Xunlei Limited

Welcome, ladies and gentlemen, and thank you for your patience. You've joined Shunlei's third quarter 2024 earnings conference call. At this time, all participants are in listen-only mode. Please be advised that today's conference has been recorded. I would now like to turn the call over to the host, Investor Relations Manager, Ms. Luan Tang. Please go ahead.

Good morning, everyone, and thank you for joining Shunlei's Q3 2024 earnings conference call. With me today are Eric Zhou, CFO, and Li Li, Vice President of Finance. Our website has our earnest press release to supplement our prepared remarks during the call. Today's agenda includes a prepared opening remarks from Chairman and CEO, Mr. Jin Buoli, on Q3 operational highlights, followed by CFO Eric Zhou presentation of financial results details and the revenue guidance of Q4 2024 before we open up the floor to your questions in the Q&A session. Please note that this call is recorded and can be replayed on our investor relations website at iot.shinlei.com. 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 our management's current expectations under existing market conditions and 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 SDC filings for a more detailed description of the risk factors that may affect our results. Xunlei assumes no obligation 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. dollar unless otherwise stated. Now, the following is prepared statement by Mr. Jim Wolley, Chairman and CEO of Shinla Limited. Good morning and good evening, everyone. Thank you all for joining us today. In the third quarter of 2024, we achieved continued profitability while total revenues declined 4.9% due to the lingering impact from last year's downsizing of our domestic audio live streaming business and reduced cloud computing sales due to the changing market landscape for our cloud computing business. We're able to partially mitigate the impact by expanding our overseas operations. Moving forward, we intend to continue to invest in overseas projects, including live streaming business, exploring new opportunities, and restructure our overall product mix to develop a more stable and growth-oriented business. Now, I'd like to review the performance of our major business segments for the third quarter of 2024. Let me start with our subscription business. Our subscription business enjoyed continuous growth and generated $33.2 million in revenue, up 15.6% year-over-year. We're very pleased with the progress achieved by our talented product team. Their efforts on product refinement and marketing strategies led to improved user engagement, loyalty, and more premium membership purchases. During the third quarter, premium subscribers accounted for 78% of total paying users, compared to about 60% in the same period last year. Going forward, we will proactively explore synergy within our product ecosystem to pursue sustainable growth. For example, we will seek further collaboration with leading cell phone makers for partnerships to use pre-installed Streamlit products to support their mobile phone browsers to drive meaningful growth and expand our user base. In the third quarter, our cloud computing business faced significant challenges and our revenue declined to $25.3 million, representing a 14.4% year-on-year decrease. We expect the cloud business to continue to face headwinds due to intense market competition and involving regulatory environment. We will evaluate options to stabilize this business and minimize impact of the revenue reduction on our total revenues as well as the bottom line. Revenue from our live streaming and IVAS business reached $21.6 million, representing a quarter-over-quarter increase of 6.7% and a year-over-year decrease of 16.7%. The consistent quarter-over-quarter increase over the last three quarters was due to the growth of our overseas live streaming operations. which partially neutralized the impact of downsizing of our domestic audio live streaming business. Our new product, MACE, is well positioned to tap into both existing markets and new targeted regions. We are incubating a number of products to search a star product with controlled operational risks. This approach allows us to explore different avenues while minimizing potential setbacks. Before I conclude, I want to emphasize our high confidence in Xinlei. Throughout the past decades, our dedication to innovation and market adoption has been a driving force behind our success in an ever-evolving environment. In this fast-paced digital era, where technology advances at an unprecedented rate, we understand the importance of staying ahead of the curve And for this reason, we will continue investing in research and development of initiatives that bring about groundbreaking solutions and products and services. Looking ahead, we are committed to pushing boundaries even further and exploring untapped potential with a relentless determination and ultimately creating value for our shareholders. With that, I will now pass the call over to Eric Eric will give a detailed review of our Q3 financial results and provide revenue guidance for the fourth quarter of 2024.

Thank you, Luhan, and thank you all again for participating in today's conference call to discuss financial results of the third quarter of 2024. In the third quarter, our total revenues were $18.1 million, representing a decrease of 4.9% year-over-year. The decrease in total revenues was mainly attributable to the decrease in our revenues from live streaming and cloud computing business. Revenues from cloud computing were $25.3 million, representing a decrease of 14.4% year-over-year. The decrease in cloud computing revenues was mainly due to the reduced sales of cloud computing services and a decline in sales of cloud computing hardware devices as a result of heightened competition and evolving regulatory environment. Revenues from subscriptions were $33.2 million, representing an increase of 15.6% year-over-year. The increase in subscription revenues was mainly driven by the increase in the number of subscribers. The number of subscribers was 5.51 million as of September 30, 2024. compared with 5.02 million as of September 30th, 2023. The average revenue per subscriber for the third quarter was RMB 48.9, compared with RMB 39.9 in the same period of 2023. The higher average revenue per subscriber was mainly attributable to an increase in the proportion of users who signed up for premium membership services. revenues from live streaming and other IVFs were $21.6 million, representing a decrease of 16.7% year-over-year. The decrease of live streaming and other IVF revenues was mainly due to the downsizing of our domestic audio live streaming operations since June 2023, which was partially offset by the increase in the revenues from our overseas audio live streaming business. Cost of revenues were $39.4 million, representing 49.1% of our total revenues, compared with $46.4 million, or 55.1% of our total revenues in the same period of 2023. The decrease in cost of revenues was mainly attributable to the decrease in bandwidth costs, as well as revenue sharing costs for our live streaming business incurred this quarter. Bandwidth costs, as included in cost of revenues, were $24.8 million, representing 31% of our total revenues, compared with $28.1 million, or 33.4% of our total revenues, in the same period last year. The decrease was primarily due to the decrease in revenues from cloud computing services during the quarter. The remaining cost of revenues mainly consisted of costs related to the revenue sharing from our live streaming business, payment handling charges, and cost of inventory sold. Growth profit for the third quarter of 2024 was $14.5 million, representing an increase of 7.8% year-over-year. Growth profit margin was 15.5% in the third quarter, compared with 44.6% in the same period of 2023. The increase in gross profit was mainly driven by the increased gross profit from our subscription business. The increase in gross profit margin was primarily due to the higher weighting of subscription revenues in our total revenue mix, which has a high gross profit margin. Research and development expenses for the third quarter were $17.7 million, representing 22.1% of our total revenues, compared with $19.5 million, or 23.1% of our total revenues in the same period of 2023. The decrease was primarily due to the decrease in labor costs. Sales and marketing expenses for the third quarter were $11.5 million, representing 14.3% of our total revenues, compared with $9.5 million or 11.3% of our total revenues in the same period of 2023. The increase was primarily due to more marketing expenses incurred for our subscription and overseas audio live streaming businesses. General and administrative expenses for the third quarter were $11.4 million representing 14.2% of our total revenues compared with $11.1 million, or 13.2 percent of our total revenues in the same period of last year. The increase was primarily due to the increase in labor costs, partially offset by the decreasing one-off impairment of servers and network equipment. Operating loss was $0.2 million, compared with an operating loss of $2.5 million in the same period of last year. The decrease in operating loss was primarily attributable to the increase in gross profit of subscription business, partially offset by the increase in market expenses during the quarter. Other income net was $4.8 million, compared with other income net of $7.3 million in the same period of 2023. The decrease was primarily due to less reversal of payables with low payment probability as compared with the same period of 2023 Net income was $4.4 million same as in the third quarter of last year Non-GAAP net income was $4.9 million in the third quarter of 2024 compared with $5.5 million in the same period of 2023 Diluted earnings per AES in the third quarter of 2024 was approximately $0.07, same as in the third quarter of 2023. As of September 30th, 2024, the company has cash, cash equivalents and short-term investments of $272 million, compared with $263.4 million as of June 30th, 2024. The increase was mainly due to the net cash inflows from operating activities, partially offset by the repayment of bank loans and spending on share buybacks. Now turning to our share repurchase program, on June 4, 2024, Xunlei announced that its board of directors had authorized a new plan for the repurchase of up to $20 million of its ADF. over the next 12 months. As of September 30, 2024, the company had spent approximately $1.5 million on share buybacks under the new share repurchase program. During the quarter ended September 30, 2024, the company had repurchased a total of 588 and 25 ADS for a total of about $1 million. And then the share reporting program is ongoing. Finally, for the fourth quarter of 2024, Xunlei estimates total revenues to be between $77 million and $82 million. And the midpoint of the range represents a quarter-over-quarter decrease of approximately 0.7%. This estimate represents management's preliminary view as of today, 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.

Thank you so much, dear participants. As a reminder, if you wish to ask a question, please press star 11 on your telephone keypad and wait for a name to be announced. To withdraw a question, please press star 11 again. Please stand by. We'll compile the Q&A roster. This will take a few moments. Once again, if you wish to ask a question, please press star, one, one. And now we're going to take our first question. And it comes from the line of Yuki Chen from Retail Investor. Your line is open. Please ask a question. Yes.

Okay, first of all, my first question is to ask, congratulations to the company for performing well in the member business. But there is a problem. In the member business, the income of the same rate increase has always been a good thing. But compared to this, it is basically a flat state. So I want to ask the management of the member business, whether it can maintain a growth trend in the future. The course question is in the Congress on maintaining a double-digit year-over-year growth rate in our subscription business.

The question is, can the company sustain its growth trend in the subscription business for future quarters? For the last several quarters, the sequential growth was basically flat. And how can we overcome the bottleneck of reaching 6 million subscribers? Thank you for your question. Our subscription business has generally kept its growth momentum, maintaining a user base between 5 million and 6 million since the beginning of this year. We are encouraged that we observe a continuous year-over-year growth in our active paying users over the past few quarters. The portion of premium subscribers among paying users increased from about 6% in the third quarter of last year to about 78% in the third quarter of this year. And as a result, there was an increase in average revenue per subscriber from approximately 39.9 yuan in the third quarter of last year to about 40.9 yuan this quarter, which indicates I believe a healthy trend for our subscription business. And in the coming days, we intend to further expand our marketing channels, continue to improve user benefits and experience, and conduct more promotional campaigns to acquire new users. And by taking these measures, We hope to achieve breakthroughs in our user base in the future. Thank you.

Thank you for your question. Our membership business has been growing. Since the beginning of this year, we have reached nearly 6 million members. This year, we have maintained the number of members between 5 million and 6 million. In the past few months, the number of effective paid members is still growing. The proportion of paid members increased from 60% in the third quarter of last year to 78% in the third quarter of this year. The revenue of each member increased from 39.9% in the third quarter of last year to 40.9% in the third quarter of this year. The data shows that our business is We believe it is a very healthy and efficient form. Then we will continue to expand our diversified cooperation channels to continue to optimize and increase the rights of our users and improve their experience. At the same time, we will develop more and more market sales activities to acquire new users. We believe our efforts will also make our number of members continue to increase. Thank you for your question.

Okay, I have a second question. Actually, I have been paying attention to China's stock market. And I have noticed that, for example, this year, until the third quarter of 2024, China has also launched a series of policies to stimulate the stock market. And then, correspondingly, we can observe that many Chinese stocks have also received a very obvious improvement. So, I would like to ask today, The question is, I noticed that in the third quarter of this year in the Chinese government,

implemented a series of policies to stimulate the stock market, which resulted in improved performance for many Chinese stocks. Xi would like to know if Xunlei has any strategies in place to enhance its share price and address the undervaluation of its stock situation. Yes, we have also noticed the Chinese government recently introduced a number of market favorable policies aimed at resolving certain domestic economic issues and boosting investors' confidence. We will continue to prioritize business development, further our share buybacks enhance communications with the capital market and actually monitor market and regulatory environment and adopt corresponding strategies as necessary to hopefully ultimately generate value for our shareholders thank you

Thank you for your question.

Excuse me, UK, any further questions? Thank you. Thank you.

Dear participants, as a reminder, if you wish to ask a question, please press star one one on your telephone keypad. Dear participants, as a reminder, if you wish to ask a question, please press star, one, one. Dear speakers, there are no further questions for today. I would now like to hand the conference over to the management team for any closing remarks.

Thank you, Linh, for your time and participation. And if you have any questions, please visit our website at irhungley.com or send us emails to our investor relations. Have a good day. Okay, we conclude today's conference. Thank you.

That does conclude our conference for today. Thank you for participating. Right now, all disconnect. Have a nice day.