Xunlei Limited

Welcome, ladies and gentlemen, and thank you for your patience. You've joined Shunlei's third quarter of 2021 earnings conference call. At this time, all participants are in the listen-only mode. Please be advised that today's conference is being recorded. I would now like to turn the call over to your host, Investor Relations Assistant, Ms. Xiaoran Liu. Please go ahead.

Thank you. Good day, everyone, and thank you for joining Shunlei's third quarter earnings conference call. By now, you should have received a copy of our earnings release, and it's also available on our IR website. For our agenda today, I will first read the prepared remarks by our chairman and CEO, Mr. Dingbo Li, on the highlights of our third 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 fourth quarter of 2021. After the management's remarks, we will open the call to questions from the audience. 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 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. Xinlei assumes no obligation to update any forward-looking statements except as required under a particular law. During this call, we will 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 the prepared statement by Mr. Zinbo Li, Chairman and CEO of Xunlei Limited. Thank you all for joining us today. For the third quarter, we delivered higher than expected revenue growth and significantly exceeded our revenue guidance for the third quarter of 2021. Previously, we had issued a revenue guidance of 1.4% sequential growth. The total revenues for the third quarter reached $60 million, representing an increase of 8.8% from the second quarter. It was mainly driven by strong sales of our cloud computing products and other internet value added services, but their impact on the bottom line was offset by lower advertising revenues and higher operating expenses. Xunlei is investing in human resources talent acquisition to support for innovative business development. As a result, we incurred a net loss of approximately $5.1 million for the third quarter. Now, I'd like to provide some details of the operating results. Revenues from our subscription business in the third quarter accounted for approximately 37.8% of our total revenues. It edged down 0.2% sequentially and climbed by 16% year-on-year. At the end of the third quarter of 2021, the number of subscribers reached 4.15 million and was up approximately 4.8% as compared with that at the end of the second quarter. Subscription revenues were down slightly due to our customer rewarding programs that reduced the average price per user. Subscription has been an important source of capital to support our endeavor, our research and development of new and innovative products. It's delighting that for the last several quarters, membership count was steady and premium services gained continuing popularity. Not only that, we have been devoting efforts to polishing customer experience, providing users with better products and services. For our cloud computing and other internet value added business, we are pleased that it grew 21.8% in the third quarter, with the growth driven mainly by our cloud computing business. Our live streaming products also contributed to the segment growth, but to a lesser extent. Especially encouraging is that we achieved growth in both cloud computing revenues and bandwidth capacity under challenging circumstances. demonstrating our strong competitive edge in meeting our customers' demands. During the third quarter, this business segment accounted for approximately 58.7% of our total revenues. As the passion for short-form and long-form video and other streaming products continues, we expect future demand for our products to remain strong. Our online advertising business is going through difficult times. As previously we had cautioned against the near-term outlook of this business, advertising revenues declined 40.5% sequentially and accounted for approximately 3.5% of our total revenues in the third quarter. The reduction was primarily attributable to reduced advertising placements on our platform in an effort to improve user experience. Since local regulatory entities have heightened supervision of internet advertising, the pressure on advertising business persists, though there are signs of some easing in the fourth quarter. We will try to mitigate the impact by actively expanding the scope of products to diverse our customer base and increase customer loyalty. Moving forward, we will continue to explore growth opportunities at home and abroad, including in conventional 2C businesses, capital operations, as well as innovative products and services like selected digital networking technologies and applications. We will take a prudent approach to exploring potential business opportunities with monetization capabilities. To conclude, I'd like to say that we have confidence that Shunlei's strong balance sheet, long history of entrepreneurship, and hardworking employees will help us cope with uncertain market conditions to achieve resilience and vitality. In the days to come, we will continue to invest in business innovation and seize growth opportunities through expansion of our product lines. Now, I will turn the call over to Eric to review financial results of the third quarter of 2021 and provide a revenue guidance for the fourth quarter of 2021. Thank you.

Thank you, Xiaorong. Hello, everyone, and thank you again for joining Xunlei's third quarter of 2021 earnings conference call. I will now go through the details of our financial results and wrap up with our revenue guidance for the fourth quarter of 2021. Total revenues were $60 million, representing an increase of 8.8% from the previous quarter. The increase in total revenues was mainly attributable to increased revenue from cloud computing and other IBIS business. Revenues from cloud computing and other IBIS were $35.2 million, representing an increase of 21.8% from the previous quarter. The increase was mainly driven by increased CDN sales due to increased demand for cloud computing products. Revenues from subscription were $22.7 million, a decrease of 0.2% from the previous quarter. The number of subscribers was 4.15 million as of September 30, 2021, compared with 3.96 million as of June 30, 2021. The average revenue per subscriber for the third quarter of 2021 was RMB 35.4%. compared with RMB 36.9 for the previous quarter. Revenues from online advertising were $2.1 million, representing a decrease of 40.5% from the previous quarter, primarily because we limited the number of advertisements placed on our platform to improve user experience. Cost of revenues was $30.4 million, representing 50.7% of our total revenues, compared with $26.2 million, or 47.5% of the total revenues in the previous quarter. The increased cost of revenues was mainly attributable to increased bandwidth costs and revenue sharing costs of our live streaming business. Bandwidth costs included in cost of revenues were $21.7 million, representing 36.2% of our total revenues, compared with $18.5 million, or 33.6% of the total revenues in the previous quarter. The increase was mainly due to increased CDN sales. The remaining cost of revenues mainly consisted of costs related to the revenue sharing costs for our live streaming business and depreciation of servers and other equipment. Gross profit for the third quarter was $29.3 million, representing an increase of 1.3% from the previous quarter. Gross margin was 48.9% in the third quarter, compared with 52.5% in the previous quarter. The decrease in gross margin was mainly attributable to decreased revenue portion of subscription and online advertising business, which had high gross margins than other business. Research and development expenses for the third quarter were $16.8 million, representing 28% of total revenues, compared with $15.2 million or 27.5% of our total revenues in the previous quarter. The increase was primarily due to increased employee-related cost. Sales and marketing expenses for the third quarter were $6.8 million, representing 11.3% of our total revenues, compared with $6.7 million, or 12.1% of our total revenues in the previous quarter. General and administrative expenses for the third quarter were $11.4 million, representing 19% of our total revenues, compared with $7.7 million, or 14% of our total revenues in the previous quarter. The increase in general and administrative expenses were primarily due to increased legal and consulting expenses, and increased amortization costs for the newly awarded restricted stocks under the company's shares incentive plan. Operating loss was $5.7 million, compared with an operating loss of $1.1 million in the previous quarter. Other income was $0.5 million, compared with other income of $0.9 million in the previous quarter. The decrease was primarily due to donation of approximately $0.8 million to eight flag victims in central China in July 2021, which was partially offset by other incomes in the third quarter. Net loss was $5.1 million, compared with a net income of $5.8 million in the previous quarter. Non-GAAP net loss was $3.1 million in the third quarter of 2021, compared with a non-GAAP net income of $1.3 million in the previous quarter. The decrease was primarily due to increased operating expenses, as discussed above. Diluted loss per eight years in the third quarter of 2021 was approximately $0.08, as compared with a diluted earnings per eight years of 0.00005 in the previous quarter. As of December 30, 2021, the company had cash, cash equivalents, and short-term investments of $228.3 million, compared with $245 million as of June 30, 2021. The reduction of cash balance was mainly due to a term loan in amount of $20 million provided to Chase Hong Kong Limited. a company controlled by IT International Inc., our largest shareholder in September of 2021. For the fourth quarter of 2021, Xinglei estimates total revenues to be between $67 million and $71 million, and the midpoint of the range represents a quarter-on-quarter increase of approximately 15%. This estimate represents management's preliminary view of the database release, which is subject to change, and any change could be material. Now we conclude prepared remarks for the conference call. Rachel, we are ready to take questions.

Certainly. As a reminder, to ask a question, you will need to press on your telephone. To withdraw your question, press the pound or hash key. Once again, if you wish to ask a question, Press star and the number one on your telephone keypad. Your first question comes from the line of Steve Chen of Stella Chain Capital. Please ask your question.

Hello. Thanks for taking my question. I got two questions. Shunlei is one of the first movers in the blockchain space in China. So will you continue to invest into this domain? And do you expect it to generate significant revenues in the near future?

这位投资者的问题是, Shunlei是中国区块链技术的先行者之一。 Will you continue to expand blockchain technology? And do you expect to make a lot of money in the near future? Let me answer this question. Thank you, Steve.

We believe that blockchain is still in the early stage of industry development. Blockchain business is a new direction of technology innovation. We are also actively involved in and promoting industry development. We will continue to promote existing projects and dig up new opportunities. We are conducting some projects related to blockchain technology. One of the projects is to improve the privacy protection of blockchain technology with several partners. We expect to earn millions of RMB. So we think blockchain is still at its nascent stage of an industry development cycle.

We view our investment in the underlying technology of blockchain as part of our technological innovation. We are participating in the development of the blockchain industry. And in the coming days, we will continue to carry out our current projects and explore additional ones. And currently, we are working on several blockchain-related projects. One of the projects is to improve the privacy aspects of the technology with several partners, and we expect to receive several million renminbi from this project. As an emergency technology and one of our incubation businesses, as far as it has not yet generated significant amount of revenue for us, we view our investment in blockchain as a real option and hope to realize returns on investments in the future. Thank you for your question.

And actually, my second question is about, can the management provide their views regarding the China's public cloud service market? And what's your advantage? And do you really expect it to grab more market share going forward? Thank you.

What are the advantages of Shunlei in this competitive market? Do we expect that the future market will expand a share?

In general, we believe that due to the continued expansion of short video and long video products, China's CDN market will continue to grow. Although the price may suffer some pressure as the competition intensifies, But there are still a lot of opportunities for training. Because we believe that based on the business model of shared economy, we have competitive product prices and unique technology. We have a strong competitive advantage. We will increase the scale of CDN business development We believe that the CDM market will continue to grow as a result of continued popularity of short-form and long-form video products. Although competition is fierce,

and prices will continue to decline. There are plenty of opportunities for us. We believe our sharing economy-based business model is highly competitive because of its proprietary technology and competitive pricing. We expect to continue to expand our CDM business while improving operating profitability. In addition, we have been investing in other edging computing technologies and cloud computing products and are looking forward to sharing with our progress in the coming days. Thank you.

Thank you.

Your next question comes from the line of Yu Zhe Zhang of Retail Investor. Please ask your question.

I also have two questions. The first question is, please ask about the loan of $20 million in September. to the youngest subsidiary company? What kind of commercial considerations are there? What kind of return can this loan bring to the shareholders of Xunlei? If the loan cannot be returned in time after two years, do you have any requests for the youngest subsidiary company to provide a mortgage in the loan contract?

This loan is mainly provided from the perspective of both parties' supply. Because Xunlei is the shareholder of Xunlei, we also have some opportunities to cooperate in business. This is a strong mutual assistance, a united business arrangement. At the same time, this arrangement is also approved by the provincial committee and the company board. Because some business secrets, we have some

So we believe this cooperation with ITOI is a win-win cooperation. And this decision also passed AAC community and board community. And due to business reasoning, we are not able to announce any more details. But we believe that this cooperation is a decent cooperation. Thank you.

I have a second question. I want to ask about some information about the financial report. The financial report disclosed that the loss of three quarters is probably caused by a large increase in management fees of 3.7 million dollars. The increase in management fees is related to some legal fees and some interest rates. Please explain whether this increase can be seen as a one-time increase or a permanent increase.

There is a part of it that is one-off, including some legal fees and consultation fees. Of course, this is for this quarter. That is to say, this quarter did not happen in the previous quarter, but it does not mean that it will happen permanently according to this proportion. Some of them are what I just talked about, which is the employee equity incentive plan. Some quarters have been created, some quarters have not been created. So some of the fees such as legal fees is a one-time fee and it doesn't mean that it will persist along the way. It only depends on the needs at the time.

But some of the fees, such as human resources and talent acquisition, these kinds of fees will persist along the way. Thank you.

I have another question. The growth of CDN is very fast. Does CDN currently have any overseas expansion plans, such as bringing these loan business to overseas countries?

Actually, we are also exploring opportunities overseas. As you know, many successful companies are international. We have such a plan. We are also studying its feasibility. But for now, our business is not out yet. But there is a possibility and a plan. This depends on our feasibility research on this business and overseas development.

Thank you. Currently, we are exploring for abroad opportunities and seeking for chances to take our CDM market abroad. But however, it only depends on the possibility of taking this to actually happening. And we're still exploring this. Thank you.

If possible, I would like to ask one last question, Mr. Guan. Last year, we discussed that the mine is under construction and it has been a year. Can the mine be used in 2022? If it is used, how much income can it bring to the mine every quarter or how much can the original operating cost bring to the original income?

This is the construction of our mine. In fact, it has been completed this summer. Last week, we completed the construction of the construction site. In the next part, there will be other special inspections, including the inspection of our fire facilities, including the energy saving of our building, The design of the building is also under the government's supervision. We are not sure when it will be completed, but according to our internal plan, we expect it to be moved to a new mine in the second quarter of next year. Thank you.

So the construction of the Xunlei building is actually almost finished. And it also depends on the government's regulatory entity's time of working to know the actual time of us moving in. But our plan is moving into the building at the second quarter of next year. And our plans for the building is a part for self-use and some for rent, which will probably generate profits. But however, we don't have the numbers yet because we haven't done that yet. Thank you.

Once again, if you wish to ask a question, please press star and the number one on your telephone keypad. Your next question comes from the line of Kiyang Zhang of WACCHA at Everwind. Please ask your question.

Good evening. I have two questions. The first one is, could the management add some color on the strategic prospects in the near future? Thank you.

Basically, our short-term goal is to uncover stringent values and achieve profitability as soon as possible. We increased significant quote-unquote revenue growth in the third quarter, but its impact on the bottom line was offset by rising operating expenses. To achieve profitability, we need to concentrate on our core 2C and 2B businesses and put optimizing business operations as our priority to improve operating efficiency. And once we achieve our near-term goal, I believe we will be in a better position to pursue growth opportunities and achieve sustainable development. We intend to explore growth opportunities that have relatively good visibility and are close to our competitive strengths. We will be looking forward to share with you our stories in the near future. Thank you.

In the basis of growth and revenue, we can gradually achieve stable profits. Once we achieve our short-term goals, I believe we will have a more solid foundation to pursue a longer-term development. We will also actively look for a more transparent and compatible development opportunity to expand our products and services, including traditional 2C products and innovative new products, 不管是国内的还是国外的。 我们希望能在不久的将来 和大家分享我们的故事。 谢谢。 Thank you.

My second question is, what is the management's expectation for earnings in the quarters ahead? Thank you.

Thank you for your question, but we don't provide guidance on net income or losses for the coming quarters. However, as reflected by the financial results of the third quarter and the revenue guidance for the next quarter, we are hopeful that we will improve both top lines and bottom lines in the coming quarters. Achieving profitability is one of our priorities. We are working towards this This goes through solid execution in multiple areas. For example, we will optimize business operations across our major product lines and explore growth opportunities in our traditional business by developing premium functions in our product portfolio. In addition, for our cloud computing business, we will stay focused on achieving the economy of scale and high-quality growth. Furthermore, we formed project incubators within our company to develop potential new products and services. I believe that above measures we are taking, we are positioning ourselves well to turn around and lay a foundation for future developments. Thank you.

Currently, the focus of our work is also around this direction. For example, the direction of operation can improve efficiency. For traditional businesses, we hope that through the optimization and enrichment of product performance, we can acquire an increasing market. In terms of cloud computing, while pursuing scale efficiency, there is also a relatively high quality growth. In addition, the company has also set up a project team to explore a new product and business direction.

Next question comes from the line of Jing Liao of ChinaSafe Capital. ChinaSafe Capital, please ask your question.

Hello, Manager Chen. I have two questions about company products. First, the third quarter of the meeting income has slightly decreased. I want to know what the future of the member business will be like. Manager Chen, what are your thoughts on the member business? Does the company consider developing new products? Thank you.

Thank you for the question. Although the revenue in the third quarter has decreased, our membership has increased by about 5%. Xunlei currently has more than 4 million members These members have this program, this product has a relatively strong profitability. But we believe that the membership business still has the potential to be further improved. Our plan for the membership business is, first of all, we want to maintain the size of the membership. Through the development of new product functions, we will provide more rights to the members, reduce the loss rate, to increase the desire to pay. At the same time, we will also optimize the membership structure, increase the proportion of high-value members, and increase the stability of the membership structure, in order to obtain a better market. Our current membership structure is also in this direction, continuously optimizing. We hope that our membership business will continue to provide funds

As we mentioned, our subscription business revenue slightly decreased sequentially. The number of subscribers increased about 5% as compared with that at the end of the second quarter, showing users' demand for high-quality file transmission services remain steady. Currently, we have about 4 million subscribers as our valuable assets, and over the years, the subscription business have demonstrated strong profitability. By further improving the quality of the product and user experience, we will continue to uncover its potential, expand user base, and increase the percentage of subscribers who use our VIP service, which we believe we are moving along accordingly. We hope our subscription business will continue to generate cash flows to support our development of new products and services, and exploration of emerging technologies.

Once again, if you wish to ask a question, please press star and the number one on your telephone keypad. After there are no more questions, I'll hand the call back to the management. Please continue.

Thank you again for your time and participation. If you have any questions, please visit our website at www.shundi.com or send emails to our investors relations. Have a good day. Rachel we conclude today's conference call. Thank you very much.

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