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.