Xunlei Ltd Q2 FY2022 Earnings Call

Welcome, ladies and gentlemen, and thank you for your patience. You've joined Xunlei's 2022 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. 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 Tang.

Thank you, and good morning, everyone, and thank you for joining Xunlei's 2022 second quarter earnings conference call. On the call with me today are Eric Zhou, Chief Financial Officer; and Lee Hu, 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 during today's call. For today's agenda, I will first read our prepared opening remarks by our Chairman and CEO, Mr. Jinbo Li, on highlights of our second quarter operations. Then Mr. Eric Zhou, our CFO, will go through the details of financial results and wrap up with our revenue guidance for the third 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 we 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 on our 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 any forward-looking statements, except as required under applicable law. On this call, we will be using both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to comparable GAAP measures can be found in the earnings press release. Please note that all numbers are in U.S. dollars unless otherwise stated. Now the following is the prepared statement by Mr. Jinbo Li, Chairman and CEO of Xunlei Limited.

Good morning, everyone, and thanks for joining us today. I'm very pleased to report that we achieved good quarterly results as most of our business lines delivered expected performance in the second quarter of 2022. Before I get into the results of the quarter, I'd like to step back and share with you the highlights of our business in the second quarter. Our subscription business did a great job that our premium subscribers reached a record level of 35% of total subscribers, and our live streaming services realized top-line growth for five consecutive quarters. Those exciting results are attributable to our efforts to cater to users' needs as well as effective marketing campaigns that led to increased demand for our products and services. Also, I'm very proud that our cloud computing subsidiary received several industry awards in the last quarter for innovation and a contribution to the industry. We achieved this inspiring result in spite of a challenging macro environment dealing with COVID-19, a slowing economy, evolving government regulations, etc. In the second quarter of 2022, our total revenues reached $78.3 million, and this is the seventh quarter in which we reached consecutive quarterly business growth. However, due to the impact of the devaluation of RMB against the U.S. dollar, in the second quarter, our total revenue reported in U.S. dollars exhibited a slight decrease of about 1% after currency conversion. Despite this, I'm pleased that our net profit grew to $6 million, a 10.1% increase from the previous quarter, and it was the second consecutive profitable quarter. I'm encouraged that our efforts to optimize our operations begin to pay off and enhance our ability to pursue high-growth opportunities. As I mentioned earlier, our cloud computing business maintained its competitiveness in the market. Among other recognition, Shangshi Longchuang was nominated as a top 20 edge computing company in May and received the 2021 to 2022 Leading Brand Award at the Cloud Connect China Cloud Computing Conference in June. With these inspiring accomplishments, we are more determined to deliver reliable, scalable, and cost-effective services to our clients and become the service provider of choice for our customers. In the second quarter, the bandwidth sold was relatively stable versus the first quarter, but cloud computing revenue was down 6.2%, primarily due to the sudden change in foreign exchange rates negatively affecting our cloud computing revenue when translated into U.S. dollars. That said, we're proactively researching and developing diversified applications for edge computing to cope with intense industry competition and continuous pricing pressure on the CDN business. I'm also encouraged to witness the progress on our subscription business, which realized $25.4 million in revenue, an increase of 0.2% from the previous quarter. Even though our total number of subscribers declined to 4.46 million in the second quarter of 2022 from 4.61 million in the previous quarter, the average revenue per subscriber grew to RMB37.8 in the second quarter from RMB34.9 versus the first quarter. The increase in average revenue per subscriber was due to more members opting for our premium services. By building an engaging member community, we believe that users' loyalty will improve as more user-friendly features are added and upgraded to our services in the future. In the second quarter, our live streaming and other Internet value-added services continued their growth momentum, which generated $24.5 million in revenue, an increase of 4.5% from last quarter. Since launching our new live audio streaming product in 2021, we've seen our live streaming products and services grow 191.3% in revenues in the second quarter of 2022 as compared to the second quarter of 2021. A large portion of the growth came from our overseas markets. We're expanding the presence of our products and services in more regions and different brand recognition in the existing markets, and we expect that the live streaming business will continue to grow. On the other hand, however, our Internet advertising delivered less than desired results and negatively affected our overall performance. Last quarter, our digital collectible service platform collaborated with art institutions, museums, and other IP owners and produced a number of digital collectibles which were uniquely identified using the blockchain technology of ThunderChain. Although its contribution to the total revenue has been very small so far, it is a new endeavor by our blockchain team. In the future, our digital collectible service platform will continue to expand collectible categories and create a diverse portfolio of digital collectibles. We believe this product has both great potential and significant risks. Meanwhile, we'll continue to strictly comply with relevant laws and regulations. In conclusion, I'm grateful for our employees' dedication and contribution to our business development. Looking forward, we will continue to focus on our strategy of leveraging our core competitive edge and innovative capabilities to cultivate new sources of revenue to diversify and accelerate our top line growth. Overall, we will also continue to optimize our operations to enhance profitability. In conclusion, I'd like to say that we're optimistic that the positive momentum we enjoyed in the first half of this year will continue into the second half of 2022. With that, I'm now turning the call over to Mr. Eric Zhou, our Chief Financial Officer. Eric will cover our financial results in detail and share our outlook. Thank you.

Thank you, Luhan. Hello, everyone, and thank you again for joining Xunlei's 2022 second quarter earnings conference call. I will now go through the details of our financial results and wrap up with our revenue guidance for the third quarter of 2022. Total revenues were $78.3 million, representing a decrease of 1% from the previous quarter. The decrease in total revenues was mainly attributable to the devaluation of RMB against U.S. dollars, partially offset by increased revenues from our live streaming and other IVAS services. Revenues from cloud computing were $28.3 million, representing a decrease of 6.2% from the previous quarter. The decrease in cloud computing revenues was mainly due to devaluation of exchange rates of RMB against the U.S. dollar, as our cloud computing revenues were denominated in RMB. During the second quarter, the bandwidth sold was practically stable, and we are mindful of enhanced industry competition. Revenues from subscriptions were $25.4 million, representing an increase of 0.2% from the previous quarter. The number of subscribers was 4.46 million as of June 30, 2022, compared with 4.61 million as of March 31, 2022. Historically, the number of memberships fluctuated from period to period and sometimes significantly. The average revenue per subscriber for the second quarter was RMB37.8 compared with RMB34.9 for the previous quarter. The higher average revenue per subscriber was due to a larger percentage of users opting for our premium service option. Revenues from live streaming and other IVAS were $24.5 million, representing an increase of 4.5% from the previous quarter. The increase in live streaming and other IVAS revenues was mainly due to the increased demand for our new live audio streaming products, which we launched in 2021. Gross profit for the second quarter was $33.7 million, representing a decrease of 3.2% from the previous quarter. Gross profit margin was 43.1% in the second quarter compared with 44.1% in the previous quarter. The decrease in gross profit and gross profit margin was mainly due to the increase in payment handling fees and other operating-related costs, driven by the increases in our live streaming and other IVAS revenue and subscription revenue, which were partially offset by improved gross margin of our live audio streaming products. Research and development expenses for the second quarter were $16 million, representing 20.4% of our total revenues, compared with $16.3 million or 20.6% of our total revenues in the previous quarter. Sales and marketing expenses for the second quarter were $5 million, representing 6.4% of our total revenues compared with $5.3 million or 6.8% of our total revenues in the previous quarter. General and administrative expenses for the second quarter were $12 million, representing 15.4% of our total revenues compared with $9.6 million or 12.2% of our total revenues in the previous quarter. The increase was primarily due to the vesting of restricted share units granted to our senior management, which led to the increase in share-based compensation expenses during this quarter. Operating income was $0.7 million compared with $3.9 million in the previous quarter. The decrease in operating income was primarily due to increased stock-based compensation expenses accrued during the second quarter, as discussed above. Other income was $7 million compared with other income of $1.2 million in the previous quarter. The increase was primarily due to foreign exchange gains and the reversal of certain payables due more than three years with low probability of payment. Net income was $6 million compared with $5.4 million in the previous quarter. Non-GAAP net income was $9.8 million in the second quarter of 2022 compared with $7.2 million in the previous quarter. The increase in net income and non-GAAP net income was primarily due to the increased other income, as discussed above. Diluted earnings per ADS in the second quarter of 2022 was approximately $0.09 as compared to $0.08 in the first quarter of 2022. As of June 30, 2022, the Company had cash, cash equivalents, and short-term investments of $259.9 million compared with $269.9 million as of March 31, 2022. The decrease in cash and cash equivalents was mainly due to the distribution of 2021 annual employee bonuses in the second quarter of 2022. Regarding the ongoing stock repurchase program, in March 2022, Xunlei announced that its Board of Directors authorized the repurchase of up to $20 million of its outstanding stock over the next 12 months. As of June 30, 2022, the aggregate value of purchased shares was approximately $1.74 million. Regarding Xunlei research and headquarters building under construction, we have been furnishing the building for the last seven months, and now we expect to relocate to the new building in October this year. Turning to guidance for the third quarter of 2022. Xunlei estimates total revenues to be between $82 million and $87 million, and at the midpoint of the range represents a quarter-over-quarter increase of approximately 7.9%. These estimates represent management's preliminary view as of the date of the press release, which is subject to change and any change could be material. Now, we conclude the prepared remarks for the conference call. Operator, we are ready to take questions.

And your first question comes from Lee Sang from MSL Group. Please ask your question.

This is Lee, and thank you for sharing your financial highlights of the second quarter performance.

Thanks for asking. He asks since Xunlei is on the watch list of SEC under the Company's Accountable Act for HFCAA. If the acceleration bill is impacted, Xunlei will be delisted from NASDAQ as early as next year. He'd like to know if the Company has any countermeasures and whether the Company considers privatization. It's a good question. Xunlei is aware that the Company has been identified by the SEC under the HFCAA in May this year. We believe such identification may be the result of its filing of its annual report on Form 20-F for the fiscal year ended December 31, 2021. Under the HFCAA, a company will be delisted from the U.S. Stock Exchange if the Company has been identified by the SEC for three consecutive years as a result of PCAOB's inability to inspect the working paper of the Company's auditor. If this accelerated version of HFCAA is impacted, the delisting could happen in 2023. We are monitoring the talks between China and the U.S. and will proactively study alternative solutions to remain a public company. Regarding privatization, so far, the Board of Directors has not discussed this issue. Thanks for asking.

We are monitoring the discussions between China and the U.S. and will actively explore alternative solutions to remain a public company. As for privatization, the Board of Directors has not discussed this matter yet. Thank you for your question.

Also, thank you for asking the question. Yes, thank you.

Thank you. We will take our next question. And your next question comes from the line of Sara Hua, who is a private investor. Please ask your question.

Thank you for the question. Yes, thank you.

Her question is that the growth rate of cloud computing and live streaming business was slowing down. Will the trend continue? First of all, we don't provide any guidance for our future revenue beyond a quarter. The rapid devaluation of Chinese currency over the last quarter impacted our financial numbers. Cloud computing revenue in Chinese currency decreased by 1.6% compared to the first quarter, while it decreased by 6.2% when converted into U.S. dollars. Revenue growth of our live streaming business in RMB was 10.2%, but it was 5% in U.S. dollars. We estimate the impact of exchange rate is around 5%. Since cloud computing and live streaming business have been growing rapidly for many quarters, we think it's normal for the growth rate to slow down to a certain extent, and we don't expect this to be a long-term situation or a negative sign. At this time, again, we can't guarantee anything due to the evolving macro factors like the impact of COVID-19, the development of the national economy, or the impact of geopolitics, etc. But we will be focused on our strategy of leveraging our competitive edge and commercial capability to improve our top line growth and profitability. Thank you.

We believe it's natural for the growth rate to decelerate to some degree, and we do not view this as a long-term issue or a negative indicator. Currently, we cannot provide guarantees due to changing macro factors such as the effects of COVID-19, the progression of the national economy, and geopolitical influences. However, we will concentrate on our strategy to utilize our competitive advantages and commercial resources to enhance our revenue growth and profitability. Thank you.

We will take our next question. Please stand by. Your next question comes from the line of Yuxi Sang, who is a retail investor. Please ask your question.

We will be focused on our strategy of leveraging our competitive edge and commercial capability to improve our top line growth and profitability. Thank you. We will take our next question. Please stand by. Your next question comes from the line of Yuxi Sang, who is a retail investor. Please ask your question.

His question, he said that since the digital results, the collectibles and the product have been off the shelf or they stopped doing so. He wants to know what's our outlook for Xunlei's digital collectible business. First, we don't really comment on other companies' products or the outlook. For us, the digital collectible market, the business is one of our many endeavors that Xunlei is trying to explore. As I mentioned earlier, the market or the business is evolving quickly both in terms of technology and the regulatory environment. For the time being, we are working with several institutions in China, and we are continuing to develop different products. We believe that for the foreseeable future, it has greater potential. Of course, it's also great risks, having said it's just one of our many explorations to seek some business, which may have great potential in the future. But of course, we realize it has also great risks and would like to emphasize that we are strictly adhering to the relevant laws and regulations. Thanks for asking.

We are collaborating with various institutions in China and ongoing development of different products. We believe this market holds significant potential for the foreseeable future, though it also comes with considerable risks. This is just one of our many efforts to explore business opportunities that may prove valuable later. We are fully aware of the associated risks and want to assure everyone that we are strictly following all applicable laws and regulations. Thank you for the question.

We are working on developing different products, which we believe have significant potential for the foreseeable future. However, we acknowledge that there are also considerable risks involved. This initiative is just one of many explorations aimed at uncovering business opportunities that may yield great potential down the line. We are mindful of the risks and want to stress that we are fully committed to complying with all relevant laws and regulations. Thank you for your question.

We have a variety of live streaming products. And right now, we still have it, but it's not a large effort by us. As we discussed in our press release, one of our focuses is to develop live audio streaming products. So far, live audio streaming has been doing quite well for the last several quarters. That will be our future focus. Thank you for asking.

We have a variety of live streaming products. Currently, we still maintain them, but it's not a significant effort on our part. As mentioned in our press release, one of our priorities is to develop live audio streaming products. Up to now, live audio streaming has performed quite well over the past several quarters. That will be our primary focus going forward. Thank you for your question.

There seems to be no further questions from the audio at this time. Please continue.

Thank you, again, for your time and participation. If you have any questions, please visit our website at ir.xunlei.com or send emails to our Investors Relations. Have a great day. Operator, we conclude today's conference call. Thank you.

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