Xunlei Limited

welcome ladies and gentlemen and thank you for your patience you've joined shunlei's fourth quarter and fiscal year 2023 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 like to turn the call over to the host investor relations manager miss luhan tang

Thank you, and good morning everyone, and thank you for joining G-WIN 2023's 4th Quarter Earnings Conference Call. On the call with me today are Amber Jo, Chief National Officer, and Lili. Now, our earnings press release is available on our website, which is intended to supplement our prepared remarks during today's call. For today's agenda, I will first read the prepared open remarks on behalf of our chairman and CEO, Mr. Kim Goldie, on the highlight of our first quarter operations. Then, Mr. Eric Zhou, our chief financial officer, will walk you through the details on the financial results and wrap up with our revenue guidance for the first quarter of 2024. After the management's remarks, we'd like to welcome you to any questions. in the Q&A session. Today's call is recorded and you can replay the call from our investor relations website at ir.tunelight.com. Before we get started, I would like to take this opportunity to remind you that 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 on the 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 forward-looking statements. Please refer to our SEC filings for a more detailed description of the risk factors that may affect our results. Treatment assumes no obligations to update any forward-looking statements 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. dollars, unless otherwise stated. Now, the following is a prepared statement by Mr. Jim Bowley, Chairman and CEO of Shima Limited. Good morning, everyone. Thank you all for joining us today. We concluded 2023 with a solid fourth quarter result as our revenue exceeded the upper end of our guidance range, and we sustained profitability for the eighth consecutive quarter. Over the past year, we maintained a strong focus on enhancing our existing products and services, restructured our business operations, and explored new initiatives to seek potential breakthroughs in our business development. Despite more short-term impacts of our business adjustment, we're encouraged by what we have done so far, and I believe that we're on our track to pursue future growth. I look forward to sharing with you our progress in the near future. Let me provide you with some insights into our first quarter operations. As announced in our earnings report release earlier today, Our flagship subscription business achieved a significant milestone with nearly 6 million subscribers at the end of 2023, and over 73% of them opted for a premium subscription, and our subscription revenue for the quarter reached $31.6 million, representing an impressive year-over-year growth of 26.8%. This can be attributed to comprehensive marketing initiatives implemented throughout the quarter of user applications and retention strategies aimed at incentivizing users to stay with us. With a robust subscriber base and continuous efforts to encourage new users to optimize features and multi-specific marketing campaigns, we expect that the positive momentum will continue in the coming days. We're glad to see that despite the intense competition in the industry, our cloud computing business has managed to maintain its competitive edge. In the fourth quarter of 2023, our cloud computing business generated $30.5 million in revenue. reflecting a 4.4% year-over-year decline, primarily due to the reduced revenue from certain mid-year clients. However, we have observed an increase in the sales of our hardware products, namely OES, OEC, and OEA, which may give users more cash rewards with sharing idle bandwidth resources. Meanwhile, Shenzhen Wangxin, a wholly owned subsidiary of Xunlei and operator of our cloud computing business, was ranked number three with a market share of 11.8% in the public edge cloud service market during the first half of 2023. according to the study conducted by International Data Corporation. We maintain optimistic about our market position in the edge cloud computing industry and maintain fully committed to consistently delivering highly scalable, secure, and cost-effective services to our valued clients. Turning to our live streaming and internet value-added services, we generated $15 million in revenue, reflecting a significant decrease of 62.5%. This sharp year-over-year decline was mainly due to our strategic downsizing of our domestic audio live streaming business since June 2023. To make up the lost revenue in the domestic market, we are actively expanding our presence in overseas markets, Additionally, our gaming business is experiencing a rebound in terms of revenue, primarily attributable to the implementation of refined operational strategies that have resulted in a higher revenue sharing model. Furthermore, our advertising business is also benefiting from the growth of our subscription services, which incentivizes more users to engage with advertisements. Although gaming and advertising currently make up a relatively small portion of our product portfolio, we're anticipating future growth opportunity in these areas. Going forward, we will be facing both challenges and opportunities in the evolving industry. By leveraging our solid cash reserves and strong balance sheet, We will continue to execute a disciplined approach, optimize capital allocation efficiency, and prioritize investment in key business areas that may bring us best value. We remain committed to creating sustainable and long-term value for our shareholders. With that, our turn is called over to Eric. Eric will cover our financial results in detail and provide our revenue guidance for the first quarter of 2024.

Thank you, Rohan. Hello everyone, and thank you again for joining the Chinese 2023 Fourth Quarter and Fiscal Year Earnings Conference Call. I will review the details of financial results and provide a revenue guidance for the first quarter of 2024. In the fourth quarter, the total revenues were $77.1 million, representing a decrease of 20.4% year-over-year. The decrease in total revenues was mainly attributable to decreased revenues generated from our live streaming business as we've downsized some of our domestic live streaming operations since June 2023 Revenues from cloud computing were $30.5 million, representing a decrease of 4.4% year-over-year The decrease in cloud computing revenues was mainly due to the decreased revenues from certain of our major customers of cloud computing services Revenues from subscriptions were $31.6 million representing an increase of 26.8% year-over-year The increase in subscription revenues was mainly due to the increase in the number of subscribers and higher average revenue per subscriber for the quarter The number of subscribers was 5.99 million as of December 31, 2023 compared with 4.99 million as of December 31, 2022 The average revenue per subscriber for the fourth quarter was RMB 36.5, compared with RMB 35.4 in the same period of 2022. The higher average revenue per subscriber was due to the continued increase in the proportion of the users opting for our premium membership. Revenues from live streaming and other IBS were $15 million representing a decrease of 62.5% year-over-year The decrease of live streaming and other IBS revenues was mainly due to the downsizing of our domestic live streaming operations during the year Cost of revenues were $36.8 million representing 47.7% of our total revenues compared with $59 million or 60.9% of the total revenues in the same period of 2022 The decrease in cost of revenues was mainly attributable to decreased revenue sharing costs for our live streaming business, which was consistent with the decrease in live streaming revenues. Bandwidth cost as included in the cost of revenues were $26.4 million representing 34.2% of our total revenues, compared with $26.9 million or 27.7% of the total revenues in the same period of 2022. The remaining costs of revenues mainly consisted of costs related to the revenue sharing costs for live streaming business, payment handling charges, cost of inventory stores, and depreciation of servers and other equipment. Gross profit for the fourth quarter of 2023 was $14.1 million representing an increase of 6.5% year-over-year. Gross profit margin was 51.9% in the fourth quarter, compared with 38.8% in the same period of 2022. The increase in gross profit was mainly driven by the increase in gross profit of subscription business. The increase in gross profit margin was mainly attributable to the increased portion of subscription revenues to total revenues which has a high profit margin as well as decreased portion of large streaming revenues to total revenues which has a relatively lower gross profit margin Research and development expenses for the fourth quarter were $19.5 million representing 25.3% of our total revenues, compared with $19.2 million or 19.8% of our total revenues in the same period of 2022. The increase was primarily due to increased labor costs incurred during the quarter. Sales and marketing expenses for the fourth quarter were $9.3 million representing 12.1% of our total revenues, compared with $8.7 million or 8.9% of our total revenues in the same period of 2022. The increase was primarily due to the increase in customer service costs and more marketing activities held for subscription business for our ongoing efforts on user acquisition partially offset by the decrease in employee bonuses accrued during the quarter G&A expenses for the fourth quarter were $11.6 million, representing 15.1% of the total revenues, compared with $9.8 million, or 10.1% of our total revenues in the same period of 2022. The increase was primarily due to the increase in labor costs and depreciation of Xunlei headquarters building during the quarter partially offset by the decrease in share-based compensation accrued during the quarter Operating loss was $0.7 million compared with an operating income of $0.4 million in the same period of 2022 The decrease in operating income was primarily attributable to the increase in operating expenses during the quarter. Other income was $3.5 million, compared with other income of $.7 million in the same period of 2022. The increase was primarily due to the increase in foreign exchange gains and investment income for short-term investments during the quarter. Net income was $3.7 million compared with $1.6 million in the same period of 2022. Non-GAAP net income was $4.5 million in the fourth quarter of 2023 compared with $3.5 million in the same period of 2022. The increase of net income and non-GAAP income was primarily attributable to the increase in other income partially offset by the decrease in operating income as discussed above. Diluted earnings per ADS in the fourth quarter of 2023 was approximately $0.06 as compared with $0.02 in the same period of 2022. As of December 31, 2023, the company had cash, cash equivalents, and short-term investments of $271.9 million, compared with $264.7 million as of September 30, 2023. The increase in cash, cash equivalents, and short-term investments was mainly due to less cash inflow from operating activities and the release of certain restricted cash. partially offset by repayment of bank loans and spending on share buybacks during the quarter. Now let me share with you our fiscal year 2023 financial results. In 2023, we generated $364.9 million in total revenues, representing an increase of 6.5% on the year-over-year basis. The increase in total revenues was mainly attributable to increased revenues from our subscription and cloud computing businesses Revenues from cloud computing were $123.4 million, representing an increase of 3.2% on a year-over-year basis The increase in cloud computing was mainly attributable to increased sales of our cloud computing hardware devices Revenues from subscription were $119.3 million representing an increase of 18.7% on a year-over-year basis The increase was mainly due to the growing number of subscribers which increased from 4.99 million as of December 31, 2022 to 5.99 million as of December 31, 2023 Revenues from live streaming and other IVS were $122.2 million representing a decrease of 0.2% on the year-over-year basis. The cost of revenues were $200.6 million representing 55% of our total revenues compared with $200.1 million or 58.4% of the total revenues in 2022. Bandwidth cost as major component of cost of revenues were $112.5 million representing 30.8% of the total revenues compared with $104.6 million or 13.5% of the total revenues in the previous year. The increased bandwidth costs were mainly due to the increased demand for subscription and cloud computing services, which was consistent with the increase in subscription and cloud computing revenues. The remaining cost of revenues mainly consisted of the costs related to the revenue-sharing costs for large streaming business, payment handling charges, cost of inventory store, and depreciation of servers and other equipment. Gross profit for the year was $163.1 million, representing an increase of $18.3 million on a year-over-year basis. Gross profit margin was 44.7% compared with 41.3% in the previous year. The increase in gross profit and gross profit margin was mainly driven by the increase in gross profit of subscription business and increased portion of subscription revenue to total revenues which had a high gross profit margin. Research and development expenses for the year were $74.2 million, representing 10.3% of our total revenues, compared with $67.7 million, or 19.8% of our total revenues in the previous year. The decrease was very due to increased labor costs and a lot of increased headcount as compared with previous years.

Sales have dropped from the expected expenses for the annual output of 3.5 million dollars to 11.9% of our total revenues, compared to 34.8 million dollars, or 7.3% of our total revenues, in the previous year.

The increase of the price has been determined by the increase in market expenses. G&E expenses for the year were 46.9 million dollars, representing 12.8% of total revenues, compared to 39.7 million dollars. G&E expenses for the year were 46.9 million dollars, representing 12.8% of total revenues, compared to 39.7 million dollars, or 11.6% of total revenues in the previous year. The increase was primarily due to the increase in shell-based compensation expenses, depreciation of Xunlei headquarters building, and one-off impairment of servers and network equipment incurred during the year. Operating loss was $1.6 million compared with an operating income of $10.1 million in the previous year. The decrease in operating income was primarily attributable to the increase in operating expenses during the year, partially offset by an increase in gross profit or subscription interest as mentioned above. Other income was $16.9 million compared with $13.5 million in the previous year. The increase was primarily due to an increase in investment income and a reversal of certain payables related to a previously exposed business with low payment of probability during the year. Net income was $14.3 million in 2023, compared with net income of $21.3 million in the previous year. Non-GAAP net income was $23.9 million in 2023 compared to $29.5 million in the previous year. The decrease in net income and non-GAAP net income was primarily driven by the decrease in operating income as discussed above. Diluted earnings per ADS in 2023 was approximately $0.22 as compared to $0.32 in the previous year. Now, turning to our share of the purchase program, during 2023, we spent approximately $4.7 million on share buybacks. Let's talk about our earnings guidance. For the first quarter of 2024, Xunlei estimates total revenues to be between $79 million and $84 million, and in the mid-point of the range, presents a quote-over-quote increase of approximately 5.7%. These estimates represent management's preliminary view as of the date of this crisis, which is substantial change, and any change could be material. Now we can quote prepared remarks for the conference call. Operator, we are ready to take questions.

Thank you. If you wish to ask a question, please press star 1 and 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star one and one again. Once again, if you wish to ask a question, please press star one and one on your telephone. There seems to be no questions at this time. We have a question in the queue. Please stand by. We will take our first question. Your first question comes from the line of King Wang from Hailu Asset Management. Please go ahead, your line is open.