Xunlei Limited

Welcome, ladies and gentlemen, and thank you for your patience. You've joined Shinglei's 2022 Third 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 Tan.

Thank you, and good morning, everyone, and thank you for joining Shinglei's 2022 Third 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 today. For today's agenda, I will first read a prepared opening remark by our Chairman and CEO, Mr. Jinbo Li, on the highlight of our third quarter operations. Then Mr. Eric Zhou, our CFO, will go through the details on the financial results and a wrap-up with our revenue guidance for the fourth 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 Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations on the current market conditions that are subject to risks and uncertainties that are difficult to predict, which may cause actual results 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. We assume no obligations to update our forward-looking statements except as required under applicable laws. On this call, we'll be using 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. dollar unless otherwise stated. With that, the following is prepared statement by Mr. Gimbali. Chairman and CEO of Stringley Limited. Good morning, everyone. Thanks for joining us today. Despite the macro headwinds we've been facing for some time, we delivered solid third quarter results with revenue exceeding the top end of our revenue guidance and net income also grew sequentially. And this is the third profitable quarter this year. And we expect to end the year with four-year profitability, assuming no extraordinary events or one-time write-offs. which we do not foresee as of this earnings release. I believe the third quarter results demonstrated our ability to focus on and execute our strategies and showing the resilience of our products and services in a challenging environment. I'd like to share with you some of the major highlights from third quarter. Generally speaking, the result of our major business lines, namely member subscription, cloud computing and live streaming and other Internet of Value-added services came in either within or exceeding our expectations. Although the results, when reported in U.S. dollar, were partially offset by the impact of devaluation of RMB against the U.S. dollar. Specifically, in third quarter of 2022, we realized $88.3 million in total revenue with a 12.8% quarter-over-quarter increase. and revenue exceeded the high end of our revenue guidance range. Meanwhile, our net income increased to $8.3 million in the third quarter from $6 million in the second quarter, which is the third consecutive profitable quarter of this year. Delivering profits three quarters in a row amidst a challenging macro environment clearly demonstrated the successful execution of our business strategies and the resilience of our business model. I feel very thankful to our employees and management for their dedication and efforts on keeping operations on track during a period of COVID-19 resurgence and carrying on our product and services to serve our users and clients without interruption. As one of our major business growth drivers, our cloud computing business in the third quarter of 2022, its revenue reached a record level of $29.1 million. In addition, Shenzhen Wangxin, the operator of cloud computing business and a wholly owned subsidiary of Xunlei, was ranked number four with a 12.2% of market share in public edge cloud service market in 2022, according to a study by International Data Corporation. Our subscription business delivered essentially stable performance and generated approximately $25 million in revenue, down 1.7% compared to last quarter, mainly due to the impact on the currency devaluation and a slight decrease in the number of subscribers, partially offset by higher average revenue per user. As reported in Yuen Ming Bi, the third quarter subscription business would have been up slightly versus the prior quarter. The average revenue per subscriber reached 39.1 RMB in the third quarter compared to 37.8 RMB in the previous quarter as the average proportion of premium membership rose to 35.3% of total subscribers from 34% in the previous quarter. We will continue to improve product features to enhance user experience and at the same time explore additional marketing channels to reach a broader user base. Our live streaming and other Internet of Value-added services was the fastest-growing business line in the third quarter of 2022. It accounted for approximately 38.8% of our total revenues in the third quarter, surpassing cloud computing and membership subscription, which accounted for approximately 33% and 28.3%, respectively, of our total revenues. In the third quarter, our live streaming and other internet value-added services reached a record level of $34.2 million in revenue, with a 39.4% quarter-over-quarter increase. We expanded the presence of our products and services in more countries, hired additional local teams, and deepened our brand recognition in this new market. However, we expect the continued appreciation of the U.S. dollar against other If it happens, we'll dampen our financial performance in overseas markets. We'll closely monitor the dynamics of global economies through political tensions and regulatory policies, and importantly, execute our international growth strategies. We have high hopes that in a foreseeable future, China's growth will be driven by the products and services that have broader user recognition and larger market potential, and rely less on our traditional products and services. This is an ongoing transition, and we look forward to sharing with you our developments in the coming quarters. To conclude, we anticipate future growth for the fourth quarter of 2022 sequentially and year-over-year, and that expects to be on course to achieve full-year profitability. However, we will stay vigilant about the current macro dynamics which could significantly impact our operations. To ensure sustainable development, we are steadily entering selected international markets to strengthen our product portfolio and address geographic market risks. We have seen significant but encouraging progress in this regard. With a healthy balance sheet, clear strategic focus, and effective execution, as well as improved product portfolio, we believe we are well positioned to navigate this volatile macroeconomic and geopolitical environment and capture long-term opportunities. Now, I'd like to turn the call to Eric to review some of the financial numbers.

Thank you, Wuhan. Good morning and good evening, everyone. We are pleased to have you join us today to discuss our third quarter results. I will now go through the details of our financial results and wrap up with our revenue guidance for the fourth quarter of 2022. Total revenues were $88.3 million, representing an increase of 12.8% from the previous quarter. The increase in total revenues was mainly attributable to increased revenue generated from our last streaming business. Revenues from cloud computing were $29.1 million, representing an increase of 2.7% from the previous quarter. The increase of cloud computing revenues was mainly due to the increased demand from our major customers for our cloud computing service. partially offset by the devaluation of exchange rate of RMB against US dollar. Revenues from subscription were $25 million, representing a decrease of 1.7% from the previous quarter. If reported in RMB, the subscription revenue would have been up slightly. The number of subscribers was 4.37 million as of September 30, 2022, compared with 4.46 million as of June 30, 2022. The average revenue per subscriber for the third quarter was 39.1 RMB, compared with 37.8 RMB in the previous quarter. The higher average revenue per subscriber was due to a larger percentage of users opted for premium membership. Revenues from live streaming and other IVS were $34.2 million, representing an increase of 39.4% from the previous quarter. The increase of live streaming and other IVS revenues was mainly driven by the rise in the number of paying subscribers of our live streaming products, which were launched in 2021. as well as our enhanced monetization capabilities. Costs of revenues were $52.8 billion, representing 59.9% of our total revenues, compared with $44 trillion, or 56.6% of the total revenues in the previous quarter. Bandwidth costs, as included in the cost of revenues, were $25.3 million, representing 28.6% of our total revenues, compared with $25.5 million, or 32.6% of the total revenues in the previous quarter. 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. Growth profit for the third quarter was $35.2 million, representing an increase of 4.4% from the previous quarter. Growth profit margin was 39.9% in the third quarter, compared with 43.1% in the previous quarter. The increase in growth profit was mainly driven by the increase in growth profit of our live streaming business. The decrease in growth profit margin was mainly due to the increased portion of live streaming revenue to total revenues, which has a lower gross profit margin. Research and development expenses for the third quarter were $16.2 million, representing 18.3% of our total revenues, compared with $16 million, or 24.4% of our total revenues in the previous quarter. Sales and marketing expenses for the third quarter were $5.8 million, representing 6.6% of our total revenues, compared with $5 million, or 6.4% of our total revenues in the previous quarter. The increase was primarily due to higher marketing expenses during the third quarter driven by our continued user acquisition efforts. G&A expenses for the third quarter were $8.2 million, representing 9.3% of our total revenues, compared with $12 million, or 15.4% of our total revenues in the previous quarter. The decrease was primarily due to the decreased share-based competition expenses, since fewer restricted share units were vested during the quarter. Upgrade income was $5.1 million, compared with $0.7 million in the previous quarter. The increase in operating income was primarily attributable to the increase in gross profit of large shipping business and less share based competition expenses accrued during the third quarter. Other income was $4.7 million compared with other income of $7 million in the previous quarter. The decrease was primarily due to reversal of certain payables over three years, with low payment probability recognized in the second quarter, but no payment item in the third quarter. Net income was $8.3 million, compared with $6 million in the previous quarter. Non-GAAP net income was $9 million in the third quarter of 2022, compared with $9.8 million in the previous quarter. The increase in net income was primarily driven by the increase in operating income as discussed above. Diluted earnings per area in the third quarter of 2022 was approximately 12 cents as compared to 9 cents in the second quarter of 2022. Moving to liquidity as of September 30th, 2022, the company has cash cash equivalents and short-term investments of $251.7 million compared with $259.9 million as of June 30, 2022. The decrease in cash and cash equivalents was mainly due to the impact of the 14th century spending on Xiumei headquarters building under construction and share repurchases. Turning to ongoing stock repurchase program, in March, Xunlei announced that its Board of Directors authorized the repurchase of up to $20 million of its outstanding common stocks over the next 12 months. As of September 30, 2022, we have spent approximately $4.3 million on buying back Xunlei stocks. Regarding Xunlei Research and Headquarters building under construction, now it is in the final stage for interior decoration and preparation, and we expect the new building to commence operations by the end of this year. And finally, moving to our guidance for the fourth quarter of 2022, the company estimates total revenues to be between $90 million and $95 million. And the midpoint of the range represents a quarter-over-quarter increase of approximately 4.8%. These estimates represent management's preliminary view as of the date of this crisis, which is subject to change, and any change could be material. Now we conclude our prepared remarks for the conference call. Operate, we are ready to take questions.

Thank you.

As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Please stand by while we compile the Q&A roster.

Our first question comes from Xiaoming Li, private investor.

You may proceed.

您好,我是个人投资者。 首先恭喜公司Q3取得了不错的一个收入增长。 我有两个问题想请教一下。 首先第一个是关于公司的业务方面。 我们注意到上个月腾讯和联通是成立了关于CDN和边缘计算的一个合资公司。 Then I would like to ask if these CDNs that may appear and the company's CDN business will directly overlap. So what is a competitive relationship? If we overlap, what kind of response strategy will we have? Will it have a relatively large impact on future performance?

Thank you. His question is, recently Tencent and China Unicom jointly established a new company focusing on CDN and edge computing. And he's wondering if the joint ventures business has any overlap with Xinlei's business. And if so, will there be any impact on Xinlei? And we think to some extent the joint venture demonstrated China's comprehensive layout of the cloud computing industry and may bring great confidence to the entire industry under the current economic environment. So far since we haven't seen any details of the joint venture and we really can't tell whether there will be any overlap in business or it will be a direct competitor for us. But from our perspective, we think edge computing has great opportunities We will adopt measures to increase the changing competitive landscape. And so far we haven't seen any impact on us yet. As one of the tier one companies in edge public cloud, we intend to collaborate closely with all the players in the industry, including carriers, edge card computing firms as well as all upstream and downstream value chain firms and together we compute a better ecosystem for edge computing and in the long term we will do our best to achieve win-win results for all stakes of the industry as we believe the market is huge and has also further potential. Thanks for the question.

Thank you for your question. Our answer is that to a certain extent, this also reflects a fact that China has a comprehensive layout of the cloud-based railways. And in the current economic situation, it has also brought great confidence to the development of our entire industry. At present, we have not seen the specific and detailed products of this company, which is jointly established by Tencent and Liantong, so we are not very clear whether there is a overlap. But from the perspective of the past, B&G is a blue sea market full of unlimited opportunities. In the current Thank you for your question.

Thank you. And the second question is about finance and guidance. As you can see, in Q3, in terms of revenue growth, live broadcast contributed a relatively large proportion. At the same time, we also saw a decline in profit. So I would like to ask if we can According to their own business plan and business competitiveness, they give a forecast of a profit margin in the middle and short term. Will this profit margin continue to decline?

and basically he asked the you know based on our performance for the last quarter and the growth of each business line and he wants to have an outstanding of outlook of the confidence business and particularly its profitability and he wants to know whether the growth of the margin will continue to decline in the future And we believe the gross profit margin will continue to decline as our live streaming business is expected to continue to grow and account for a larger percentage of the total revenues. Our live streaming product has a lower gross margin than our traditional subscription business. But we expect that in the longer term, the overall gross margin will gradually stabilize to a certain level. Thank you.

We believe that the net profit margin will still drop because our live broadcast new business net profit margin is lower than the traditional member business net profit margin. But we also believe that in the near future, there will be a gradually stable trend.

好的,谢谢,我这边没有问题了。 Thank you, one moment for questions. Our next question comes from Zining Song with Accenture, you may proceed. 能听到我吗?你好,我这边的问题是,

My question is mainly about future business development. There are two questions. The first question I would like to ask, because the current member income of your company and the total number of members is relatively stable. I would like to ask if there will be any new breakthroughs in the future?

And the caller asked, he said that subscription business has been relatively stable for the last several quarters and he would like to know if we will have a breakthrough in this business. This is a good question. We hope our products and services as well as the number of subscribers will remain stable at a relatively higher level and continue to improve. We are exploring new potential opportunities and strive to add more convenient, efficient and reliable functions on top of existing subscription service. In addition, we are also exploring additional marketing channels to try to reach a broader user base. Thank you.

This is a very good question. Currently, we hope that our products and services, as well as the number of members, will maintain a relatively stable and high level. At the same time, we will continue to improve our status. We have never stopped trying to research new fields. For example, we are constantly improving the functions of our products, and we are also improving the experience of our users. We hope to bring more convenience, efficiency, and reliable functions to the existing member services. At the same time, we are also exploring more market channels to expand our user base. Thank you for your question. Okay, thank you.

In addition to the members, we also found that Gui's live broadcast business has become a business with a large income ratio, and the growth rate is relatively fast. I would like to ask, what kind of development will the live broadcast business have in the future? Thanks for asking.

And his question is, since our live streaming product has become the fastest growing business and the largest growth driver of QNA, and he would like to know the of this business. And he also wants to know if we can take a transition for Xunli's business model. This is a good question. Since we launched our live streaming business in 2021, we have seen significant growth, and our recent fast-growing operating results met our initial expectations. We are expanding our presence in more countries, find more local talents, and deepen our brand recognition in these new markets. As for whether we will make a transition, we are open to all possibilities in the future, and we will closely monitor the industry development and affect our overseas growth strategies accordingly. We are optimistic that in the future, the seamless growth will be driven by the products and services that have broader user recognition and larger market potential. and rely less on our traditional products and services. And I believe this is an ongoing endeavor, and we look forward to sharing with you our progress in the coming quarters. Thank you.

This is a very good question. Actually, since we launched our live broadcast business in 2021, we have seen a lot of huge growth opportunities. The performance of the recent few weeks of rapid growth The initial expectation is that we will also promote our products in more countries and regions, and expand our local operations team. We will also continue to improve our brand recognition in these new markets. As for whether to transform, we have an open attitude towards all possibilities in the future. We will also pay close attention to the development of the industry and actively adjust our international development strategy. We are also very optimistic that in the future, the growth of Shunlei will be driven by a higher user recognition rate, a greater market potential for products and services, rather than relying on our traditional products and services. I believe this is a transition in progress. We look forward to sharing our progress with you in the next few seasons. Thank you.

Okay, I have no more questions. Thank you.

Thank you. One moment for questions. Our next question comes from Gordios Katsarios with Royalston Holdings.

Hi. Thank you for taking my call. The share repurchase program, you have about 4 million shares repurchased. I mean, not shares and value. But that doesn't seem to be reflected in the Unless I'm reading something wrong, and the total number of shares issued and outstanding, can you share some light on exactly how that's calculated or why the total share outstanding are not much lower?

Mostly the

I don't know exactly why the number is not what you saw. First, this number is the accumulated number, the dollar amount since we started the program. And secondly, so far it's been done according to a 10B5-1 program. And because it's going on based on a, you know, predetermined formula by our brokerage halls. And we really don't have control of it. But that said, when the window opens, you know, the trading window opens, we may look at all options. But if you need to know the specific description, if you see it, we may discuss it off the line because I need to look at the numbers and know exactly what you meant. Thank you.

Okay. I have a second question if you may. Most of your income is in other income. Is this like account receivables that you had written off years ago and you're putting them back on the books? Is that what it is, if I understand correctly? And second, Do you anticipate this other income to continue as in the last two quarters?

The other income basically, the two major items in other income section, we have the some income from our bank deposits. We also have some income, sometimes lost due to the exchanges gain or losses. And for the last quarter, we also had some, as you mentioned, reversal of some of the account payable, which later we deemed it's not needed. And the second, we really don't provide any guidance on the net income for the coming quarters. But based on our progress so far, and particularly the performance of the last three quarters, and based on also our revenue guidance, we feel optimistic that for the full year, we are going to have net profits. Thank you.

Thank you. And as a reminder, to ask a question, you will need to press star 1 1 on your telephone. Our next question comes from Sarah Jiang with Private Investor. You may proceed.

Hello. First of all, congratulations. The company has achieved a very good performance. I have a few questions for you. The first question is about our blockchain business. Then, please ask about our current investment in the blockchain and NFT business. What is the current progress and what is the plan for the future?

Thank you. She has a question regarding our blockchain, particularly our digital collectible assets business. and he wants to know our plan for the future and for this business and we think this is a still a new and emerging industry and in real cases the development of the of a new industry will be on the event for regarding you know the our products you know our blockchain business and we basically experienced the same, you know, the experience some of the other companies have experienced. And we are still operating the enterprise digital collaborative search platform, and also actively cooperate with creative and cultural organizations, museums, and IP owners. At the same time, we are exploring more opportunities for cooperation. And so far, our investment in blockchain business is very limited. And it accounts for an insignificant part of our portfolio. And we treat it as a real option and may adjust our strategy in the future based on the development of the industry. And as for the outlook of the world industry, I believe that different people or different companies may have different opinions. And even for an industry giant like Facebook, we see it will need trials and make adjustments to its strategies. But again, we think it's a nascent industry and full of opportunities and challenges as well. Thank you.

Thank you very much for your question. We think this industry is very new. When any new industry is developing, at the beginning, there will still be some setbacks. As for new products and technologies, each company has its own views and development. At present, our digital product platform is actively cooperating with some creative cultural and creative platform, history, literature, and our museum, as well as the company. At the same time, we are also exploring Thank you for your answer. My second question is,

And he asked, basically, we discussed before that we want to control our cost. And he would like to know the progress so far in this regard.

And this is a good question. Basically, the overall cost remains relatively stable. And it's up slightly because we also grow our business. You see, we have exploring additional products and also entering into a diverse geographic market, which all require capital investment and expenses. So we want to strike a balance between growth and preserving capital. And so far, our strategy is try to grow our business with a reasonable capex or expenses. We want to maintain a strong balance sheet. At the same time, try to grow our business. Thanks for your question.

That's a very good question. At the moment, our overall cost is very stable. We can see that we are developing our traditional business and also developing our new business overseas. so there will be more costs and expenses. We also want to balance our cash flow, but we also hope to have more development in our business. We also hope to maintain a very strong financial balance. Thank you for your question.

Thank you very much for your answer. And then my next question is, in fact, there was also a discussion on the press conference about the issue of distribution of shares. And then I would like to ask if the company has any progress in this regard. And then we have a lot of cash in the balance sheet. So I would like to ask how the company is currently planning to use a cash in the account.

It's a good question, you know, there are different ways of using cash. Basically, she asks whether we, you know, how we are going to use the cash we have, and whether we are going to distribute any dividends. And there are different ways of using the cash, and for instance, we can distribute dividends. We can buy stocks, and we can also use cash expand our market. And so far, we have chosen to reinvest the cash into our companies. And for a couple reasons. First, we still feel we have very good growth opportunities. And if we go beyond our existing business, we see there are quite other opportunities, a lot of opportunities out there. And so far, our initial exploration has been successful, and so we feel we can get higher returns for our investment than distribution cash. Second reason we do it is there are some practical restrictions if we're distributing cash. For instance, we might have to pay taxes. When we distribute, we try to, the image sent the money overseas and on the company level and also some investors may pay taxes on the money they receive. So it may not be a a better decision for the time being, particularly when we have growth opportunities. Can you translate? Okay. Our cash is used in many places.

For example, we have been repurchasing stocks and expanding our overseas markets. Now we mainly use our cash to reinvest in our company's business. Because we think there are still a lot of opportunities for growth. And we think that we are now exploring some areas that have made some good progress. We also think that these investments will have a higher return. At the same time, there is another point that is worth mentioning, which is that if we are to send it to the west, there will be a lot of problems with funding. For example, tax problems, or investors will That said, paying dividends could be an option in the future, but for the time being, we feel we can use the cash for more productive purposes. Thank you. Thank you. Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Eric Zhao for any further remarks.

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

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