Xunlei Limited

Welcome, ladies and gentlemen, and thank you for your patience. You've joined Shunlei's 2022 First Quarter Earnings Conference Call. At this time, all participants are in 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.

Thank you, and good morning, everyone, and thank you for joining Shunlei's 2022 First Quarter Earnings Conference Call. On the call with me today are Eric Zhou, Chief Financial Officer, and Li Wu, 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 during today's call. For today's agenda, I will read prepared opening remarks by our Chairman and CEO, Mr. Jinbo Li, on the highlight of our first quarter operations. Then, Mr. Eric Zhou, our CFO, will go through the details of financial results and wrap up with our guidance for the second 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 I 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 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 forelooking statements. Please refer to our SEC filings for a more detailed description of the risk factors that may affect our results. Xinlei assumed no obligations to update any forward-looking statements, except as required under applicable law. On this call, we will be using both GAAP and non-GAAP financial measures. A conciliation 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. Now, the following is the prepared statement by Mr. Jinbo Li, Chairman and CEO of Xunlei Limited. Good day, everyone, and thanks for your participation in our first quarter earnings conference call. We're thrilled to see our operating and financial results have kept the momentum we saw in the previous quarter. Even we had to operate our business when the city was temporarily locked down in mid-March due to the end Omicron outbreak in Shenzhen, where our headquarters is located. We were able to cope with the challenges and continued to serve our customers without interruption. In the first quarter, our total revenues reached $79 million, an increase of 11.1% compared to that of the previous quarter. This is also the sixth quarter in which we reached consecutive quarterly revenue growth. Further, we achieved a net income of $5.4 million in the first quarter, compared with a net loss of $0.5 million in fourth quarter of 2021. We had a good start for 2022, and I'm grateful to our diligent employees and management for their dedication and successfully controlling costs and implementing our strategy of focusing on our competitive strengths. Our major line of products and businesses achieved solid growth during the first quarter. Cloud computing continued to be competitive in the market, where we strive to provide reliable, scalable, and cost-effective services to our clients. And it achieved a 7% sequential growth and generated $30.2 million in revenue in the first quarter of 2022. It is especially encouraging that the growth was built upon the momentum we achieved during the previous quarters. We also made progress on our subscription business, which realized $25.3 million in revenue, an increase of 7% from the previous quarter. In general, the number of our subscribers has been growing since we launched the Cloud Drive function in summer 2020. The total number of subscribers grew to 4.61 million in the first quarter of 2022 from 4.39 million in the previous quarter. We're seeing stable member activities and looking forward to building a more engaging member community to retain and increase our user base. In the first quarter, our live streaming and other internet value-added services have made a significant improvement too, which generated $23.5 million in revenue, an increase of 22.1% from the last quarter. In particular, our live streaming business realized an impressive 32.9% sequential increase compared to the previous quarter, driven by increased demand and market expansion. However, our internet advertising was especially hit by strict regulatory policies affecting the internet advertising, internet services, and gaming sectors. We expect our advertising business will continue to face headwinds in the coming quarters. We will closely monitor regulatory policies and industry trends and adopt business strategies to turn this business around if possible. Finally, we recently launched our digital collectible product line. So far, it is an insignificant part of our product portfolio. We are largely relying on our existing resources to explore this new and exciting industry development, and we will strictly comply with relevant laws and government regulations. We understand it is an emerging business with an untested business model. and an evolving regulatory environment. And we also face tremendous competition. In closing, I'd like to say that at Xunlei, we're constantly exploring new and innovative products and services. Our strong performance in the first quarter of 2022 further supports our confidence about the sustainability and promising outlook of our business. With a strong balance sheet stable cash flows, and an improving business. We believe our revenue growth and near-term trajectory will remain optimistic. With that, I will turn this call over to Mr. Eric Zhou, our Chief Financial Officer. Eric will cover the financial results in detail and share our outlook.

Thank you, Luhan. Hello, everyone, and thank you again for joining SHIMI's 2022 First Quarter Earnings Conference Group. I will now go through the details of our financial results and wrap up with our revenue guidance for the second quarter of 2022. For the first quarter of 2022, total revenues were $79 million, representing an increase of 11.1% from the previous quarter. The increase in total revenues was mainly attributable to increased revenues from our live streaming, cloud computing, and subscription business. Revenues from cloud computing were $30.2 million, representing a sequential increase of 7%, as compared with $28.2 million in the previous quarter. The increase was mainly driven by increased demand for cloud computing products. Revenues from subscription were $25.3 million, representing an increase of 7% from the previous quarter. The number of subscribers was 4.61 million as of March 31, 2022, compared with 4.39 million as of December 31, 2021. The average revenue per subscriber for the first quarter was RMB 34.9, compared with RMB 34.3 for the previous quarter. Revenues from live streaming and other IVAs were $23.5 million, representing an increase of 22.1% as compared with $19.2 million in the previous quarter. The increase of live streaming and other IBS revenues was mainly attributable to increased demand for live streaming services, partially offset by reduced advertising revenue. Costs of revenues were $43.9 million, representing 55.5% of our total revenues, compared with $37.6 million, or 52.8% of the total revenues in the previous quarter. The increased cost of revenues were mainly attributable to increased sales of our cloud computing and other IBIS services. Bandwidth costs, as included in cost of revenues, were $26.9 million, representing 34% of our total revenues, compared with $22.8 million, or 32.1% of the total revenues in the previous quarter. The increased bandwidth costs were mainly due to increased sales of cloud computing products, as well as additional bandwidth usage for the Cloud Drive feature, which has been added to our subscription product since summer 2020. The remaining costs 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 first quarter was $34.9 million, representing an increase of 4.9% from the previous quarter. Gross profit margin was 44.1% in the first quarter, compared with 46.7% in the previous quarter. The increase in gross profit was mainly due to increased live streaming, cloud computing, and subscription revenues. The decrease in gross profit margin was mainly due to increased portion of live streaming revenues to total revenues, which has a lower gross profit margin Research and development expenses for the first quarter were $16.3 million, representing 20.6% of our total revenues, compared with $16.6 million, or 23.3% of our total revenues in the previous quarter. Sales and marketing expenses for the first quarter were $5.3 million, representing 6.8% of our total revenues, compared with 6.6 million or 9.3% of our total revenues in the previous quarter. The decrease was primarily due to decreased marketing and promotional activities carried out for our major products during the quarter. General and administrative expenses for the first quarter were $9.6 million, representing 12.2% of our total revenues, compared with $11.1 million, or 15.6% of our total revenues in the previous quarter. The decrease was primarily due to the decreased legal and consulting expenses. Operating income was $3.9 million, compared with an operating loss of $1.7 million in the previous quarter. The increase in operating income was primarily due to increased gross profit and decreased operating expenses as discussed above. Other income was $1.2 million, compared with other income of $1 million in the previous quarter. Net income was $5.4 million, compared with a net loss of $0.5 million in the previous quarter. Non-GAAP net income was $7.2 million in the first quarter of 2022, compared with a net income of $1.7 million in the previous quarter. The increased net income and non-GAAP net income were primarily due to the improved gross profit and decreased operating expenses as discussed above. Diluted earnings per eight years in the first quarter of 2022 was approximately $0.08 as compared with a diluted loss per eight years of $0.01 in the fourth quarter of 2021. As of March 31, 2022, the company had cash, cash equivalents, and short-term investments of approximately $269.9 million, compared with $239 million as of December 31, 2021. The increase of cash and cash equivalents was mainly due to increased bank borrowings to support the construction of our new headquarters and research and development building and net cash generated from operations. Turning to our revenue guidance, for the second quarter of 2022, Xinglei estimates total revenues to be between $77 million and $82 million. And the midpoint of the range represents a quarter-over-quarter increase of approximately 0.6%. This estimate represents management's preliminary view as of the date of this release, which is subject to change, and any change could be material. Now we conclude prepared remarks for the conference call. After it, we are ready to take questions.

Thank you. Dear participants, we will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star and 1 on your telephone keypad and wait for a name to be announced. The first question comes from Land of Wendy Kang from Industrial Investor. Please ask your question.

His question is, besides Xunlei's traditional business, what other business, Xunlei,

may develop in the future. I answer in English first and then Lu Han will translate into Chinese. Besides cloud computing and subscription business, we strive to seek additional growth opportunities by exploring new and innovative products and services in order to speed up corporate development. Xunlei has its unique competitive edges and years of operating experience, and we hope to incubate and invest in exciting products and services that will meet the customers' needs and to ensure long-term and sustainable development of the company. For example, we have lately added Cloud Drive function to our membership subscription product, we expanded live streaming service to new markets and launched digital collectibles products. And all these products and services are the extension of our value chain or center around our core competitive strengths. Thank you for asking.

Thank you for your question. Our main business, in addition to In addition to cloud computing and membership business, we are also working hard to develop new products and services to speed up the company's development. Xunlei has its own technical barriers and has many years of operating experience. We hope that with solid technical ability, we can amplify the needs of consumers and satisfy the long-term development of Xunlei products and services. For example, we have recently launched cloud business, expanded live business, and also launched digital products. These products and services are the extension of our value chain and also surround our core competitive advantage.

Thank you for your question. Okay, thank you for your answer. Then I have another question. We noticed that the company's recent stock price is in a downward trend. This may also be related to the overall trend of the Chinese stock market. Then the company announced some time ago

The question is that recently the company's stock price reached a historically low level. The company announced a share-back program to purchase up to 20 million Xunlei stock, and Could you please provide some updates? Thanks for the question. The board of directors announced a share purchase program on March 31st. And the company has also signed an engagement letter with a securities brokerage firm to conduct transactions based on a predetermined trading algorithm. But for the time being, We cannot disclose the specific information. The board will review the share repurchase program periodically and adjust its size and terms if needed. Thank you.

Thank you.

Thank you. The next question comes from the line of John Gough, individual investor. Please ask your question.

Okay, thank you. I'm quite interested in the non-fungible token so that people have different point of view of NFT. And some of them regard it as an important part of Metaverse, and some think it's only a short-term hype. So I know that many of the top-tier Chinese stock commerce, they actually already participate in the NFT market. So could you please explain what are Shunlei's efforts in NFT artworks both in China and the overseas market? Thank you.

And his question is about NFT. And he said basically there are different opinions about NFT. Some people are very positive and some people may not be quite positive about it. In China, there are some big players in this market and he wants to know what Xunlei is doing and what is our outlook of the future. Thanks for asking and it's a good question. First, I'd like to clarify that overseas people use NFT to describe the product. and we at home often use the words digital collectibles instead. They are similar but are different in several aspects. Xunli recently launched its digital collectibles product line. So far it is an insignificant part of our product portfolio. We understand that it's an emerging business with a yet untested business model and an evolving regulatory environment. We are largely relying on existing resources to explore this new and potentially exciting opportunity. Further, we will strictly comply with relevant rules and regulations of the government. In several aspects, domestic digital collectibles are different from the NFT in overseas markets. And these differences may determine that they may have different development trends and prospects. Some of the differences include that overseas NFTs use public trends while domestic digital collectibles use alliance chains. In overseas, cryptos can be used as a means of payment, and at home, people use RMB and the equivalent. And in overseas, NFT may be traded freely, while at home, there are restrictions on trading and exchanging. And finally, in overseas, and depending on the host country of the NFT platforms. Government oversight is usually open and transparent, while at home we still yet need to develop or improve relevant laws and regulations, particularly for this new development. And in spite of the difference, I think there are opportunities for this digital credible market at home. Among us, some people enjoy collecting stamps, coins, and antiques, et cetera. In an era of digitalization, there will be some people, especially the younger generation, would like to collect digital assets, and the potential market could be huge. Of course, this is an emerging market, and it needs cultivation, as well as the support of pertinent regulations and reasonable oversight. Therefore, personally, I think it is an opportunity worth exploring and potentially rewarding for the participants of this new industry development. Thank you for your question.

In recent years, the interest of domestic and foreign investors has begun to decrease. Will there be opportunities in China? What is the difference between the foreign market and the domestic market? First of all, this is a very good question. We also want to clarify that in China, we usually call it digital goods, not NFTs. Both have similar places, but also have different places. We have recently launched a product line for digital goods. But so far, it is just a small part of our product combination. The commercial model of the product has not yet been tested, and it is not very mature. For digital products, we think it is a new industry. The environment is constantly changing. We mainly rely on existing resources to explore this new opportunity that is challenging and very potential. And we will strictly abide by the relevant legal regulations and government policies. Domestic digital goods and foreign NFTs are a little different, and these differences determine their possible differences in future development paths and horizons. Some differences include that overseas we use public chains, and domestic we use allied chains. Overseas payment can be done with encrypted currencies, while domestic can only be done with RMB or other currencies. Foreign NFTs can be traded freely, but domestic companies have a lot of restrictions on the trade and exchange of digital products. It also depends on the environment. In a country that depends on you overseas, the monitoring of NFTs is generally more open and transparent, while in China we do not yet have a special law on digital products. Related monitoring policies are also under development and improvement. Even so, we believe that digital products still have a certain market in China. In our community, there are also people who like to collect stamps, coins, cultural relics, and other rare items. In the era of digitalization, I believe that we young people, especially the young generation, will also like to collect digital products. And this market potential is very large. However, this market has just started, and it still needs time to cultivate and develop. Thank you. The next question comes from Li Deng, a private investor. Please ask your question.

His question is he wants to know if the domestic COVID policies

will affect companies' operations and its costs. In mid-March, there was a large-scale one-week lockdown in Shenzhen. As Xunlei is an internet company and that we had ample time to prepare for that event that time, we didn't see any material adverse impact on our operations. In fact, in the early phase of COVID-19 outbreak in 2020, Our subscription business actually grew due to an increase in customer demand during a period of extended spring holidays and spring festival holidays when people had more time surfing the internet. Therefore, generally speaking, we don't expect the current Omicron pandemic will have any material adverse impact on our operations unless something extreme and not foreseeable happens. Thank you.

At the end of March, our headquarters in Shenzhen held a one-week large-scale temporary lockdown. Since Shunlei is an Internet company, we have made sufficient preparations in advance, and the company's income and business operations have not been affected. In fact, at the earliest stage of the COVID-19 outbreak in 2020, Our membership business is actually growing. The reason is that the epidemic caused the extension of the holiday season. People have more time to go online. So in general, our business is not affected by Omicron, unless something extreme happens, something unpredictable. Thank you. Okay, thank you. I have another question.

I saw that the net profit rate on Taibao is decreasing. Can you explain the reasons behind it in detail? And do you expect the future interest rate to continue to drop?

And his questions, he noticed the company had declining gross margin rates for the last several quarters. And he also wants to know what is our forecast of the gross margin for the coming quarters. And thank you for your question. In the past, our subscription business, which has a high gross margin than other products, was the major revenue component of the company. And in the last several quarters, our new live streaming business has become a significant contributor of the total revenues. Because our live streaming business has a lower gross margin than the subscription business, the overall gross margin was reduced. However, our gross profit grew to $34.9 million. That is an increase of 4.9% from the previous quarter. The increase in gross profit was mainly due to increased live streaming, cloud computing, and subscription revenues. And in the coming quarters, we expect the trend may gradually stabilize. Thank you.

The decline in the net profit is mainly due to the decline in the net profit due to the decline in the net profit due to the decline in the net profit due to the decline in the net profit due to the decline in the net profit due to the decline in the net profit due to the decline in the net profit

Thank you. The next question comes from Don C. Please ask your question.

Hi and thanks for taking my question and congratulations for a good quarter. I've got several questions. The first one is the company has very large cash reserves and so what is the reason for borrowing more cash for the new headquarter? The second question would be, the growth guidance is quite stable for the next quarter. What's your view on the entire year? Do you think that the growth has already peaked? And the third and last question is, which steps are you taking for the potential event of a delisting? Is there any possibility for a secondary listing or anything else that helps current shareholders? Thank you very much.

Thanks for the question. I'll try one by one. For the question, we have healthy cash flows. The reasons for borrowing is basic leverage because we believe we can use the owner's capital for better returns and better investment opportunities. The borrowing rate for us is relatively very low. We are paying less than 5% of the interest rate for the construction loans. I believe, and probably you may agree, the cost of equity is much higher than 5%. And for the second question, regarding the growth outlook, and for the second quarter, we forecast a growth rate, revenue growth rate of about 0.6%. And for a couple of reasons, I think most importantly is usually the second quarter is kind of seasonally weak, and first quarter and last quarter is usually strongest. So we take into account this kind of seasonality when we are providing the forecast. And the second is we also currently, we are trying to adjust and optimize our operations. Probably know there are different, there are evolving changes in the Chinese industry and many companies take actions. So we are basically trying to take a conservative view, approach to our development and we try to make sure we are able to grow our company on a stable basis rather than make quite dramatic moves when the environment is not quite stable at this time. And the third question is about delisting. And you will know the reason for the delisting possibility is because of the Holding Foreign Company Accountable Act passed by the U.S. Congress. And Xunlei is audited by a well-known auditor whose working people cannot be audited or examined completely by the PCAOB. And as a result, Xunlei is has been put on the list of the potential investing in the future. If for the next three years, the company, we will still be on the list. And for the time being, we are closely monitoring this development, and we will closely monitor the negotiations between relevant Chinese and U.S. regulatory agencies, and we may take actions depending on the outcome of the negotiation, and we will keep the market informed in the future. Thank you.

This investor asked three questions. The first question is that our cash is relatively small, The second question is, We currently have a very low growth rate for the second quarter, 0.6%. Why? Our answer is because, first of all, the first reason is because of the seasonal reason. Generally speaking, our growth in the fourth quarter and the first quarter is relatively high, while our growth in the second quarter will generally slow down. The second reason is also because of the overall growth rate The big environmental impact of Hongguan, our company hopes to be more conservative to predict our future. But under this premise, we will also work hard to develop our technology, our products. We hope to have a very good result while being affected by some big environmental impacts. The third question is, because we are on the list of pre-pickings, is it possible for us ah, Thank you for your question.

Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star and 1 on your telephone keypad. The next question comes from the line of Yuzhe Zhang, and he is a retail investor. Please ask your question.

I would like to ask if the management has made any new mistakes in maintaining the current stock price. In addition to stock repurchase, uh... and and and and and and and and and and and

First, the management believe the stock prices is influenced by a number of factors and some of us are really beyond our control. That being said, first we will continue to stick to our operating strategies and try to grow our business and try to create value for the company out of operations. Secondly, for the cash, there are different ways to use it. Paying out different is one way, but the other use of the cash could be like acquisitions, investment in new opportunities. research and development of new and potential innovative products. And these options, you know, we will consider carefully. And for the paying of the dividend, thank you for suggesting. And I will bring this matter to the meetings of the board of directors. It's really not in my capacity to make a decision. But anyway, thank you for your question.

这位投资人的问题是,除了股票回购以外, 我们还有别的措施,比如说分红。 那我们的CFO的回答是, 我们认为有些因素其实不在我们掌控之内的。 但是现在我们将继续 Thank you very much for your questions and suggestions. I will also present this I have another question. I have another question. I have another question. I have another question. I have another question. I have another question. I have another question. I have another question.

And his question is about the rental status of the Xunlei headquarters building under construction. And currently, the building is still in a final stage of internal finishing up. And because of some delays due to Omicron in spring of this year, the moving date has been delayed and we expect moving sometime in around September, October. And because the building has not been completed or not ready for rental yet, you know, and So far, we don't have any tenants yet. Remember, this building is largely for internal use. But we are in the process of hiring or trying to find the potential tenants for the excess spaces in the building. And we will provide some market updates in the next several months. Thank you.

um I have one last question.

Basically, he said in the

it's difficult to forecast Schoenle's operating expenses and he noticed we have some increase in employee headcounts and employee expenses, employee related expenses last year and he wants to know if we will have a large increase in headcounts this year. And basically the The increase in headcounts is due to we are exploring new products and services, and we hide additional manpower to do research and development, and for marketing purposes, which results in an increase in operating expenses. Further, at Xunlei, we maintained an annual salary increase for the majority of our employees. And we treat our employees, first we respect our employees' contribution and we respect their hard work. And that's why we, if possible, we will try to treat our employees well and hopefully they were in return and make contributions to the company and to our shareholders. And regarding the headcount of this year, and to my knowledge, and as of now, we don't have any plan for a large increase of headcounts this year. On the contrary, we will work hard to control expenses, and to optimize our operations this year. Thank you.

In terms of development and innovation, we have increased investment, so we have increased costs. And then in terms of our staff wages, because we cherish the results of our employees and their efforts, so in the past year, most of our employees have increased their salaries. Currently, we do not have a large number of projects to increase the number of employees. Of course, we will also work hard to control our costs, optimize our costs, and create more profits. Thank you for your question.

I also want to ask the last question, which is the company's PCDN loan business. I want to ask about China's personal mode of using home-based loans to upload. Have you encountered any policy blockade or supervision? Has this situation improved? Because I heard that the Chinese government or China's state-owned telecommunications operation company is very, very strict with these supervision. There are many cases that have pulled out some of the network lines. Is there any improvement now?

Basically, his question is regarding our PCDN business, and he wants to know if there's any rectory pressure on our shared economy model. And so far, we haven't received any government sanctions on business model. And we try to do the way which is based on the shared economy and which will be in compliance with the existing government regulations. And that being said, we will monitor future development, both industrial development and regulatory development, and take appropriate actions to maintain our operations. Thank you.

Thank you.

Thank you, dear participants. As a reminder, if you wish to ask a question, please press star and 1 on your telephone keypad. We have a speaker that I don't know for the questions at this time. Please continue. I would like to hand the call back to the speaker for closing remarks.

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

Thank you. That does conclude our conference for today. Thank you for participating in all this connect. Have a nice day.