Xunlei Ltd Q2 FY2021 Earnings Call

Good day, ladies and gentlemen, and thank you for standing by. You joined Xunlei's Second Quarter of 2021 Earnings Results Call. At this time, all participants are in 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 Assistant, Ms. Sharong Liu. Please take over, ma'am.

Thank you, Operator. Hello, everyone, and thank you for joining Xunlei's Second Quarter of 2021 Earnings Conference Call. For our agenda today, I'll first read a prepared remark by our Chairman and CEO, Mr. Jinbo Li on the highlight of our second quarter operations. After that, Mr. Eric Zhou, our CFO will provide additional details on the financial results and wrap up with our revenue guidance for the third quarter of 2021. We will be happy to take your questions after our management remarks. Please be limited to two questions at a time, so others can get their questions 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'll 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. Now the following is a prepared statement by Mr. Jinbo Li, Chairman and CEO of Xunlei Limited.

Thank you all for joining us today. We continue to deliver revenue growth and met our revenue guidance for the second quarter. The total revenue for the second quarter reached $55.2 million, representing a 3.6% growth sequentially. Further, we realized a profit for the second quarter despite rising operating expenses as a result of higher headcount and annual salary merit adjustments, as well as increased marketing expenses to promote our new products. I trust our investment in human resources and the development of new products will help drive future growth. Now let me review the key financial and operating highlights for the quarter. Our subscription business in the second quarter accounted for approximately 41.2% of our total revenues and achieved 3% growth sequentially, and 9.8% year-on-year. Even though there was a slight decrease in the number of subscriptions, our VIP membership proportion continued to increase, which resulted in an increased average rate per user and consequently higher revenue than the previous quarter. Over the last 12 months, membership count has remained relatively stable, and more members are using our premium services. We achieved this through continuously improving our products and services and giving users what they want. Meanwhile, we're committed to delivering quality products to our customers. Turning to our cloud computing and other internet value-added business, it grew 5.8% in the second quarter of 2021 sequentially after a very strong performance in the previous quarter, with the growth driven primarily by our live streaming products. During the second quarter, we launched new products and increased related marketing expenses. This business segment accounted for approximately 52.4% of our total revenues. For the cloud computing business, although the sold bandwidth was up in the second quarter, its revenue declined slightly due to a number of factors, including the effect of changes in foreign currency rates and reduced results as compared with the first quarter. Despite the lackluster product performance in the second quarter, we maintained optimism that future demand for our products will be strong due to the continuing popularity of short-form and long-form video and other streaming products which generally require CDN service. Therefore, we expect elevated growth in sold bandwidth in our cloud computing business in the second half of this year. Moving to our online advertising business, revenue declined 8.7% in the second quarter of 2021 as compared with the first quarter. Our advertising business accounted for approximately 6.4% of our total revenues in the second quarter. The reduction was primarily due to reduced advertising placements on our platform in a competitive landscape. Additionally, domestic regulatory entities may have heightened scrutiny of internet operations, and Xunlei was among a number of companies that were mentioned in public and asked to rectify certain issues related to the way in which advertising was conducted. We will strive to be in compliance with relevant rules and regulations. As a result, we anticipate our advertising business will be affected, leading to a reduction in our advertising business in the short term. Looking forward, we are continuing our endeavor to advance decentralized networking technology. Lately, we have been cooperating with a domestic university to apply for a grant to develop blockchain-based key technologies that can be applied for big data asset management. We believe the blockchain industry is still in its nascent stage and is full of both challenges and opportunities. We will take a selective approach to exploring potential business opportunities. In closing, I would like to say we have confidence that Xunlei's strong balance sheet and financial liquidity will help us tide over a period of tremendous volatility in the capital markets. Further, in addition to committing long-term investments to improve user experience in order to better serve our large loyal customers, we will also elevate the importance of social value when making decisions concerning our products and services. Having said that, I will now turn the call over to Eric to review the financial results of the second quarter of 2021 and provide revenue guidance for the third quarter of 2021. Thank you.

Thank you. Hello, everyone, and I thank you again for joining our Q2 2021 earnings conference call, and I'll go through the details of our financial results and wrap up with our revenue guidance for the third quarter of 2021. Total revenues were $55.2 million, representing an increase of 3.6% from the previous quarter. The increase in total revenues was mainly attributable to increased revenue from live streaming and subscription business. Revenues from cloud computing and other internet value-added services were $28.9 million, representing an increase of 5.8% from the previous quarter. The increase was mainly driven by the increased revenue from other internet value-added services. Revenues from subscription were $22.7 million, an increase of 3% from the previous quarter. The number of subscribers was 3.96 million as of June 30, 2021, compared with 4.05 million as of March 31, 2021. The average revenue per subscriber for the second quarter of 2021 was RMB 36.9 million, compared with RMB 35.5 for the previous quarter. Revenues from online advertising were $3.5 million, representing a decrease of 8.7% from the previous quarter, primarily due to lower advertising placements. Furthermore, due to the evolving regulatory environment of the domestic internet industry, advertising revenue is expected to continue to decline in the short term. Cost of revenues was $26.2 million, representing 47.5% of our total revenues, compared with $24.4 million, or 45.8% of the total revenues in the previous quarter. The increased cost of revenues was mainly attributable to increased revenue-sharing costs of the live streaming business. Bandwidth costs included in cost of revenues were $18.5 million, representing 33.6% of our total revenues, compared with $17.7 million, or 33.2% of the total revenues in the previous quarter. The remaining cost of revenues mainly consisted of costs related to the revenue-sharing for our live streaming business and the depreciation of servers and other equipment. Gross profit for the second quarter was $29 million, representing an increase of 1.2% from the previous quarter. Gross margin was 52.5% in the second quarter, compared with 53.7% in the previous quarter. The decrease in gross margin was mainly due to decreased revenue from online advertising which has a higher gross margin than other business lines. Research and development expenses for the second quarter were $15.2 million, representing 27.5% of our total revenues, compared with $13.3 million, or 24.9% of our total revenues in the previous quarter. The increase was mainly due to increased staff costs as a result of merit salary adjustments and increased headcount as compared with the previous quarter. Sales and marketing expenses for the second quarter were $6.7 million, representing 12.1% of our total revenues, compared with $4.5 million, or 8.4% of our total revenues in the previous quarter. The increased sales and marketing expenses were mainly due to more promotional activities during the quarter. General and administrative expenses for the second quarter were $7.7 million, representing 14% of our total revenues, compared with $6.6 million, or 12.5% of our total revenues in the previous quarter. The increase in general and administrative expenses was primarily due to increased employee-related costs as compared with the previous quarter. Operating loss was $1.1 million, compared with an operating income of $4.2 million in the previous quarter. Net income was $5.8 million compared with a net income of $6.8 million in the previous quarter. Non-GAAP net income was $1.3 million in the second quarter of 2021, compared with $7.4 million in the previous quarter. The decrease in net income and non-GAAP net income was primarily due to increased operating expenses, as discussed above. Diluted earnings per ADS in the second quarter of 2021 were approximately $0.0005 as compared with a diluted earnings per ADS of $0.10 in the previous quarter. As of June 30, 2021, the company had cash, cash equivalents and short-term investments of approximately $245 million compared with $245.2 million as of March 31, 2021. Now turning to the revenue guidance for the third quarter of 2021. We expect total revenues to be between $54 million and $58 million. At the midpoint of the range, this represents an increase of approximately 1.4%. This estimate represents management's preliminary review as of the date of the release, which is subject to change, and any change could be material. Now we conclude prepared remarks for the conference call.

We are ready to take questions.

Operator, if we don't have any questions today, then we can conclude our conference call today. And for the audience, if you have any questions in the future, please visit our website or send emails to our Investor Relations Department. Thanks again. Have a nice day.

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