Earnings Call Transcript - XNET Q3 2022

Operator, Operator

Welcome, ladies and gentlemen, and thank you for your patience. You've joined Xunlei's 2022 Third 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.

Luhan Tang, Investor Relations Manager

Thank you, and good morning, everyone, and thank you for joining Xunlei's 2022 third 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 today. For today's agenda, I will first read our prepared opening remarks by our Chairman and CEO, Mr. Jinbo Li, on highlights of our third 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 fourth 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 US 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 our 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 our earnings press release. Please note that all numbers are in US dollars unless otherwise stated. With that, the following is the prepared statement by Mr. Jinbo Li, Chairman and CEO of Xunlei Limited.

Jinbo Li, Chairman and CEO

Good morning, everyone, and thanks for joining us today. Despite the macro headwinds we've been facing for some time, we delivered solid third quarter results with revenue exceeding the top end of our revenue guidance and net income also grew sequentially, and this is the third profitable quarter this year, and we expect to end the year with full year profitability, assuming no extraordinary events or one-time write-offs, which we do not foresee as of this earnings release. I believe the third quarter results demonstrated our ability to focus on and execute our strategy and show the resilience of our products and services in a challenging environment. I'd like to share with you some of the major highlights from the third quarter. Generally speaking, the results of our major business lines, mainly member subscription, cloud computing, and live streaming, as well as other Internet value-added services can either retain or exceed our expectations. Although, the results, when reported in US dollars, were partially offset by the impact of devaluation of R&D against the US dollar. Specifically in the third quarter of 2022, we realized $88.3 million in total revenue with a 12.8% quarter-over-quarter increase. And the revenue exceeded the high end of our revenue guidance range. Meanwhile, our net income increased to $8.3 million in the third quarter from $6 million in the second quarter, which is the third consecutive profitable quarter of this year. Delivering profits three quarters in a row amidst a challenging macro environment, clearly demonstrated the successful execution of our business strategies and the resilience of our business model. I feel very thankful to our employees and management for their dedication and efforts in keeping operations on track during a period of COVID-19 resurgence, and in incurring our products and services to serve our users and clients without interruption. As one of our major business growth drivers, our cloud computing business in the third quarter of 2022, its revenue reached a record level of $29.1 million. In addition, Shenzhen Onething, the operator of cloud computing business and a wholly-owned subsidiary of Xunlei, was ranked number four with 12.2% of market share in the public edge cloud service market in 2022 according to a study by International Data Corporation. Our subscription business delivered essentially stable performance and generated approximately $25 million in revenue, down 1.7% compared to last quarter, mainly due to the impact of the currency devaluation and a slight decrease in the number of subscribers, partially offset by higher average revenue per user, as reported in renminbi. The third-quarter subscription business has been up slightly versus the prior quarter. The average revenue per subscriber reached RMB 39.1 in the third quarter compared to RMB 37.8 in the previous quarter, as the average proportion of premium membership rose to 35.3% of total subscribers from 34% in the previous quarter. We will continue to improve product features to enhance user experience and at the same time, explore additional marketing channels to reach a broader user base. Our live streaming and other Internet value-added services was the fastest-growing business line in the third quarter of 2022, accounting for approximately 38.8% of our total revenues in the third quarter, surpassing cloud computing and membership subscription, which accounted for approximately 33% and 28.3%, respectively, of our total revenues. In the third quarter, our live streaming and other Internet value-added services reached a record level of $34.2 million in revenue with a 39.4% quarter-over-quarter increase. We expanded the presence of our products and services in more countries, hired additional local teams, and deepened our brand recognition in this new market. However, we expect a continued appreciation of the US dollar against other currencies, which, if it happens, will dampen our financial performance in the overseas market. We will closely monitor the dynamics of global economies, geopolitical tensions, and regulatory policies and, importantly, execute our international growth strategy. We have high hope that in the foreseeable future, Xunlei's growth will be driven by the products and services that have broader user recognition and larger market potential and rely less on our traditional products and services. This is an ongoing transition, and we look forward to sharing with you our development in the coming quarters. To conclude, we anticipate future growth for the fourth quarter of 2022 sequentially and year-over-year, and that we are expected to be on course to achieve full-year profitability. However, we will stay vigilant about the current macro dynamics, which could significantly impact our operations. To ensure sustainable development, we are steadily entering selected international markets to strengthen our product portfolio and address geographic market risk. We have seen encouraging progress in this regard. With a healthy balance sheet, clear strategic focus, effective execution, and an improved product portfolio, we believe we are well-positioned to navigate this volatile macroeconomic and geopolitical environment and capture long-term opportunities. Now, I'd like to turn the call over to Eric to review some of the financial numbers.

Eric Zhou, Chief Financial Officer

Thank you, Luhan. Good morning, and good evening, everyone. We are pleased to have you join us today to discuss our first quarter results. I will now go through the details of our financial results and wrap up with our revenue guidance for the fourth quarter of 2022. Total revenues were $88.3 million, representing an increase of 12.8% from the previous quarter. The increase in total revenues was mainly attributable to increased revenue generated from our live streaming business. Revenues from cloud computing were $29.1 million, representing an increase of 2.7% from the previous quarter. The increase of cloud computing revenues was mainly due to increased demand from our major customers for our cloud computing service, partially offset by the devaluation of the exchange rate of RMB against US dollars. Revenues from subscriptions were $25 million, representing a decrease of 1.7% from the previous quarter. If reported in R&D, the subscription revenue would have been up slightly. The number of subscribers was 4.37 million as of September 30, 2022, compared with 4.46 million as of June 30, 2022. The average revenue per subscriber for the third quarter was RMB 39.1, compared with RMB 37.8 in the previous quarter. The higher average revenue per subscriber was due to a larger percentage of users opting for our premium membership. Revenues from live streaming and other IVAS were $34.2 million, representing an increase of 39.4% from the previous quarter. The increase of live streaming and other IVAS revenues was driven by the rise in the number of paying subscribers of our live streaming products, which were launched in 2021, as well as our enhanced monetization capability. Cost of revenues was $52.8 million, representing 59.9% of our total revenues, compared with $44.3 million or 56.6% of the total revenues in the previous quarter. Bandwidth costs included in the cost of revenues were $25.3 million, representing 28.6% of our total revenues, compared with $25.5 million or 32.6% 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 depreciation of servers and other equipment. Gross profit for the third quarter was $35.2 million, representing an increase of 4.4% from the previous quarter. Gross profit margin was 39.9% in the third quarter compared with 43.1% in the previous quarter. The increase in gross profit was driven by the increase in gross profit from our live streaming business. The decrease in gross profit margin was mainly due to the increased portion of live streaming revenue to total revenues, which has a lower gross profit margin. Research and development expenses for the third quarter were $16.4 million, representing 18.3% of our total revenues compared with $60 million or 20.4% of our total revenues in the previous quarter. Sales and marketing expenses for the third quarter were $5.8 million, representing 6.6% of our total revenues compared with $5 million or 6.4% of the total revenues in the previous quarter. The increase was primarily due to higher marketing expenses during the third quarter, driven by our continued user acquisition efforts. G&A expenses for the third quarter were $8.2 million, representing 9.6% of our total revenues compared with $12 million or 15.4% of our total revenues in the previous quarter. The decrease was primarily due to the decrease in share-based compensation expenses since share units were vesting during the quarter. Operating income was $5.1 million compared with $0.7 million in the previous quarter. The increase in operating income was primarily attributable to the increase in gross profit from the live streaming business and less share-based compensation expenses accrued during the third quarter. Other income was $4.7 million compared with other income of $7 million in the previous quarter. The decrease was primarily due to the reversal of certain payables due over three years with loan payment probability recognized in the second quarter, but no significant item in the third quarter. Net income was $8.3 million compared with $6 million in the previous quarter. Non-GAAP net income was $9 million in the third quarter of 2021 compared with $9.8 million in the previous quarter. The increase in net income was primarily driven by the increase in operating income as discussed above. Diluted earnings per ADS in the third quarter of 2022 was approximately $0.12 as compared to $0.09 in the second quarter of 2021. Moving to liquidity. As of September 30, 2022, the company had cash, cash equivalents, and short-term investments of $261.7 million compared with $259.9 million as of June 30, 2022. The decrease in cash and cash equivalents was mainly due to the impact of foreign exchange rates, spending on Xunlei headquarters building under construction, and share repurchases. Turning to the ongoing stock repurchase program, in March, Xunlei announced that its Board of Directors authorized the repurchase of up to $20 million of its outstanding common stocks over the next 12 months. As of September 30, 2022, we have spent approximately $4.3 million on buying back Xunlei stocks. Regarding Xunlei research and headquarters building under construction, it is now in the final stage of interior decoration and preparation, and we expect the new building to commence operations by the end of this year. And finally, moving to our guidance for the fourth quarter of 2022. The company estimates total revenues to be between $90 million and $95 million, and at the midpoint of the range represents a quarter-over-quarter increase of approximately 4.8%. These estimates represent management's preliminary view as of the date of this press 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.

Operator, Operator

Thank you. Our first question comes from Sangmi Lee, private investor. You may proceed.