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Edited Transcript of XNET.GSB earnings conference call or presentation 9-Mar-17 1:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Xunlei Ltd Earnings Call

Shenzen Mar 11, 2017 (Thomson StreetEvents) -- Edited Transcript of Xunlei Ltd earnings conference call or presentation Thursday, March 9, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dani Zhung

Xunlei Limited - IR

* Sean Zou

Xunlei Limited - Chairman and CEO

* Tom Wu

Xunlei Limited - CFO

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Presentation

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Operator [1]

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Good morning, and thank you for standing by for Xunlei's Fourth Quarter 2016 Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded today.

I would now like to turn the call over to your host today, Ms. Dani, IR manager of Xunlei. Thank you. Please go ahead.

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Dani Zhung, Xunlei Limited - IR [2]

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Thank you. Good morning, and good evening. Welcome to Xunlei's Fourth Quarter 2016 Earnings Call. I am [Dani Zhung], Investor Relations manager at Xunlei. With me today on the call today are Mr. Sean Zou, our Chairman and CEO; and Mr. Tom Wu, our CFO. Today's conference call is being broadcasted and a replay of the call will be available on our IR website following the call. Our earnings release was distributed yesterday, and it is now available on the IR website as well as newswire service.

Before I get started, please note 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. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Please refer to our SEC filings for a more detailed description of the risk factor that may affect our results. We do not assume any obligations to update any forward-looking statements, except as required under applicable law.

During this call, we will be referring to both GAAP and non-GAAP financial measures and that the non-GAAP measures are reconciled to the most recent directly comparable to the GAAP measures in this table attached to our earnings release, which can be found again on our IR website. Please note that all numbers are in U.S. dollars unless otherwise stated.

I will now turn the call over to Sean. Sean, please.

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Sean Zou, Xunlei Limited - Chairman and CEO [3]

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Thank you, Dani. Good morning, and good evening, everyone. Thanks for joining us today for our earnings call for the fourth quarter of 2016. Let me start by commenting on our top line.

Our total revenues for this quarter were $39.5 million, which represented a 12.3% increase on a year-over-year basis. Progress in key segments of mobile advertising, cloud computing and subscription contributed to this growth. Subscription business grew by 9.5%. Mobile advertising grew by 185%. And the revenue for cloud computing grew by 80.4% on a year-over-year basis. Tom, our CFO, will provide more details on our financial results in his section.

Given this is the first earnings call for this year, I would like to take this opportunity for a quick review of last year, and then more importantly, key strategies and outlook for Xunlei in the coming new year 2017. For the full year of 2016, we reported total revenues of $157 million, representing a 20.7% increase from the same period in 2015. With this growth, we achieved a number of strategic initiatives.

First, we made progress on our cloud computing business. We successfully extended bandwidth sales to the live video industry, which is one of the promising, growing Internet usages in China. Second, we further accelerated the transition to mobile Internet by increasing active users and enriching product diversity. And last, our subscription business grew in terms of revenues. We have been very focused on execution and the management of this product.

For 2017, our strategies will continue to focus on the key initiatives. For cloud computing, we need to further improve our technology and the scale in terms of the revenue size, customers' mix and segment diversity. Live videos should remain a core application of our focus. But we obviously need to be aware of other applications emerging in the marketplace and the relevance of our cloud computing products in these new areas. Second, to continue to develop and improve our mobile applications and user interface. Last but not least, to continue to focus on execution and the customer care of our traditional business, which is something we have done reasonably well in the past year.

Cloud computing. Now let's start with our cloud computing business, which is powered by crowdsourcing technology, utilizing existing idle capacity, focusing primarily on streaming sector, including live videos or video on demand, and then possibly short videos in 2017. A quick review of the genesis of this business.

Content delivery and acceleration have always been a core competence for Xunlei from the very beginning. While in the past, the technology for such content delivery and acceleration was used almost exclusively for Xunlei's own usage, it became clear to us that we would monetize this technology to other business platforms with similar needs. Although this transition to serving other businesses does mean that Xunlei is no longer a pure 2C business, we think that it is a natural extension of our technological core competence, and we do have a differentiation in providing that technology to other business customers.

In the fourth quarter 2016, revenues from our cloud computing business increased 80.4% compared to the corresponding period. As mentioned earlier, the live video segment was particularly important during the overall sale of the bandwidth. We have had particular success with Panda TV, which is one of the thought leaders in the live video business in China. Total number of customers for cloud computing is also increasing. As mentioned earlier, we will focus on increasing both broader customer mix as well as vertical applications, such as live videos. Short videos is also fast emerging consumer application in China, but we're still in early stage of examining our technology architecture and our relevance in this space.

In 2017, our key strategies for cloud computing will be, first, to continue to advance on our product and the technology front. This is still an evolving technology. There is certainly further optimization and the customization to be rendered. Second, to build out a more efficient cost structure. As the technology improves, we will also need to improve the profitability profile of this business. This business is still in the investment phase, generating loss unfortunately.

The second anchor of 2017 overall strategy has to do with the importance of Xunlei's ongoing technological improvement, especially applied machine learning technology. This is critical in terms of upgrading user experience and potentially driving our user traffic and transforming our revenue mix. Our traditional business is a content delivery platform, focusing on download acceleration services. With technology improvements and our ongoing new mobile services, we are also experimenting in the short video segment, which is a fast-growing business in China. And this business is primarily within our mobile app space and is more related to UGC content as opposed to a downloading tool. Clearly, how to distribute a relevant UGC content more efficiently to users is of critical importance for this business. Starting mid of last year, we started to apply our proprietary technology in these services.

Such technology has made a difference in improving our user experience with more relevant contents. For example, our click-through rate on our mobile app has been meaningfully improvement since applying the technology. We have further invested in more sophisticated technology towards the end of the last year. And that, too, appears to have a positive impact on our user experience.

What we are saying is that, for 2017, one of our key strategies is to further focus on improving our applied machine learning technology, especially in our mobile content distribution business, to increase the size of our user traffic, quality and the revenue potential of this business.

Before I turn over to Tom, let me briefly comment on our subscription business, which still represented about 57% of our total revenues in 2016. Subscription business performed reasonably well last year. Membership revenues last year grew about 9.4% on a year-over-year basis. Even though membership level remaining relatively flat, we were very focused on execution and the customer care. ARPU in the fourth quarter was RMB30.1, which was about up by 19% from the corresponding period of last year, contributing to the growth in subscription revenues.

The number of paying subscribers ended in December was 4.97 million, essentially flat from 5.02 million at end last year. This was fairly traditional, and in some way, a mature business. I think we did a reasonably good job managing both the revenues and its profitability. This business is strategically important for Xunlei, not only because it provides the biggest user traffic, which is increasingly on smartphones, but also provides Xunlei with its biggest source of revenue, profit and cash flow, which allow us to continue to invest in new growth areas. So it is critical for us to continue to manage this business well, and then balance it with new growth initiatives.

With that, I now would turn it to Tom for more details of financial reviews. We look forward to updating you on our progress soon. Tom?

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Tom Wu, Xunlei Limited - CFO [4]

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Thank you, Sean. Good morning, and good evening, everyone. For the fourth quarter, total revenues were $39.5 million, which represented a 12.3% growth on a year-over-year basis. Increases in mobile advertising, cloud computing business and subscription revenues were the major contributors for the year-over-year basis growth.

Subscription revenues were $21.7 million. Number of subscribers was essentially flat from 5.02 million in the corresponding period of last year to 4.97 million, end of this quarter. ARPU, as Sean mentioned, grew to RMB30.1 compared to RMB25.3 in the corresponding period of last year. And Sean mentioned in his section that we were very focused on our execution and customer care. The continuing importance of our mobility products was also a factor.

For our cloud computing business, Project Crystal, revenues of crowdsourced bandwidth video segment was strong, contributing to the rise of revenues. Overall cloud computing revenue was -- grew 7.8% on a sequential basis. We're obviously very focused on executing this business, which as Sean mentioned is still generating losses.

Online advertising revenues, which included mobile advertising revenue in the quarter were $4.6 million. Mobile advertising revenue grew 185.1% compared to the corresponding period of last year, which we started to monetize our mobile traffic in terms of advertising sales in the fourth quarter of 2015. Traffic for this particular mobile app peaked at around about 10 million DAU, daily active user, last year.

Cost of revenues was $20.2 million compared to $21.1 million in the third quarter of 2016. Gross profit margin was 48.2% compared to 48% in the previous quarter. The operating expenses were $29.1 million compared to $30.3 million in the previous quarter. The decrease on a sequential basis was mainly due to decrease in general and administrative costs.

Net loss for continuing operations for the quarter was $7 million compared with an operating loss of $7.6 million in the previous quarter. Non-GAAP net loss from continuing operations was $4.4 million.

Turning to our balance sheet. We continue to have a very strong balance sheet. We ended the quarter with cash, cash equivalent and short-term investments balance of $381.5 million, which is down slightly from $391.4 million of the previous quarter. The decline was partly due to several strategic equity investments we made during the past quarters. Cash value per ADS at the end of the quarter remained at [$5.77] per ADS.

Let me finish by going over our guidance for the next quarter. We expect our revenues to be between $39 million to $41 million for the first quarter of 2017. The midpoint of the range represents a year-over-year increase of about 4%. And we look forward to updating everybody soon.

Operator, we're open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) There are no further questions at this time. Please continue.

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Tom Wu, Xunlei Limited - CFO [2]

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Thank you for joining us this evening. If there are no further questions -- shall we pause a bit more, operator?

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Operator [3]

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Sure. (Operator Instructions)

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Tom Wu, Xunlei Limited - CFO [4]

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If there are no further questions --

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Operator [5]

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There are no further questions as of the moment. Please continue.

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Tom Wu, Xunlei Limited - CFO [6]

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Right. If there are no further questions, thank you for joining us tonight. And we certainly look forward to updating you on our progress in the coming quarters. Thank you, and have a good morning.

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Sean Zou, Xunlei Limited - Chairman and CEO [7]

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Thank you, everyone.

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Operator [8]

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