revenue guidance to reflect the recent progress. I am confident that we are on track to pursue business expansion and breakthroughs. I believe that Xunlei's strong business fundamentals will enable us to achieve our growth prospects and to deliver meaningful value to our users, partners, and shareholders. And I look forward to sharing with you our progress in the near future. Thank you.

That was the prepared remarks by our Chairman and CEO. Now I would like to review the financial results of the first quarter of 2021 and provide a revenue guidance for the second quarter of 2021. Total revenues for the first quarter of 2021 was $53.3 million, representing an increase of 5.9% from the previous quarter. The increase was primarily driven by the revenue increase from cloud computing and subscription services. Revenues from cloud computing and other IVAS combined were $27.3 million, representing an increase of 5.7% from the previous quarter. The cloud computing revenue was $21 million, increasing 10.9% sequentially. The increase in cloud computing and other IVAS revenues was mainly due to increased demand for our cloud computing services. Revenues from subscriptions were $22.1 million, a 6.9% increase from the previous quarter. The number of subscribers was approximately 4.05 million as of March 31, 2021 compared with 3.83 million as of December 31, 2020. The average revenue per subscriber for the first quarter of 2021 was RMB35.5 compared with RMB35.4 for the previous quarter. Revenues from online advertising were $3.9 million, representing an increase of 2.4% from the previous quarter. Cost of revenues was $24.4 million, representing 45.8% of our total revenues, compared with $23.3 million or 46.4% of our total revenues in the previous quarter. The increase was mainly due to the increased sales of our cloud computing services. Gross profit for the first quarter was $28.6 million, representing an increase of 6.7% from the previous quarter. Gross margin was 53.7% in the first quarter, compared with 53.3% in the previous quarter. The decrease in gross profit and gross margin was mainly due to increased revenues of our subscription business which had a higher gross margin than other product lines. Research and development expenses for the first quarter were $13.3 million, representing 24.9% of our total revenues, compared with $12 million or 23.9% of our total revenues in the previous quarter. Sales and marketing expenses for the first quarter were $4.5 million, representing 8.4% of our total revenues, compared with $2.8 million or 5.6% of our total revenues in the previous quarter. The increase was mainly due to more promotional activities. General and administrative expenses for the first quarter were $6.6 million, representing 12.5% of our total revenues, compared with $7.9 million or 15.7% of our total revenues in the previous quarter. The decrease was primarily due to less employee welfare and professional consulting expenses, compared with those for the previous quarter. Operating income was $4.2 million, compared with $4.1 million in the previous quarter. Net income was $6.8 million, compared with $4.6 million in the previous quarter. Non-GAAP net income from continuing operations was $7.4 million in the first quarter of 2021, compared with $4.8 million in the previous quarter. The increased net income and non-GAAP net income were primarily due to the increase in revenue of our major business lines and a high gross margin as discussed above. Diluted earnings per ADS from continuing operations in the first quarter of 2021 was approximately $0.10 as compared with about $0.07 in the previous quarter. As of March 31, 2021, the company had cash, cash equivalents and short-term investments of approximately $245.2 million, compared with $255.1 million as of December 31, 2020. Now turning to the revenue guidance for the second quarter of 2021. We expect total revenues to be between $54 million and $58 million and the midpoint of the range represents a quarter-over-quarter increase of approximately 5.1%. This estimate represents management's preliminary view as of the date of this 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.

You have a question coming from the line of an indiscernible participant. Please go ahead.

We anticipate revenues to be between $54 million and $58 million, with the midpoint indicating a quarter-over-quarter increase of about 5.1%. This estimate reflects management's initial perspective as of the date of this announcement and may be subject to change, with any adjustments potentially being significant. We now conclude our prepared remarks for the conference call. Operator, we are ready to take questions. You have a question from the line of someone who is indiscernible. Please go ahead.

I will speak in Chinese first and then translate into English. Now I will speak briefly in English. The question was whether we are developing a short video business and when we will launch this product. We believe it is the right time to develop a short-form video product. Our reasoning comes from a few key points. First, the operations of each of our business lines are stable and performing well after last year's transition. We are now pursuing the next phase of growth and need to improve user retention with additional product features and capture further growth opportunities. Secondly, our consumer-facing business still holds significant growth potential. With users increasingly turning to video for social and entertainment needs, short-form video represents a valuable business opportunity with a growing market and monetization potential. It also complements our existing products well. We plan to enter this market by focusing on specific content that may appeal to certain user groups. We believe there is still potential for us to benefit from our investments. That said, we have been researching and developing specific products, but we do not have a concrete timeline for launching this product yet. However, we do intend to launch it in the near future. Thank you for your question.

The next question is from the line of an analyst from Retail Investment. Please go ahead.

We believe there is still potential for us to benefit from our investment. We have been working on developing certain products, but we do not have a specific timeline for their launch at this moment. However, we plan to introduce this product soon. Thank you for your question. The next question is coming from the line of an analyst from Retail Investment. Please go ahead.

The question he asked had two parts. The first part was about our launch in the cloud computing business model and how we could expand our business in the future, including deepening our cooperation with national telecommunication carriers. I mentioned that our cloud computing business operates on an innovative sharing economy model, utilizing the bandwidth contributed by our users while also seeking potential partnerships with national telecom carriers. The second part of his question was whether we would disclose app user numbers for Xunlei, either daily or monthly active users. We don't share this information frequently due to commercial reasons, but we do provide some numbers in our recent annual report. I encourage interested investors to read that report for more details. Thank you for your question.

We are also exploring potential cooperation opportunities with our national telecom carriers. The second question was whether we would disclose Xunlei app users, either on a daily or monthly active user basis. We don't disclose this information regularly due to commercial considerations. However, we have shared certain numbers in our recently issued annual report. I encourage interested investors to read our annual report to find the relevant information. Thank you for your question.

We have the next question coming from an unidentified source. Please go ahead.

Hi. And thanks a lot for taking my question. I am wondering if you could elaborate more on the hybrid P2P technology in cloud computing and for your CDN services? What are the main advantages? And how big is the market? Maybe for instance, could you give a number on the current clients? And is this number of clients that are using it increasing or not? Thank you.

Okay. Xunlei is one of the pioneers in P2P or P2SP in network technology. Over the years, we have developed in-depth expertise in this regard. As I mentioned earlier in answering the previous caller's question, we are using an innovative business model, especially based on the sharing economy. We outsource the idle bandwidth from all users of OneThing Cloud hardware intelligence and product to provide the service to all enterprise customers. In addition to our technological qualification and expertise, one of our advantages is that we are low-cost service providers. Because of this, today many of the top Internet companies in China and some of the household name internet companies are our customers. And because of the confidentiality, I am not at liberty to disclose their names. But I would rather say some of the most well-known Internet companies in China are our clients. Thank you.

The next question comes from an unidentified speaker. Please proceed.

One of our advantages is that we are low-cost service providers. Because of this, many of the top Internet companies in China and some well-known internet companies are our customers. Due to confidentiality, I cannot disclose their names, but I can say that some of the most recognized Internet companies in China are our clients. Thank you. The next question comes from an indiscernible source. Please go ahead.

The question is about the status of our Xunlei buildings under construction. We initially aimed to finish construction by the end of April, but it seems we will now complete it in June or July due to delays caused by neighboring municipal projects affecting all buildings. We are preparing for the internal renovation and plan to have it completed by the end of this year. Therefore, it is likely that we will move into the new building at the beginning of next year. Thank you.

And we have the next question from a retail investor. Please go ahead.

We are currently preparing for the internal renovation work, and we aim to complete this renovation by the end of this year. Therefore, it's likely that we will move into the new building at the beginning of next year. Thank you.

Basically, in the first quarter, all other businesses showed improvement except for the so-called other business. Previously, our other business included the video streaming segment and some one-time event-related sales. While we did not have those last quarter, they were present in earlier quarters. Consequently, our other business last quarter was impacted by these one-time events and our live streaming business. Thank you.

In the first quarter, all other businesses showed improvement except for the other business segment. Previously, this segment included the video streaming business and some one-time event reporting sales, which were absent last quarter but present in earlier quarters. Therefore, the performance of the other business last quarter was influenced by these one-time events and our live streaming business. Thank you.

Thank you again for your time and participation. If you have any questions, please visit our website at www.xunlei.com or send emails to our Investors Relations. Have a good day. Operator, I think we can conclude this conference call. Thank you.

Thank you. Ladies and gentlemen, that concludes our conference call for today. Thank you all for your participation. You may disconnect now.