Xunlei Limited

Welcome, ladies and gentlemen, and thank you for your patience. You've joined Shingle's 2022 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. I would now like to turn the call over to the host, Investor Relations Manager, Ms. Luhan Tang.

Thank you. Hello. Good morning, everyone, and thank you for joining Shunlei's 2022 Second 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 first read a prepared opening remark by our Chairman and CEO, Mr. Jim Bulley, on the highlight of our second quarter operations. Then Mr. Eric Zhou, our CFO, will go through the details of financial results and wrap up with our revenue guidance for the third 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 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 Security 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 a forward-looking statement. Please refer to our SEC filings for more detailed description of the risk factors that may affect our results. Xunlei 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 for a reconciliation of non-GAAP Two comparable gap measures can be found in 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. Jim Bulley, Chairman and CEO of Shinley Limited. Good morning everyone and thanks for joining us today. I'm very pleased to report that We achieved a good quarterly result as most of our business lines delivered expected performance in the second quarter of 2022. Before I get into the results of the quarter, I'd like to step back and share with you the highlights of our business in the second quarter. Our subscription business did a great job that our premium subscribers reached a record level of 35% of total subscribers. And our live streaming services realized top line growth for five consecutive quarters. Those exciting results are attributable to our efforts to cater to users' needs, as well as effective marketing campaign that led to increased demand for our products and services. Also, I'm very proud that our cloud computing subsidiary received several industry awards in the last quarter for innovation and a contribution to the industry. We achieved these inspiring results in spite of challenging macro environment dealing with COVID-19, a slowing down economy, evolving government regulations, et cetera. In the second quarter of 2022, our total revenues reached $78.3 million. And this is the seventh quarter in which we reached consecutive quarterly business growth. But due to the impact of devaluation on RMB against the US dollar in the second quarter, Our total revenue reported in the US dollar exhibited a slight decrease of about 1% after currency conversion. Despite so, I'm pleased that our net profit grew to $6 million, a 10.1% increase from the previous quarter, and it was the second consecutive profitable quarter. And I'm encouraged that our efforts to optimize our operations began to pay off and enhanced our ability to pursue high growth opportunities. As I mentioned earlier, our cloud computing business maintained its competitiveness in the market. Among other recognition, Shenzhen Wangxin was nominated as the top 20 edge computing company in May and received 2021 to 2022 leading brand award. and the Cloud Connect China Cloud Computing Conference in June. With these inspiring accomplishments, we are more determined to deliver reliable, scalable, and cost-effective services to our clients and become the service provider of choice for our customers. In the second quarter, the bandwidth fold was relatively stable versus the first quarter, but cloud computing revenue was down 6.2% primarily as the sudden change in foreign exchange rates negatively affected our cloud computing revenue when translated into US dollars. That said, we're proactively researching and developing diversified applications for edge computing to cope with intense industry competition and a continuous pricing pressure on a CDM business. I'm also encouraged to witness the progress on our subscription business which realized $25.4 million in revenue, an increase of 0.2% from the previous quarter. Even though our total number of subscribers declined to 4.46 million in the second quarter of 2022 from 4.61 million from the previous quarter, the average revenue per subscriber grew to 37.8 RMB in the second quarter from 34.9 RMB versus that the first quarter. The increase in average revenue per subscriber was due to more members opted for our premium services. By building an engaging member community, we believe that users' loyalty will improve as more user-friendly features are added and upgraded to our services in the future. In the second quarter, our live streaming and other internet value-added services continued their growth momentum, which generated $24.5 million in revenue an increase of 4.5% from last quarter. Since launched our new live audio streaming product in 2021, we've seen our live streaming products and services grew 191.3% in revenues in the second quarter of 2022 as compared to that of second quarter of 2021. A large portion of the growth came from our overseas market. We're expanding the presence of our products and services in more regions and different brand recognition in existing markets. And we expect that the live streaming business will continue to grow. On the other hand, however, our internet advertising delivered less than desired results and negatively affected our overall performance. Last quarter, our digital collectible service platform collaborated with art institutions, museums, and other IP owners and produced a number of digital collectibles, which were uniquely identified using the blockchain technology of Thunder Chain. Although its contribution to the total revenue has been very small so far, it is a new endeavor by our blockchain team. In the future, our digital collectible service platform will continue to expand collectible categories and create a diverse portfolio of digital collectibles. We believe this product is of both great potential and significant risks. Meanwhile, we'll continue to strictly comply with relevant laws and regulations. In conclusion, I'm grateful for our employees' dedication and contribution to our business development. Looking forward, we will continue to be focused on our strategy of leveraging our core competitive edge and innovative capabilities to cultivate new resources new sources of revenue to diversify and accelerate our top-line growth. Oliver will also continue to optimize our operations to enhance profitability. In conclusion, I'd like to say that we're optimistic that the positive momentum we enjoyed in the first half of this year will continue into the second half of 2022. With that, I'm now turning the call over to Mr. Eric Zhou, our Chief Financial Officer Eric will cover our financial results in detail and share our outlook. Thank you.

Thank you, Luhan. Hello, everyone. And thank you again for joining Schindler's 2022 Second Quarter Earnings Conference Call. I will now go through the details of our financial results. And at the top is our revenue guidance for the third quarter of 2022. Total revenues were $78.3 million. representing a decrease of 1% from the previous quarter. The decrease in total revenues was mainly attributable to devaluation of R&B against US dollars, partially offset by increased revenues from our live streaming and other IVS services. Revenues from cloud computing were $28.3 million, representing a decrease of 6.2% from the previous quarter. The decrease of cloud computing revenues was mainly due to devaluation of exchange rate of RMB against the US dollar as our cloud computing revenues were denominated in RMB. During the second quarter, the bandwidth sold was practically stable and we are mindful of intense industry competition. Revenues from subscription were $25.4 million. representing an increase of 0.2% from the previous quarter. The number of subscribers was 4.46 million as of June 30th, 2022, compared with 4.61 million as of March 31st, 2022. Historically, the number of membership fluctuated from period to period and sometimes significantly. The average revenue per subscriber for the second quarter was 37.8 RMB, compared with 34.9 RMB for the previous quarter. The higher average revenue per subscriber was due to a larger percentage of users opted for a premium service option. Revenues from live streaming and other IBS were $24.5 million, representing an increase of 4.5% from the previous quarter. The increase of live streaming and other IVS revenues was mainly due to the increased demand for new live audio streaming products, which we launched in 2021. Gross profit for the second quarter was $33.7 million, representing a decrease of 3.2% from the previous quarter. Gross profit margin was 43.1% in the second quarter, compared with 44.1% in the previous quarter. The decrease in gross profit and gross profit margin was mainly due to increase the increase in payment handling fees and other operating related costs driven by the increases of our live streaming and other IBS revenue and subscription revenue, which were partially offset by improved gross profit margin of our live audio streaming product. Research and development expenses for the second quarter were $16 million, representing 20.4% of our total revenues, compared with $16.3 million, or 20.6% of our total revenues in the previous quarter. Sales and marketing expenses for the second quarter were $5 million, representing 6.4% of our total revenues, compared with $5.3 million, or 6.8% of our total revenues in the previous quarter. General and administrative expenses for the second quarter were $12 million, representing 15.4% of our total revenues, compared with $9.6 million, or 12.2% of our total revenues in the previous quarter. The increase was primarily due to the vesting of restricted share units granted to our senior management, which led to the increase in share-based compensation expenses during this quarter. Operating income was $0.7 million, compared with $3.9 million in the previous quarter. The decrease in operating income was primarily due to increased stock-based compensation expenses accrued during the second quarter as discussed above. Other income was $7 million, compared with other income of $1.2 million in the previous quarter. The increase was primarily due to folding exchange gains and the reversal of certain payables during more than three years with low probability of payment. Net income was $6 million, compared with $5.4 million in the previous quarter. Non-GAAP net income was $9.8 million in the second quarter of 2022, compared with $7.2 million in the previous quarter. The increase in net income and non-GAAP net income was primarily due to the increased other income as discussed above. Diluted earnings per eight years in the second quarter of 2022 was approximately $0.09, as compared to $0.08 in the first quarter of 2022. As of June 30, 2022, the company had cash, cash equivalents, and short-term investments of $259.9 million, compared with $269.9 million as of March 31, 2022. The decrease in cash and cash equivalents was mainly due to distribution of 2021 annual employee bonuses in the second quarter of 2022. Regarding the ongoing stock repurchase program, in March 2022, Xunlei announced that its board of directors authorized the repurchase of up to $20 million of its outstanding stocks over the next 12 months. As of June 30th, 2022, the aggregate value of purchase shares were approximately $1.74 million. Regarding Xunlei Research and Headquarters building under construction, we have been furnishing the building for the last several months, and now we expect to relocate to the new building in October this year. Turning to gardens for the third quarter of 2022, Xunlei estimates total revenues to be between $82 million and $87 million. And at the midpoint of the range represents a quarter-over-quarter increase of approximately 7.9%. These estimates represent management's preliminary view as of the date of this press release, which is subject to change, and any change could be material. Now we conclude the prepared remarks for the conference call. After it, we are ready to take questions. Thank you.