Xunlei Limited

Hey, ladies and gentlemen, and thank you for your patience. You've joined Shunlei's fourth quarter and the full year of 2020 earnings conference call. At this time, all participants are in a listen-only mode. There will be a Q&A session after the management remarks. I would now like to turn the call over to your host, Investor Relations Manager, Ms. Meng Nengao.

Thank you. Good morning and good evening. Thank you for joining Xinlei's fourth quarter and full year of 2020 earnings conference call. For our agenda today, Ms. Jinbo Li, our CEO, will provide a brief overview of our strategies and financial performance. After that, Ms. Eric Zhou, our CFO, will provide additional details on the financial results and wrap up with our revenue guidance for the first quarter of 2021. We'll be happy to take your questions about our measurement remarks. Please fill in to two questions at a time so others can get their question in as well. Today's conference call is being recorded and the 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 the discussion today will contain certain forward-looking statements made under the safe harbor provisions of the U.S. Private Experities Litigations Reform Act of 1995. Such statements are based on management's current expectations and their current market intentions, and they're subject to risks and certainties that are difficult to predict, which may cause actual results to differ materially from those made in the full 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 full looking statements except as required under applicable laws. During the call, we will refer to our both GAAP and non-GAAP financial measures. A consideration of non-GAAP to comparable GAAP measures can be found in our earnings press release. Please note that our numbers and U.S. dollars are less otherwise stated. And with that, let me pass to our CEO, Mr. Dean Burley, for a prepared remark.

Good morning and good evening, everyone. Welcome to Xunlei's fourth quarter and full year of 2020 earnings conference call. Completing the year of 2020 with a strong fourth quarter, we're happy to share with you the company's recent developments and outlook. In the fourth quarter of 2020, the company has gained considerable results and progress, with a total revenue of up to $5,030 million, which is 15% higher than the income value of the quarter. In particular, the interest rate and operating efficiency have steadily improved and the loss has been minimized. Compared to the third quarter, the company's capital size has also increased.

我相信公司有能力应对各种挑战并抓住发展机遇。 The fourth quarter of 2020 was a quarter of accomplishments and progresses. We beat the high end of revenue guidance with $50.3 million total revenue, a 15% growth sequentially. In particular, we have steadily improved both growth margin and operational efficiency. As a result, We achieved the profitability in the fourth quarter and ended the quarter with a higher cash position than the previous quarter. I believe, Xunlei, the wealth position is coupled with challenges and capturing growth opportunities.

Now I will briefly introduce the financial performance of the fourth quarter and the whole year in 2020. The fourth quarter revenue was $50.3 million, which increased by 15%. The main business line revenue was stable. Especially due to the rapid growth of demand by corporate customers, the income of cloud computing and other Internet services has increased by 22%. Through a series of sophisticated operations, the employee's income has reached $20.7 billion. Advertising income has also continued to rise, increasing by 27.6%. The company's total net profit is 53.3%, which is the highest in the past three years, and the net profit of the previous quarter is 51.9%. Now, I'd like to give you a recap of the financial highlights of the fourth quarter and fourth year of 2020. Our total revenues in the fourth quarter were $3.3 million, representing a 15% increase sequentially.

which was driven by revenue increases across all business segments, especially revenues from our cloud computing and other IVAS services grew by 22% sequentially as a result of the rising demand from our enterprises' clients. Revenues for our subscription business reached $20.7 million after a number of operational optimization initiatives. Our online advertising business rebounded with 27.6% sequential increase. The overall growth margin expanded to 53.3% from 51.9% in previous quarter, reaching a record high level for the past three years. On top of that, we achieved profitability in the fourth quarter with 4.6 million net profits. At the end of fourth quarter, our cash equivalent and short-term investment, you can add approximately $255 million, compared with $246 million in the previous quarter. Next is the financial performance of 2020.

The company's annual total revenue is $1.87 billion, which is a 3% increase. In this year, we have seen an improvement in operations and efficiency, as well as an improvement in net profit and net loss. Let's take a look back at the year of 2020.

Total revenues for 2020 were $187 million, a 3% year-over-year increase. Our revenue growth also came along with gross margin and bottom line improvement, demonstrating our solid execution of operational optimization. I believe these positive results will position us well for a strong start as we head into the new year.

For us, 2020 is both a year of transformation and a year of steady development. In the beginning of the year, we formed short-term strategic goals in three directions, focusing on training core competitiveness, improving operational efficiency, and improving organizational capability. We can say that our team has successfully completed these goals.

The year of 2020 was a year of transition and progress. We started this journey with the establishment of a short-term framework that comes with three pillars, which were focusing on our core technological edge, enhancing operational efficiency, and upgrading organizational capabilities. Today, we are confident to say that Our team has exceptionally achieved these goals with the business turnaround results for the fourth quarter of 2020. And I'm optimistic that we could carry the momentum into the future. 现在我将回顾主要业务线的发展情况。 Now I'd like to review some of our recent progresses for our major business segments. 首先关于训练业务。

We continue to strive to develop new product functions and provide additional services to members, such as training tablets. To enhance the user experience, member structures are optimized, and the number of effective paid members is gradually increasing. At the same time, the proportion of high-value members and the flow rate continue to increase, presenting a stronger business transformation ability. In addition, through effective operation and financial management, the turnover rate of member businesses is further optimized,

Let's begin with our subscription business. We have lately made some strides in providing our subscribers with additional premium features, including cloud storage. Through enhancing user experience, our subscriber structure is moving towards one with increased fee paying users. Meanwhile, our monetization capabilities continue to improve, resulting in expansion of our high value subscribers and improved retention rate. On top of that, by implementing disciplined cost control measures and operational enhancements, we improved gross margin for our subscription business.

The growth of revenue in the fourth quarter of 2020 is also due to the continuous recovery of advertising business. Internet advertising business revenue has increased by 27.6%. Through accurate positioning technology applications, we can better position the audience.

Our revenue growth in the fourth quarter of 2020 was also driven by rebound of our advertising business. A 27.6% increase quarter over quarter. They improved advertisement replacement by applying proprietary precision targeting algorithm from our partners. This sophisticated algorithm helped us better target customers and increase the effectiveness of the apps in our platform. As a result, we realized improved average of pricing per user and increased the revenue.

In terms of cloud computing business, our competitive advantage is due to the company's technological innovation and resource operation ability in the distribution and computing field. This business has achieved a strong growth in the fourth quarter. Now turning to our cloud computing business. Our competitiveness is rooted in our capabilities in technological innovation and resource pooling. This strong growth in the fourth quarter made that one step closer

to achieve an economy of scale for profitability of our cloud computing services. We believe the demand from our enterprise clients remains high and will continue to grow. At the same time, our technological progress has enabled us to expand with improved profitability.

At the end of 2020, the month of sales reached a new high. We have benefited from the growth of the demand of existing customers and the expansion of the size of customers. The annual loan sales have increased by 51%. In this year, we continue to expand our node size across the country and improve our node capacity through technical upgrades to provide customers with a better solution. Although the current market environment is full of challenges, we always strive to provide fast, safe and stable services at competitive prices and become partners that are trustworthy for business users. This is our core competitiveness.

At the end of 2020, our monthly sales bandwidth reached a record high. The revenue from bandwidth sales during 2020 grew by approximately 51% as a result of signing up new clients and increased demand from our existing clients. During the year, we furthered our efforts on expanding our nationwide network of shared cloud computing nodes and upgrading the capacity capacity of the nodes by technological innovation to provide improved cloud computing solutions for commercial users. Although we are in a highly competitive market, we are committed to strengthening our competitive advantages by providing fast, reliable, and secure service at a reasonable price through technological innovation. Our goal is to become a service provider of choice for our customers.

As one of our innovative directions, we have also achieved relevant results in the blockchain. In the fourth quarter of 2020, Xunlei Co., Ltd., a well-known high school, successfully applied for a key research project in the direction of Guangdong Provincial Technology Hall's financial technology. The subject has repeatedly solved the data security and user privacy protection problems in the blockchain technology application. We will focus on the development of blockchain projects that support the physical economy. As one of our innovative businesses,

the continuum of endeavor in the blockchain space. During the fourth quarter of 2020, Xinlei and several leading Chinese universities and institutions were awarded a research project in the realm of blockchain syntax, a major research program sponsored by the Department of Science and Technology of Guangdong Province. The research project seeks to address a number of technological issues such as data security and user privacy protection in the application of blockchain technology. We intend to focus on research and development of blockchain technologies that can empower the real economy. So far, we have provided blockchain infrastructure and the technological support to companies in a number of industries. And we'll continue to explore other applications. We believe blockchain has significant potential, even though it's still in the next stage of an industry development cycle. We are treating our investment in blockchain as a real option and therefore will adopt a proactive strategy.

In summary,

Last year, we grew revenue, improved growth margin, and significantly reduced net losses. We made progress in research and development and delivered superior value to our customers, which we believe will help drive our future corporate development.

We have high expectations for 2021. In the new year, we expect to see some important events in the company's development, such as the construction and implementation of training buildings. Looking forward, I'd like to say that we have high expectations for 2021. As mentioned in our press release,

We anticipate a couple of major events for this year. For example, the construction of our headquarters building will be soon completed and we'll start to prepare for operations shortly afterwards. In competition of this project, completion of the project will significantly decrease our financial and operating risks and allow the management to spend more time on growth or ending tasks. In addition, with our core competitiveness reinforced, We will pursue business breakthroughs and expansion and set sights on selected overseas markets, aiming at becoming a leading player in selected vertical sales and achieving growth prospects. I will look forward to sharing with you the latest development of this event in the coming days.

Next, I would like to invite Eric to introduce the fourth quarter of 2020 and the financial performance of the whole year, as well as the income forecast for the first quarter of 2021. Thank you.

Having said that, I will now turn the call over to Eric to reveal financial results for the fourth quarter and fourth year of 2020 and provide guidance for the first quarter of 2021. Thank you.

Thank you, Qingbo. Hello, everyone, and thank you again for joining Trimly's fourth quarter and the fourth year of 2020 conference call. I will now go through the details of our financial results and wrap up with our revenue guidance for the first quarter of 2021. Total revenues for the fourth quarter of 2020 were $50.3 million, representing an increase of 15% from the previous quarter. The increase was primarily driven by the increase of revenues from each of our major product lines. Revenues from cloud computing and other IBIS combined were $25.9 million, representing an increase of 22% from the previous quarter. the cloud computing revenue was $18.9 million, increasing 20.2% sequentially. The increased cloud computing and other IVS revenues were primarily due to increased sales of our cloud computing services and the refinement of our operating models for our other IVS services during the quarter. Revenues from subscriptions were $20.7 million, a 5.5% increase from the previous quarter. The number of subscribers was approximately 3.83 million as of December 31, 2020, compared with 3.75 million as of September 30, 2020. The average revenue per subscriber for the fourth quarter of 2020 was 35.4 RMB, a slight decrease from 35.9 RMB for the previous quarter. Revenues from online advertising were $3.8 million, representing an increase of 27.6% from the previous quarter. The increase was mainly due to seasonality and optimized operations primarily attributable to the application of precision targeting algorithms. Cost of revenues was $23.3 million, representing 46.4% of our total revenues, compared with $21 million, or 48.1% of our total revenues in the previous quarter. The increase was mainly due to the increased sales of our cloud computing and IVAS services. Bandwidth costs in the fourth quarter of 2020 were $15.2 million, representing 30.2% of our total revenues, compared with $15.4 million, or 35.1% of the total revenues in the previous quarter. The decrease was primarily due to increased capacity of our cloud computing nodes and improved bandwidth procurements. Gross profit for the fourth quarter was $26.8 million, representing an increase of 18.3% from the previous quarter. Gross margin was 53.3% in the fourth quarter, compared with 51.9% in the previous quarter. The increase in gross profit and gross margin was mainly due to improved gross margin of cloud computing services and increased revenues of subscription and online advertising business, which had high gross margins than other product lines. Research and development expenses for the fourth quarter were $12 million, representing 23.9% of our total revenues, compared with $12.1 million, or 27.6% of our total revenues in the previous quarter. Sales and marketing expenses for the fourth quarter were $2.8 million, representing 5.6% of our total revenues, compared with $4.2 million, or 9.6% of our total revenues in the previous quarter. The decreased sales and marketing expenses were mainly due to fewer promotional activities and a reversal of the expenses which were previously accrued. General and administrative expenses for the fourth quarter were $7.9 million, representing 15.7% of our total revenues, compared with $7.5 million, or 17.1% of our total revenues in the previous quarter. The increase in general and administrative expenses was primarily due to increased employee welfare expenses partially offset by decreased legal fees due to reversal of provisions based on the progress of certain cases. Operating income was $4.1 million, compared with an operating loss of $1 million in the previous quarter. Net income was $4.6 million, compared with a net loss of $1.5 million in the previous quarter. Non-GAAP net income from continuing operations was $4.8 million in the fourth quarter of 2020, compared with a net loss of $0.9 million in the previous quarter. The decreased net loss and the non-GAAP net loss were primarily due to the increase in revenues of each business line and a high gross margin as discussed above. Diluted earnings per eight years from continuing operations in the fourth quarter of 2020 was approximately $0.07 as compared with a loss of $0.02 in the third quarter of 2020. As of December 31, 2020, the company had cash, cash equivalents, and short-term investments of $255.1 million, compared with $246 million as of September 30, 2020. For the year of 2020, total revenues were $186.7 million, representing an increase of about 3% on a year-over-year basis. The increase in total revenues was mainly attributable to an increase in revenues from our cloud computing and subscription services. Revenues from cloud computing and other IVS were $89.2 million. representing an increase of 6% on a year-over-year basis. The revenues of cloud computing services was $64.3 million, representing a 29.1% year-over-year increase. The increase in cloud computing and other IVS revenues was mainly attributable to the increased sales of cloud computing services. as a result of our expanded service capacities and increased demand from our customers. Revenues from subscriptions were $84.3 million representing an increase of 3.4% on a year-over-year basis. Revenues from online advertising were $13.2 million representing a decrease of 15.6% on a year-over-year basis. The decrease was mainly due to a decreased demand for our online advertising by our mobile platform users during the first half of 2020. Cost of revenues was $92.6 million, representing 49.6% of our total revenues in 2020, as compared with $99.9 million and 55.1% of our total revenues in 2019. The decrease was mainly due to decreased sales of cloud computing products and revenue sharing costs for our live streaming products. Android's cost, as included in cost of revenues, were $62.4 million, representing 33.4% of our total revenues, compared with $57.1 million, or 31.5% of our total revenues in the previous quarter. in the previous year. The increase was mainly due to the increased sales of our cloud computing services. The remaining cost of revenues mainly consisted of costs related to the revenue sharing costs for our live streaming products and the depreciation of servers and other equipment. Gross profit for the year was $93.7 million, representing an increase of 16.1% on a year-over-year basis. Gross margin was 50.2%, compared with 44.5% in the previous year. Research and development expenses for the year were $55.5 million, representing 29.7% of our total revenues, compared with $68.6 million, or 37.8% of our total revenues in the previous year. The decrease was primarily due to the optimization of organizational structure, employee benefits, and compensation. Sales and marketing expenses for the year were $18.1 million, representing 9.7% of our total revenues, compared with $31.8 million, or 17.6% of our total revenues in the previous year. The decrease was primarily due to fewer marketing and promotion activities and the optimization of organizational structure, benefits, and compensation. General and administrative expenses for the year were $33.9 million, representing 18.2% of our total revenues, compared with $38.9 million, or 21.5% of our total revenues in the previous year. The decrease was mainly due to the decreased rental expenses as a result of consolidation of offices, decreased legal and professional fees, and the optimization of organizational structure. Employment of assets next for the year was $5.1 million, comprising of a one-time write-off of certain receivables and payments in relation to our cloud computing business. compared with the credit amount of $2.1 million in the previous year. Operating loss was $18.8 million, compared with an operating loss of $56.4 million in the previous year. The decrease was mainly due to the increase in total revenues, improved gross margin, and the decrease in total operating expenses as a result of enhanced operating efficiency. Net loss from continuing operations was $14.1 million in 2020, compared with a net loss of $53.4 million in the previous year. Non-debt net loss from continuing operations was $11.8 million in 2020, compared with a loss of $48 million in the previous year. Diluted loss per eight years from continuing operations in 2020 was 21 cents as compared with a loss of 79 cents in the previous year. As of December 31, 2020, the company had cash, cash equivalents, and short-term investments of $255.1 million, compared with $265.3 million as of December 31, 2019. And finally, I'd like to turn to our guidance for the first quarter of 2021. We expect total revenues to be between $53 million and $56 million for the quarter. The midpoint of the range represents a quarter-over-quarter increase of about 8%. We conclude management's prepared remarks and operator, we are ready to take questions.

Certainly. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Once again, to ask a question, hit star and the number 1 on your telephone keypad. Your first question comes from the line of Jing Liao, China Safe Capital. Please ask your question.

So the question is about corporate business development.

So can management share some insights about some important aspects of the business development in the year of 2021?

and deep-dive and analyze the user's habits and needs, and develop a strategy to improve user experience and enrich the product spirit. We will also launch new entertainment and social products related to short videos. At the same time, we will plan to deploy new products in the company plan overseas.

So our goal in the new year is to do business breakthroughs through product innovation. We believe that there are promising growth prospects and diverse application scenarios for our 2C business. To achieve this, we have made comprehensive and deep analysis for our users' behavior and demand to set product strategies. We are considering developing new social and entertainment products as our next move. Meanwhile, we will set sights on selected overseas markets for our incubated new products to pave the way for growth.

For the B-end cloud computing business, our goal is to achieve income growth and scale efficiency. Through technical innovation, we will optimize the cost structure and improve profitability. At the resource end, we will further expand the scale of nodes. For our cloud computing business, we still strive to achieve economic sub-scale and quality growth by technology-powered cost enhancements.

Our resource tool is to expanding with more nodes and increase node stability through partnership and technological innovation. Based on our current client base, we will also explore business opportunities in other vertical sectors in order to acquire more enterprise clients from various fields. Thank you for your question. So next question.

The next question comes from the line of Juju. Please ask your question.

Hello, I want to ask about your short video business. Is it going to be released in QR?

Short video is our new business. So the question is about the short-form video business of the company.

So we think that short-form video sector is one of our business innovations in this year. And currently, we don't have to have made required disclosure about this project, but we will make required disclosure if possible in the future and communicate with the investor community. So it's based on our current product portfolios. We think that short-form video is still one promising field and could generate synergies with our current product portfolios. Thank you for your questions.

Your next question comes from the line of Trista Yang of CSFG. Please ask your question.

Hi. This is Trista from CSFG Hong Kong. Firstly, I'd love to congratulate on a good quarter of yours. I have a question about the headquarter students. What's the size of these students and what is the total assessment for these students? Thank you.

The new 26-story headquarters building has approximately 65,000 square meters, and the total investment budget is about 600 million RMB, and it is located in the Lanshan District of Shenzhen, And we expect to complete the building in the near future and on the budget. Thank you.

Thank you.

Once again, if you wish to ask a question, please press star and the number 1 on your telephone keypad. Your next question, please announce your first and last name and the company you're calling from. Your line is now open. For the participant who pressed star one, please announce your first and last name and the company you're calling from. Your line is now open. Once again, if you wish to ask a question, you may press star and the number one on your telephone keypad. Your next question comes from the line of Steve Chen of Stella Chain Capital. Please ask your question.

Thanks for taking my call. And my question is, given the kind of feasibility Do you project a profitability or turnaround of the full year of fiscal year 2021? .

As we mentioned in the press release, we have high expectations for 2021 and we will continue to improve operating efficiency and at the same time explore growth and explore growth opportunities. But we do not provide an annual guidance. But we anticipate that this year will be a year of progress and accomplishments. Thank you for your question.

Thank you. And also a follow-up question regarding the progresses on the blockchain side. So previously you mentioned that there's a few projects like collaborations with certain universities in Guangdong and also some progresses on those like security side. So do you expect that the company will continue investing on the blockchain side and to echoing the current progress of the blockchain and the cryptocurrency as a general.

What's your last question, Steve?

Would you expect it to keep investing in the blockchain business and to to actually echoing, to stay actually in line with the current upbeat trend of the blockchain and the cryptocurrency as a general.

Okay. Basically, he, you know, shall we translate into Chinese or not? Okay, yeah. And... Probably some of us may know that Shunlei started to develop blockchain products in around 2017. And over the years, its blockchain technology and Shunlei's soundchain have been used for a number of applications, including shared cloud computing, media products, charity funds, copyright protection, supply chain, etc. Last year, we launched a blockchain as a service platform, or BaaS, to further facilitate blockchain technology to serve the real economy. Our BaaS platform is a high-performance blockchain technology platform based on our infrastructure of our soundchain, and with one-stop blockchain service solutions, it is designed to free developers from complicated technical issues when deploying blockchain applications. And we believe there are still a lot need to be done to improve blockchain technology and to use it to serve our real economy. A couple of months ago, Xunlei and several leading Chinese universities and institutions were awarded a research project on blockchain and fintech technology, which was sponsored by the Department of Science and Technology of Guangdong province. The research project seeks to address a number of technical issues, such as data security and user privacy protection in the application of blockchain. We will continue to invest in blockchain technology, research, and development. We also plan to explore other opportunities in the blockchain space. And we will be happy to share with you our progress in the coming days. Thank you for your question.

Thank you. Once again, if you wish to ask a question, you may press star and the number one on your telephone keypad. As there are no further questions, I will now turn the call over to the management for the closing remarks.

All right, operate. We conclude today's conference call. And please feel free to contact us if you have any questions. Have a good day.

Thank you for your participation in today's conference. You may now disconnect.