Xunlei Limited

Welcome, ladies and gentlemen, and thank you for your patience. You've joined Shunle's 2023 Third 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 your host, Investor Relations Manager, Ms. Lu Han Chang. Thank you. Please go ahead.

Thank you, and good morning, everyone, and thank you for joining Shunle's 2023 Third Quarter Earnings Conference Call. On the call with me today are Eric Zhou, Chief Financial Officer, and Li Li, Vice President of Finance. Now, our earnings press release is available on our IR website, which is intended to supplement our prepared remarks during today's call. For today's agenda, I'll first read our prepared opening remarks on behalf of our Chairman and CEO, Mr. Kim Poo Lee, on highlight of our third quarter operations. Then, Mr. Eric Zhou, our CFO, will walk you through the details on the financial results and wrap up with our revenue guidance for the fourth quarter of 2023. After the management's remarks, we'd like to welcome any questions from you in our Q&A session. Today's call is recorded and you can replay the call from our investor relations website at ir.finalight.com. 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 state proper 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 the forward-looking statements. Please refer to our SEC filing for a more detailed description of the risk factors that may affect our results. Surely, assume no obligation to update any forward-looking statement except as required under applicable laws. On this call, we will 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. Now, the following is the preparative statement by Mr. Jim Bordy, Chairman and CEO of Schimley Limited. Good morning, everyone. Thank you all for joining us for our third quarter earnings conference call. Despite the impact of our downside domestic audio live streaming business on our revenue scale, our total revenues reached $84.2 million. and exceeded the upper end of our quarterly guidance, representing a moderate decline of 4.6% compared to the previous year's figure. Meanwhile, we're pleased to report another profitable quarter, marking eight consecutive quarters of profitability. Furthermore, our growth profit margin also improved to 44.6% this quarter from 39.9% in the third quarter last year These results reflected our relentless efforts to mitigate the impact of business adjustments and our unwavering commitment to further enhance our existing operations as other major business lines continue to exhibit year-over-year growth momentum. Now, let me share some insights of our main business operations. In the third quarter, the subscription business yielded solid results with a total revenue of $28.7 million, representing an increase of 15.2% compared to the same quarter last year. Moreover, users also showed increasing willingness to pay for our products, and the number of total subscribers reached a record high level of approximately 5 million in the third quarter. We're pleased with the continuous growth in our average revenue per subscriber. driven by a higher proportion of premium subscribers in the third quarter than in the previous quarter. At the end of September, the proportion of premium subscribers accounted for 63.9% of the total number of subscribers. We believe that each improvement we made to our subscription business validates our exceptional product and service capabilities, enhanced user engagement efforts, and refined user acquisition strategies. I expect that both our user base and our operations will continue to improve as a result of our ongoing product enhancement and user acquisition activities. Our cloud computing business has consistently maintained its competitive advantage in the industry, leveraging our intensive network of edge computing nodes to not only offer higher rewards for household users, but also provide cost-effective solutions for enterprise clients. Despite intensive industry competition, our cloud computing services and hardware devices continue to experience sustained demand among enterprises and customers and generated $29.5 million in revenue with a 1.4% year-over-year increase. Going forward, we will capitalize on our expertise and competitive edge in shared cloud computing while also allocating resources to R&D in order to explore new applications for growth potential and business development. In the third quarter, live streaming and other internet value added services generated $26 million in revenue, representing a 24.1% decline compared to the same period of last year due to downsizing of our domestic audio live streaming operations. Despite that, We remain committed to fostering innovation in products and services to explore new opportunities. To conclude my remarks today, as a pioneering internet company of 20-year history, Xunlei has consistently adhered to our core values in every action taken and decision made. This demonstrates our unwavering commitment to providing secure and cutting-edge products and services to our customers In order to maintain agility amidst the ever-evolving market conditions, we will closely monitor industry trends and customers' demands and adopt corresponding strategies effectively. Our objective is to identify growth opportunities that align with our core competencies and create sustainable value for our shareholders. With that, I will turn the call over to Eric. Eric will cover our financial results in detail and provide a revenue guidance for the fourth quarter of 2023.

Thank you, Heng. Hello, everyone, and thank you again for joining the Q&A's 2023 third quarter earnings conference call. I will review the details of our financial results and provide the revenue guidance for the fourth quarter of 2023. For the third quarter of 2023, total revenues were $84.2 million, representing a decrease of 4.6% year-over-year. The decrease in total revenues was mainly attributable to the decreased revenues generated from our live streaming services as we have downsized our domestic audio live streaming operations since June this year. Revenues from cloud computing were $29.5 million, representing an increase of 1.4% year-over-year. The increase in cloud computing revenues was mainly due to the increased sales of new generation cloud computing hardware devices. Revenues from subscription were $28.7 million representing an increase of 15.2% year-over-year. The increase in subscription revenues was mainly due to higher average revenue per subscriber and an increased number of subscribers as a result of our ongoing efforts on user acquisition and product informant. The number of subscribers was 5.02 million as of September 30, 2023, compared with 4.37 million as of September 30, 2022. The average revenue per subscriber for the third quarter of 2023 was RMB 39.9 compared with RMB 39.1 in the same period of 2022. The high average revenue per subscriber was mainly due to the continued increase in the proportion of the users opting for premium membership. Revenues from live streaming and other RBS were $26 million, representing a decrease of 24.1% year-over-year. The decreased live streaming revenues were primarily attributable to the downsizing of our domestic audio live streaming operations. Meanwhile, other IVS revenues increased in the third quarter of 2023 as compared with the same period of 2022. Our teams are working diligently towards mitigating the impact of the downsizing of our domestic audio live streaming business on our overall revenue through exploration of new opportunities and the continued optimization of our existing businesses. Cost of revenues were $46.4 million, representing 55.1% of our total revenues, compared with $52.8 million, or 59.9% of the total revenues in the same period of 2022. The decreased cost of revenues were mainly attributable to the decrease in revenue sharing costs of live streaming, which was consistent with the decline in live streaming revenues. Bandwidth costs, as included in the cost of revenues, were $28.1 million, representing 33.4% of our total revenues, compared with $25.3 million, or 28.6% of the total revenues in a thin period of 2022. The increase in bandwidth costs was mainly due to the increased bandwidth usage driven by the development of subscription and cloud computing businesses. The remaining costs of revenues mainly consisted of costs related to revenue sharing for live streaming business, payment of handling fees, and cloud computing hardware devices. Gross profit for the third quarter of 2023 was $37.5 million, representing a 6.6% increase from the same period of 2022. Gross profit margin was 44.6% in the third quarter of 2023, compared with 39.9% in the same period of 2022. The increase in gross profit and gross profit margin was mainly driven by an increased proportion of subscription revenues, which has high gross profit margin, as well as decreased proportion of downsized domestic audio live streaming revenues, which has lower gross profit margin. Research and development expenses for the third quarter of 2023 were $19.5 million representing 23.1% of our total revenues, compared with $16.2 million or 18.3% of our total revenues in the same period of 2022. The increase was primarily due to the increased labor costs incurred during this quarter. Sales and marketing expenses for the third quarter of 2023 were $9.5 million representing 11.3% of our total revenues, compared with $5.8 million, or 6.6% of our total revenues in the same period of 2022. The increase was primarily due to the increased marketing activities carried out for user acquisition. General and administrative expenses for the third quarter of 2023 were $11.1 million, representing 13.2% of our total revenues, compared with $8.2 million, or 9.3% of our total revenues in the same period of 2022. The increase was primarily due to the increase in one-time impairment of servers and network equipment, depreciation of Xunli headquarters building, and shell-based competition incurred during this quarter. Operating loss was $2.5 million, compared with an operating income of $5.1 million in the same period of 2022. The decrease was primarily due to the increased operating expenses incurred in the third quarter of 2023, as compared with the same period of 2022. Other income was $7.3 million, compared with $4.7 million in the same period of 2022. The increase was mainly due to the reversal of certain payables related to previously exposed business with low payment probability, partially offset by the decrease in net foreign exchange gains as compared with the same period of 2022. Net income was $4.4 million compared with $8.3 million in the same period of 2022. Non-GAAP net income was $5.5 million in the third quarter of 2023 compared with non-GAAP net income of $9 million in the same period of 2022. The decrease in net income and the non-debt net income was primarily attributable to the increased marketing expenses, labor costs, and depreciation expenses, partly offset by the reversal of certain payables with low payment probability as discussed above. Diluted earnings per area in the third quarter of 2023 was approximately $0.07, as compared with $0.12 in the same period of 2022. As of September 30, 2023, the company had cash, cash equivalents, and short-term investments of $264.7 million, compared with $258.5 million as of June 30, 2023. The increase in cash, cash equivalents, and short-term investments was mainly due to net operating cash inflow and net proceeds from bank borrowings, but partially offset by spending on share buybacks during this quarter. In June 2023, Twinlink announced that its board of directors had authorized the purchase of up to 20 million of the shares over the next 12 months. As of September 30th, 2023, the company had spent approximately $2.6 million on share buybacks under the share repurchase program. Turning to our revenue guidance, for the fourth quarter of 2023, Qinlei estimates total revenues to be between $70 million and $75 million, and the midpoint of the range represents a quarter-over-quarter decrease of approximately 8.6%. The decline is due to the impact of the downsizing of domestic live streaming businesses whereas the operations of our subscription and the cloud computing business are not affected. 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 prepared remarks for the conference call. Operator, we are ready to take questions.