Earnings Call Transcript - XNET Q2 2024

Operator, Operator

Welcome, ladies and gentlemen and thank you for your patience. You joined Xunlei Second Quarter 2024 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

Good morning, everyone and thank you for joining Xunlei's Q2 2024 Earnings Conference Call. With me today are Eric Zhou, CFO; and Hu Lee, VP of Finance. Our IR website has our earnings press release to supplement our prepared remarks during the call. Today's agenda includes prepared opening remarks from Chairman and CEO, Mr. Jinbo Li, on Q2 operations highlights; followed by CFO, Mr. Eric Zhou, presenting financial results details and the revenue guidance for the Q3 2024, before we open up the floor to your questions in the Q&A session. Please note that this call is recorded and can be replayed on our Investor Relations website at ir.xunlei.com. Before we get started, I would like to take this opportunity to remind you that this 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 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 obligation to update any forward-looking statements, except as required under applicable laws. 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 U.S. dollars unless otherwise stated. Now the following is prepared statement by Mr. Jinbo Li, Chairman and CEO of Xunlei Limited.

Jinbo Li, Chairman and CEO

Good morning and good evening, everyone. Thank you all for joining us today. Our second quarter results are in line with our expectations, and we're pleased to maintain the momentum of profitability. In particular, our subscription business has demonstrated robust performance with a year-over-year increase of 10.8% in revenue, and the growth can be attributed to our continuous improvement of product features and effective marketing, aimed at enhancing user engagement. Furthermore, during the second quarter we successfully launched Xunlei browser on major platforms, which has been widely acclaimed for its exceptional performance in video streaming, web browsing, and novel reading. The positive feedback received from the users has been overwhelming and speaks to the dedication and hard work put forth by our team. I'd like to share some highlights of our operations. As mentioned earlier, our subscription business has achieved impressive revenue growth. We are thrilled to have witnessed a remarkable increase of about 1 million users in our subscriber base over the past year. We are grateful for the continued support and trust shown by our user community. Their engagement and active participation play an important role in shaping the success of our products. As we move forward, we will continue to prioritize innovation, user centricity, and collaboration among our teams. By leveraging cutting-edge technologies and fostering an inclusive environment that boosts user acquisition, we aim to further enhance not only our subscription business, but also all aspects of Xunlei's products and services. In the second quarter, our cloud computing business faced challenges as we experienced a decline in revenue of $26.4 million, representing a decrease of 13.8% year-over-year. This decline was attributed to intense pricing competition among competitors and reduced sales volume of our hardware devices. To address these challenges, we have been actively adapting our strategies to align with the evolving industrial landscape. Our focus remains on leveraging our competitive edge and market position to improve financial performance by providing technology-leading and cost-effective products and services. This revenue from our live streaming and IVAS business reached $20.3 million, representing a quarter-over-quarter increase of 18.7% and a year-over-year decrease of 53.9%. The significant year-over-year decline is due to the impact of our strategic downsizing of our domestic audio live streaming business since the second quarter last year. However, we're pleased to see that our efforts to mitigate the negative impact by expanding our overseas market yielded positive results in the second quarter of this year. Our expansion initiatives have allowed us to tap into new customer bases and diversify our revenue stream. Moving forward to grow our business, we will continue exploring international markets while improving existing products and services based on user feedback and the latest market trends. Looking ahead, we will continue to explore all options to maintain our position as a leading distributed cloud service provider to meet the evolving needs of our users and clients. With a strong operational track record and balance sheet and continued investments in innovation and growth initiatives, we believe we are well-positioned to create long-term and sustainable value for all shareholders. With that, I will now pass the call over to Eric. Eric will give a detailed review of our Q2 financial results and provide revenue guidance for the third quarter of 2024.

Naijiang Zhou, CFO

Thank you, Luhan. Thank you all again for participating in Xunlei's conference call to discuss the financial results of the second quarter of 2024. In the second quarter, our total revenues were $79.6 million, representing a decrease of 23.7% year-over-year. The decrease in total revenues was mainly attributable to the decreased revenues from our live streaming business as a result of the downsizing of our domestic audio live streaming operations since June 2023. Revenues from subscriptions were $32.9 million, representing an increase of 10.8% year-over-year. The increase in subscription revenues was mainly driven by the increase in the number of subscribers. The number of subscribers was 5.71 million as of June 30, 2024 compared with 4.72 million as of June 30, 2023. The average revenue per subscriber for the second quarter of 2024 was RMB 39.5 compared with RMB 42.9 in the same period of 2023. The lower average revenue per subscriber was due to more promotional activities during the second quarter of this year. Revenues from cloud computing were $26.4 million, representing a decrease of 13.8% year-over-year. The decrease in cloud computing revenues was mainly due to the decreased revenues generated from certain major customers of the cloud computing services and a decline in the sales of cloud computing hardware devices. Revenue from live streaming and other IVAS were $20.3 million, representing a decrease of 53.9% year-over-year. The decrease of live streaming and other IVAS revenues was mainly due to the downsizing of our domestic audio live streaming operations since June 2023, which was partially offset by the increase in revenues from our overseas audio live streaming business. Cost of revenues were $38.6 million, representing 48.5% of our total revenues compared with $58.1 million or 55.7% of the total revenues in the same period of 2023. The decrease in cost of revenues was mainly attributable to the decreased revenue sharing costs for our live streaming business as well as the decreased bandwidth costs incurred during the quarter. Bandwidth costs as included in cost of revenues were $25.8 million, representing 32.4% of our total revenues compared with $28.9 million or 27.7% of the total revenues in the same period of 2023. The decrease was primarily due to the enhanced utilization efficiency and the decrease in revenues of the cloud computing services during the quarter. The remaining cost of revenues mainly consisted of costs related to revenue sharing for our live streaming business, payment handling charges, cost of inventory sold, and depreciation of servers and other equipment. Gross profit for the second quarter of 2024 was $14.7 million, representing a decrease of 11.3% year-over-year. Gross profit margin was 51.1% in the second quarter compared with 44% in the same period of 2023. The decrease in gross profit was mainly driven by the decreased gross profit from our live streaming business, partially offset by the increased gross profit from our subscription business. The increase in gross profit margin was mainly due to the higher portion of the subscription revenues, which have a high gross profit margin and the lower portion of live streaming revenues, which have a relatively lower gross profit margin. Research and development expenses for the second quarter were $17.5 million, representing 21.9% of our total revenues compared with $17.2 million or 16.5% of our total revenues in the same period of 2023. Sales and marketing expenses for the second quarter were $10.9 million, representing 13.7% of our total revenues compared with $15.4 million or 14.7% of our total revenues in the same period of 2023. The decrease was primarily due to a reduction in marketing expenses incurred for our live streaming business as a result of the downsizing of our domestic audio live streaming operations since June 2023. General and administrative expenses for the second quarter of 2024 were $11.2 million, representing 14.1% of our total revenues compared with $12.4 million or 11.9% of our total revenues in the same period of 2023. The decrease was primarily due to the decreased share-based compensation expenses, partially offset by an increase in labor costs during the quarter. Operating income was $1 million compared with an operating income of $0.9 million in the same period of 2023. The increase in operating income was primarily attributable to the decreased marketing expenses and share-based compensation expenses, partially offset by the decrease in gross profit from the live streaming business during the quarter. Other income net was $2.5 million compared with other income net of $4.7 million in the same period of 2023. The decrease was primarily due to the reduction in exchange gains and subsidy income received during the quarter. Net income attributable to common shareholders was $4.8 million compared with $5 million in the same period of 2023. Non-GAAP net income was $3.2 million in the same period of 2024 compared with $8.4 million in the same period of 2023. The decrease of net income and non-GAAP net income was primarily attributable to the decrease in gross profit and other income, partially offset by the decrease in operating expenses as discussed above. Diluted earnings per ADS in the second quarter of 2024 was approximately $0.04 as compared to $0.08 in the same period of 2023. As of June 30, 2024, the company had cash, cash equivalents, and short-term investments of $263.4 million compared with $272.5 million as of March 31, 2024. The decrease was mainly due to the net cash outflows from operating activities, spending on share buybacks, and segments of construction opportunity buildings headquarters. Now turning to our share purchase repurchase program in June 2023, Xunlei announced that its Board of Directors had authorized the purchase of up to $20 million of shares over the next 12 months. As of June 30, 2024, the company had spent approximately $4.7 million on the share buybacks under the aforementioned share repurchase program. In June 2024, the Board of Directors of the company had authorized a new plan for the repurchase of up to $20 million of shares over the next 12 months. As of June 30, 2024, the company spent approximately $0.5 million on share buybacks under the new share purchase program. Finally, for the third quarter of 2024, Xunlei estimates total revenues to be between $81 million and $86 million, and the midpoint of the range represents a quarter-over-quarter increase of approximately 4.9%. This estimate represents 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 prepared remarks for the conference call. Operator, we are ready to take questions.

Operator, Operator

Thank you management. We have a question from the line of Kiki Lee. Please go ahead.

Unidentified Analyst, Analyst

Thank you management. We have a question from the line of Kiki Lee. Please go ahead.

Naijiang Zhou, CFO

Thank you for the question and for your congratulations on a strong quarter. Xunlei has been operating in the subscription business for approximately 20 years, starting with its initial download service and continually adding features to enhance user experience. Our current subscription product has transformed into a comprehensive tool that includes downloading, acceleration, storage, digital content consumption, and content sharing. Additionally, we have introduced value-added functions and new products within our ecosystem, like our recent browser launch, which aligns well with our core business. This allows users to access resources more quickly and accurately while enjoying the content. We've received positive feedback from users and have successfully attracted a significant number of new users without major promotional efforts. We are also seeking strategic partnerships to increase our product exposure and drive further growth through collaboration. I look forward to updating you on our progress soon. Thank you for your question.

Operator, Operator

Thank you for the questions. There are no questions at this time. However, we do have follow-up questions from Kiki Lee. One moment please. Ms. Lee, your line is open again. Please ask your question.

Unidentified Analyst, Analyst

Thank you for the questions. There are no questions at this time. I apologize, we have follow-up questions from Kiki Lee. One moment please. Ms. Lee, your line is open again. Please ask your question.

Naijiang Zhou, CFO

The follow-up question is regarding a recent announcement by another Chinese company listed on NASDAQ about a dividend in July, which led to a significant increase in its share prices. Given that Xunlei's stock price has been undervalued for a while, there is curiosity about whether the company plans to take actions to boost investor confidence. Thank you for the question. Our Board of Directors has not discussed any relief measures yet. However, we will keep you updated. So far, we have focused our capital on exploring new initiatives and growth opportunities. Thank you again for your questions.

Operator, Operator

Thank you for the questions. At this time, there are no further questions from the line. I would like to hand the call back to management for closing.

Jinbo Li, Chairman and CEO

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

Operator, Operator

Thank you. Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect your lines.