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.