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Edited Transcript of XNET.GSB earnings conference call or presentation 14-Aug-19 12:00pm GMT

Q2 2019 Xunlei Ltd Earnings Call

Shenzen Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Xunlei Ltd earnings conference call or presentation Wednesday, August 14, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charlene Lu

Xunlei Limited - IR Manager

* Lei Chen

Xunlei Limited - CEO & Director

* Zhou Naijiang

Xunlei Limited - CFO

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Presentation

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Operator [1]

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Good morning. Thank you for standing by for Xunlei's Second Quarter 2019 Earnings Conference Call. (Operator Instructions) I'll now turn the call over to your host today, our IR manager, Ms. Charlene Lu. Please go ahead.

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Charlene Lu, Xunlei Limited - IR Manager [2]

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Thank you, Annie. Good morning and good evening, and thank you all for joining us today. Welcome to Xunlei's Second Quarter of 2019 Earnings Conference Call.

I'm Charlene Lu, Investor Relations Manager at Xunlei. With me today are Mr. Lei Chen our CEO; and Mr. Eric Zhou, our CFO. We will be happy to take your questions after our presentation. (Operator Instructions)

Today's conference call is being recorded, and a replay of the call will be available on our IR website afterwards. Our earnings press release was distributed earlier today and is now also available on our IR website.

Before we get started, please note that the discussions 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 the management's current expectations under current market conditions and are subject to the risks and uncertainties that are difficult to predict, which can cause actual results to differ materially from those made in the forward-looking statements. Please refer to our SEC filings for more detailed descriptions of the risk factors that may affect our results. We do not assume any obligation to update any forward-looking statements except as required under applicable laws. During this call, we will refer to 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.

With that, let me hand over to our CEO, Mr. Lei Chen, for prepared remarks.

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Lei Chen, Xunlei Limited - CEO & Director [3]

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Good morning and good evening, everyone. Thank you all for joining us today. Let me start with our recent corporate developments and the financial highlights of the second quarter of 2019. Then Eric will provide more details on the financial results and take you through the guidance for the third quarter of 2019.

Our total revenue was approximately USD 47.8 million this quarter, which exceeded the top end of our earnings guidance as a result of revenue growth from our cloud computing and other Internet value-added services. Revenues from cloud computing and other Internet value-added services combined were $22.5 million, representing an increase of 40.6% from the previous quarter. We are delighted to see organic growth in both demand for our shared cloud computing resources and our enterprise client base [bringing in] new clients such as Baidu, NetEase Games and Qutoutiao.

During the second quarter, we made an equity investment in an emerging IT products and services provider and expanded our cloud computing network capacities through aggregating idle computing resources from business-class networking devices for our shared cloud computing business. We believe that the increased demand for our shared cloud computing resources indicates a broad appreciation of our products and services and will drive our financial performance in the future.

We are deeply committed to our strategic initiatives for business development and transformation and will continue to advance our mission to empower individuals through technical -- technological innovation and development of a shared cloud computing and blockchain-based ecosystem. We are optimistic about our long-term growth prospect as we are backed by our strong technology capabilities and portfolio of products and services offerings.

Now I'll briefly highlight our momentum and innovation across our businesses. We believe shared cloud computing will be an important market force that cannot be ignored and that will be a key driver for our long-term growth. In line with the previous quarters, the demand for our cloud computing services remained strong driven by our success in steadily growing our enterprise client base. This is reflected in the continued growth of our StellarCloud's IaaS sales over the last several quarters.

In this quarter, we won new clients such as Baidu, a leading Chinese language Internet search provider; NetEase Games, a leading provider of self-developed PC-client and mobile games to worldwide users; and Qutoutiao, a Chinese mobile content aggregator, contributing to our cloud computing revenue growth in the second quarter.

To ensure sufficient shared cloud computing resources for our growing client base, we are constantly working to expand the scale of our network capacity through product innovation and external cooperation. Shared uplink capacities are valuable resources that we target to commercialize and utilize through technological innovation. In addition, with the rapid development of 5G technology, we expect more intelligent devices with higher computing resources to be developed. These devices may be the potential cloud computing nodes for our shared cloud computing network.

In essence, we are creating a shared computing network by encouraging millions of participants to share their idle computing resources. With this shared cloud computing network, we provide high-quality, cost-effective cloud services for corporate clients. StellarCloud, an important part of our shared computing and blockchain ecosystem under development, provides cloud computing services, including edge computing, functional computing and shared CDN solutions to enterprises at a much lower cost than the industry average.

Early in this year, we launched a new product in our StellarCloud platform that improves the connectivity of IoT devices under complex network conditions. Our advanced technologies enable StellarCloud to provide its enterprise users with efficient and cost-effective access to powerful cloud computing solutions and can help these companies in their transition to cloud computing, including content delivery, live streaming, data storage and artificial intelligence.

As more companies go digital, we anticipate significant growth in the IoT space and other related industries, which will drive up demand for edge computing and can lead to a variety of applications. Again, we believe our shared cloud computing model and advanced technology will redefine cloud computing and bring more possibilities to the industry's future developments.

We believe that not only are we record-breaking in shared cloud computing, but we are also making progress at improving our blockchain infrastructure for daily use. Last year, we launched ThunderChain as part of our strategy in building a blockchain-powered shared cloud computing ecosystem. We are dedicated to exploring practical adoptions of blockchain in a number of industries and sectors and in providing tools, frameworks and guidelines for blockchain development.

We hope ThunderChain can become a solution to blockchain's scalability dilemma with its ability to concurrently process up to millions of transactions per second. We are constantly improving the performance of ThunderChain and have released the source code of the web assembly virtual machine module of ThunderChain with accompanying protocols and documentations for application developers to experiment and develop large-scale and practical blockchain applications.

So far, we have partnered with companies in different industries to develop blockchain applications with real-world uses. We already assisted in developing dozens of blockchain projects with our high-performance blockchain service. Our first-hand industry insight and hands-on experiences also contributed to a number of blockchain projects with domestic and foreign institutions.

For instance, domestically, we cooperated with the Copyright Protection Center of China to support the operations of their digital copyright identifier system, which can help the CPCC's copyright authorization and transaction system to become more efficient. We also collaborated with Guangdong South New Media Co., Ltd. to provide technical solutions in digital media copyright protection.

Overseas, we recently won a Thailand academic blockchain project to build a blockchain infrastructure for the university's affiliated health care institutions to facilitate accurate and efficient medical data and information sharing while ensuring patient privacy. Ultimately, patients and health care providers with proper authorization will be able to access immutable clinical records to streamline diagnostic processes and improve treatment efficiency.

In mid-June, we announced a joint laboratory blockchain technology with Hong Kong University of Science and Technology, a world-leading research institution. Leveraging HKUST's research capabilities and our industry experience, we expect to carry out more blockchain development initiatives. As we accumulate extensive blockchain-related experience in both academic and industrial practice, we have applied for additional blockchain patents based on our recent blockchain initiatives accordingly.

Our live streaming business rebounded this quarter and achieved good quarterly revenue growth. It's mainly due to higher user numbers than the previous quarter and the better marketing activities held during this quarter. Our live streaming platform, Xunlei Live, provides both video and audio-based interactive entertainment experiences to our users.

Live streamers and viewers engage and interact through bullet chatting, real-time commenting, gifting and so forth. We intend to further expand our live streaming community in terms of the numbers of active live streamers and viewers and create an engaged, interactive and immersive community for our valuable users.

Now returning to our traditional business. Revenues from subscriptions were USD 21.4 million in second quarter, up 0.9% from the previous quarter. Our cloud acceleration subscription services began in March 2009. We earn a time-based subscription fee by providing our users with exclusive services such as access to high-speed online transmission, premium acceleration or access privileges.

Over the years, revenue from membership subscription has been a stable source of cash flow for us in our pursuit of growth and innovation. Our subscriber base was 4.3 million as of June 30, 2019, down from 4.57 million as of March 31, 2019. The average revenue per subscriber for the second quarter of 2019 was RMB 33.9, up from RMB 31.1 as of March 31, 2019.

Mobile Xunlei, a mobile application that allows users to search, download and consume digital media content on their mobile devices, supplements our subscription business. Many of our mobile application users also became users of our PC-based Xunlei Accelerator and subscribed to our membership services afterwards. We aim to deliver an efficient, smart and safe Internet experience while continuously upgrading our technological advantages and improving our experience.

Revenues generated from online advertising were USD 3.9 million in the second quarter of 2019, down 5.4% from the previous quarter mainly due to continued softness in our concentrated gaming sector advertising clients as well as a backdrop of macroeconomic uncertainties. We are trying to diversify our sources of our online advertising revenues to mitigate the impact of declining demand for game advertisers.

In closing, I'd like to reiterate that we are dedicated to shared cloud computing and blockchain technology. The innovative shared cloud computing and blockchain-based ecosystem we are developing for the next wave of technological breakthrough is key to our mission of empowering individuals through technological innovation. We expect significant growth opportunities in both fields: our shared cloud computing services with the emergence of Internet of Things, AR, AI and big data; as well as our high-performance blockchain technology as the market matures.

We believe our business is dynamic and full of opportunities. With a solid customer base and our strong R&D capabilities, we believe we are well positioned for growth and creating long-term shareholder value. At Xunlei, we strive to build a blockchain-enabled shared cloud computing platform and become a driving force of technological innovation.

With that, I'll now turn the call over to Eric to review the financial results and the guidance for third quarter 2019. Eric, please?

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Zhou Naijiang, Xunlei Limited - CFO [4]

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Thank you, Lei. Hello, everyone, and thanks again for joining Xunlei's second quarter of 2019 conference call. And now I'd like to go through the details of our financial results.

Total revenues were $47.8 million, up 15.7% from the previous quarter. Revenues from cloud computing and other IVAS combined to $22.5 million, representing an increase of 40.6% on a sequential basis. This increase was mainly due to higher demand for our cloud computing services by enterprise customers as well as increase in our active live streaming user members and enhanced live streaming marketing activities held during the quarter.

Revenues from subscribers were $21.4 million, up 0.9% from the previous quarter. The number of subscribers was 4.3 million as of June 30, 2019, compared with 4.57 million as of March 31, 2019. And the average revenue per subscriber was RMB 33.9 compared with RMB 33.1 in the previous quarter. Revenues from online advertising were $3.9 million, down 5.4% from the previous quarter.

Cost of revenue was $25.3 million, representing 52.9% of our total revenues. Bandwidth costs in the second quarter of 2019 were $12.7 million, representing 26.6% of our total revenues compared with $10.8 million or 26% of the total revenues in the previous quarter. The remaining cost of revenues are mainly made up of live streaming revenue-sharing costs and cloud computing costs.

Gross profit for the second quarter was $22.3 million, up 5.5% from the first quarter driven by the improved cloud computing and live streaming business. Gross margin was 46.7% in the second quarter compared with 51.4% in Q1. The decrease in gross margin was mainly due to the lower margin associated with revenues from a seasonal live streaming campaign as well as the rapid expansion of our cloud computing network capacity.

Research and development expenses for the second quarter of 2019 were $17.8 million, representing 37.3% of our total revenues, compared with $18.8 million or 45.6% of our total revenues in the previous quarter. The decrease was mainly due to employee compensation cost savings.

Sales and marketing expenses for the second quarter of 2019 were $6.8 million, representing 14.3% of our total revenues, down from $7.6 million or 18.4% of our total revenues in the previous quarter. The drop was mainly due to less onetime marketing expenses incurred this quarter.

General and administrative expenses for the second quarter of 2019 were $10.2 million, representing 21.4% of our total revenues, compared with $9.4 million or 22.6% of our total revenues in the previous quarter. Impairment of assets, net, for the second quarter of 2019 was a credit of $0.7 million, representing a net recovery of previously impaired assets, compared with a credit of $0.9 million in the previous quarter.

Operating loss for the second quarter was $11.8 million compared with an operating loss of $13.7 million in the first quarter. The decrease was mainly due to increased revenues from cloud computing sales and live streaming income and less operating expenses incurred during the quarter.

Net loss was approximately $2 million in the second quarter of 2019 compared with a net loss of $8.6 million in the previous quarter. Non-GAAP net loss was $0.7 million in Q2 compared with non-GAAP net loss of $7.2 million in Q1. The decreased net loss and non-GAAP net loss were primarily due to an approximately $6.7 million gain on disposal of LinkToken operations and its related assets and liabilities.

Diluted loss per ADS in the second quarter of 2019 was $0.03 compared with a diluted loss per ADS of $0.13 in the previous quarter. As of June 30, 2019, the company had cash, cash equivalents and short-term investments of $284.8 million, and the amount per ADS was $4.20.

And finally, I'd like to turn to our guidance for the third quarter of 2019. We expect total revenues to be between $45 million and $51 million for the next quarter. The midpoint of the range represents a quarter-over-quarter increase of about 0.4%.

With that, we conclude our prepared remarks today, and I will now turn the call over to the operator for your questions. Operator, we will now take the questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from the line of [Steve Chan] of Stellar Partners.

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Unidentified Analyst, [2]

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My first question is regarding your onetime gain. So you got approximately $6.7 million on product gains. Is this a cash transaction?

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Zhou Naijiang, Xunlei Limited - CFO [3]

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It consists of both cash and noncash gains. Approximately about RMB 20 million for the resulting cash proceeds, and the rest was due to cancellation of future liabilities. Thank you.

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Unidentified Analyst, [4]

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Okay. So my second question is regarding your recent updates, overseas blockchain project in Thailand. So what's the significance of this project?

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Lei Chen, Xunlei Limited - CEO & Director [5]

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About the project in Thailand, the project is designed to facilitate accurate and efficient medical data and information sharing while ensuring patient privacy, so the patients and authorized health care providers will be able to access immutable clinical records to streamline diagnostic processes and improve treatment efficiency.

The project will create a generic data access layer for the databases of these medical facilities to support database-independent access of patient data and break down the walls between different facilities to enable information sharing and interconnection. Health care providers in remote areas will be able to obtain patient data from higher level of hospitals and to provide accurate analysis of the patient's conditions by leveraging equal access to information.

Blockchain as a distributed and traceable system will also ensure that patient records not to be tampered with. In the event of a medical incident, this provides a credible chain of custody. In addition, when a patient record is being requested, the patient may authorize access using ThunderChain's privacy protection technology to ensure that patient data is made available only to the authorized health care providers, thus fully protecting data security.

We believe this project may provide references for enhancing interconnection between health information systems in China as well and improving the quality of medical services for there are similar issues facing hospitals in China, especially in remote areas with limited resources. So that's the overview of the project. Thank you again for the question.

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Operator [6]

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No question as of this time. (Operator Instructions) No questions as of this time. Please continue.

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Lei Chen, Xunlei Limited - CEO & Director [7]

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All right. That's all for today. Thank you again for your kind attention. Please contact us if you have any questions, and have a good day. Operator?

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Operator [8]

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Thank you. Ladies and gentlemen, that does conclude the conference for today, and thank you for participating. You may now all disconnect.