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Edited Transcript of XNET.GSB earnings conference call or presentation 12-Mar-20 12:00pm GMT

Q4 2019 Xunlei Ltd Earnings Call

Shenzen Mar 31, 2020 (Thomson StreetEvents) -- Edited Transcript of Xunlei Ltd earnings conference call or presentation Thursday, March 12, 2020 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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Conference Call Participants

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* Trista Yang;Noah Hong Kong;Business Development Manager

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for your patience. You've joined Xunlei's Fourth Quarter and Full Year 2019 Earnings Results Conference Call. (Operator Instructions)

I'd now like to turn the call over to your host, Investor Relations Manager, Ms. Charlene Lu.

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Charlene Lu, Xunlei Limited - IR Manager [2]

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Thank you, Amber. Good morning and good evening, and thank you all for joining us today. We welcome you to this conference call to discuss Xunlei Fourth Quarter's and Full Year of 2019's Earnings. For our agenda today, Mr. Lei Chen, our CEO, will provide a brief overview of the key strategy and financial performance. After which, Mr. Eric Zhou, our CFO, will provide additional details on the financial conditions, wrapping up with our financial outlook for the next quarter.

We will be happy to take your questions after our management's remarks. (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 management's current expectations under current market conditions and are subject to the 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. We do not undertake any duty 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 the non-GAAP to the comparable GAAP measures can be found in our earnings press release. Please note that all numbers are in U.S. dollars, unless otherwise stated.

And with that, let me pass 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. Welcome all of you to our conference call today to discuss our fourth quarter and full year 2019 earnings. I'm delighted to share with you the company's recent achievements and outlook.

The results for this quarter show a general improvement compared to the previous quarter's results. In particular, one of the positive trends in this quarter was the consecutive revenue growth of our StellarCloud, cloud computing and the related products and services. This growth, along with improved live streaming revenues from enhanced seasonal marketing activities, led to an approximately 18% sequential quarter-over-quarter revenue growth in our cloud computing and other IVAS activities. When compared with the fourth quarter of 2018, the quarterly revenue in this segment grew about 36%. On annual basis, revenue from cloud computing and IVAS declined 31.3% mainly due to reduced OneThing Cloud hardware and the live streaming revenues partial offset by a strong growth of our StellarCloud IaaS sales. With strong operational execution, our cloud accelerating business continued its profitability and provided us with stable cash flow.

Revenues from subscriptions in the fourth quarter of 2019 were $19.8 million, which is a 2.9% increase from the previous quarter. Our subscriber base as of December 31, 2019, increased from 3.8 million to 4.0 million compared to the previous quarter. In fiscal year 2019, our membership subscription business provided us with stable cash flows and accounted for approximately 45% of our total revenues.

Revenues from online advertising did not change much this quarter, which were $3.9 million, representing an increase of 3.9% from the previous quarter. However, for fiscal 2019, this segment was adversely affected by reduced demand from the mobile gaming industry and experienced a decline in revenue of 43.7% on a year-over-year basis. We are seeking ways to diversify our sources for online advertising revenues and are adopting various measures to mitigate the impact from the gaming sector.

The overall revenue performance in the fourth quarter was within our expectations, and the performance by product segment was consistent with our corporate development strategies. Total revenues were $48.3 million, representing an increase of 10.2% from the previous quarter. Xunlei has lately embarked our transition to shared cloud computing and blockchain to meet individual and enterprise users' emerging needs while investing in the future and have developed competitive strengths in areas such as cloud acceleration, shared cloud computing and blockchain technologies.

With respect of the year of 2019, I'd like to highlight a few accomplishments. First and foremost, at the end of the year, our monthly sold bandwidth was more than doubled compared with the previous year. In fiscal 2019, we furthered our efforts on expanding our nationwide network of shared cloud computing nodes through third-party service provider collaborations as well as equity investments to provide improved cloud computing solutions for commercial users and achieved a double-digit revenue growth in this segment. We also established business relations with several leading internet companies in China, including Baidu, Youku, IGE, Xiaomi and so on.

We also gained momentum on our blockchain development. We have kept on optimizing the performance of ThunderChain and actively sought opportunities at home and abroad and in both public and private sectors. So far, we have operated with a number of government bodies and business organizations on product deliveries. Last year, we partnered with the top-ranked public university in Thailand and won 2 projects in a row not only to empower its affiliated medical institutions who use blockchain-based solutions but also to help improve the university's academic certificate verification systems. We have gained rich experience in implementing blockchain solutions for dozens of applications, including copyright protection, public welfare, insurance, transportation, digital marketing, supply chain, new retailing, et cetera. I'm delighted to say that we have made the first move towards the use of blockchain in serving the real economy.

We have deepened our relationships with our business partners. For instance, we have collaborated with China Tower Corporation to develop edge computing; the Copyright Protection Center of China and National Computer Network Emergency Response Technical Center of China for blockchain application; and with some household names, Chinese internet companies, for cloud computing services. We believe these collaborations not only demonstrate Xunlei's strength but also will help us lay a solid foundation for future development.

As one of the top internet companies in China, we always prioritize in maintaining high-caliber research and development. In the shared cloud computing area, we significantly improved the efficiency of our shared cloud computing devices. As a result, we're able to deliver more bandwidth capacity without incurring significant capital investment. In addition, we also conducted research in developing machine learning and AI models in our shared cloud computing platform. Last year, our team won 3 major awards at the First China Artificial Intelligence Multimedia Information Recognition Technology Competition for innovation in AI and cloud computing technologies. Xunlei is known for its excellence in product and technology, and we intend to maintain this competitive edge.

For the blockchain space, our accomplishments in ThunderChain include the capability to process millions of transactions per second, enhanced data privacy and traceability, improved encryption algorithms and so on. Recently, to strengthen our leadership position, we provided an update to ThunderChain's 16 product solutions across 6 major industry sectors, which included but were not limited to supporting government affairs by facilitating information sharing across real estate, enhancing cross-region corporation, improving electronic invoice services and so on. With this set of release, ThunderChain now can offer a wider range of effective blockchain product solutions.

We're 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 also open sourced ThunderChain Open Platform for application developers to experiment and develop large-scale and practical blockchain applications, which has accumulated over 50 smart contracts, thousands of users and millions of transactions.

Based on our compelling innovation strategies. We're pleased with the momentum of our cloud computing services business and technological breakthroughs in blockchain areas. We have endeavored to diversify our business for growth and will make the required disclosures of other innovations when there is meaningful progress.

Going forward, we will continue to expand our shared cloud computing capacity to realize the benefits of economies of scale. We look forward to implementing a hybrid development strategy to utilize cloud-sourced uplink capacities to reduce our purchase of bandwidth from traditional suppliers. We have cooperated with different third-party service providers and scaled up our cloud computing capacity in China, which ultimately contributed to a solid StellarCloud IaaS sales growth in 2019.

Xunlei is an innovator in shared cloud computing and operates extensive distribution of cloud computing nodes through sharing economy.

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. More importantly, this business model helps us save energy and reduce CO2 emissions compared to traditional internet data centers, thus making progress on ESG governance and long-term shareholder value.

With a speedy rollout of 5G mobile networks, we expect more intelligent devices with high computing power to be deployed. We believe our shared cloud computing will be an important market force and can become an economic solution in the 5G era that cannot be ignored and will serve as an important driver for our long-term growth.

Further, we'll explore business opportunities in the blockchain segment built on our past success. Our cloud computing services have benefited from our innovations in blockchain technology, which helps us sell more than 1.5 million units of the OneThing Cloud hardware. We are also pleased to see positive results received by clients that we provided blockchain solutions for. Lately, many governments around the world have emphasized the important role of blockchain technology in the next round of technological innovation and are encouraging the development of blockchain technology and digital currency.

We have confidence that blockchain technology will have more substantial applications in the future and will become a disruptive force in the market. The potential of blockchain can be great when it's unleashed and can potentially influence a wider range of industries. Thus, we believe our innovative cutting-edge blockchain capabilities and our experience with implementing a real world blockchain applications will put us in a strong position in this emerging industry.

We will also strengthen the operations of our traditional products. This year, we intend to broaden our subscription services to our users and, ultimately, generate synergies across our product lines. We will also explore options to improve our online advertising business.

And finally, amid the challenging business environment, we will take proactive steps to cope with the challenges. The coronavirus situation is evolving, and the business visibility may be very limited. We're taking precautionary measures to manage business continuality. We are putting our employees' safety foremost. At our workspace, we are strictly following the guidance issued by the local government authority, and we are closely monitoring this development.

With that overview, I will now turn the call over to Eric to review the financial results and the guidance for first quarter of 2020.

Eric, please.

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Zhou Naijiang, Xunlei Limited - CFO [4]

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Thank you, Lei. Hello, everyone, and thank you again for joining Xunlei's Fourth Quarter and Fiscal Year 2019 Conference call. And now I'd like to go through the details of our financial results and wrap up with our financial outlook for the first quarter of 2020.

Total revenues for the fourth quarter of 2019 were $48.3 million, up 10.2% from the previous quarter. The increase in total revenues was mainly attributable to increased revenues from cloud computing and other IVAS business. Revenues from cloud computing and other IVAS combined to $24.6 million, representing an increase of 18% on a sequential basis. This increase was mainly due to increased sales of our cloud computing products and services, expanded offerings of our other IVAS services and enhanced seasonal marketing activities for our live streaming platform during the quarter. Revenues from subscriptions were $19.8 million, up 2.9% from the previous quarter. The number of subscribers was 4 million as of December 31, 2019, up from 3.8 million as of September 30, 2019. The average revenue per subscriber for the fourth quarter of 2019 was RMB 35.1, same as that in the previous quarter. Revenues from online advertising were $3.9 million, representing an increase of 3.9% from the previous quarter.

Cost of revenues was $30.3 million, representing 62.7% of our total revenues compared with $24.4 million or 55.8% of our total revenues in the previous quarter. The increase was mainly attributable to increased capacity and sales of our cloud computing products and services. Bandwidth costs in the fourth quarter of 2019 were $17.8 million, representing 36.8% of our total revenues compared with $15.8 million or 36.1% of the total revenues in the previous quarter. The increase was mainly due to an increased capacity of our cloud computing nodes. The remaining cost of the revenues mainly made up of cloud computing product costs and the revenue sharing costs for our live streaming business.

Gross profit for the fourth quarter was $17.9 million, down 7.2% for the previous quarter. Gross margin was 37.1% in the fourth quarter compared with 44.1% in the previous quarter. The decrease in gross profit was mainly due to a write-off in the amount of $3.2 million for OneThing Cloud hardware inventory based on our impairment assessment.

Research and development expenses for the fourth quarter of 2019 were $14.3 million, representing 29.6% of our total revenues, down from $17.6 million or 40.1% of our total revenues in the previous quarter. The reduction was primarily due to lower labor costs and employee benefits as a result of our cost control measures.

Sales and marketing expenses for the fourth quarter of 2019 were $11.1 million, representing 23.1% of our total revenues, up from $6.2 million or 14.2% of our total revenues in the previous quarter. The increase was mainly due to more marketing and advertising expenses incurred this quarter for year-end promotional activities.

General and administrative expenses for the fourth quarter of 2019 were $10.2 million, representing 21.2% of our total revenues compared with $9.1 million or 20.8% of our total revenues in the previous quarter. The increase was primarily due to higher professional consulting and integrated audit fees incurred during the quarter as a result of supporting our increased compliance requirements and the growth of our business.

Impairment of assets net for the fourth quarter of 2019 was a credit of $0.1 million, representing a net recovery of previously impaired assets compared with a credit of $0.4 million in the previous quarter.

Operating loss for fourth quarter was $17.7 million compared with an operating loss of $13.2 million in the previous quarter. The increase in operating loss was primarily due to increases in year-end sales and marketing expenses.

Net loss was approximately $18.1 million in the fourth quarter of 2019 compared with a net loss of $24.6 million in the previous quarter. Non-GAAP net loss was $17 million in the fourth quarter compared with non-GAAP net loss of $23.1 million in the previous quarter. The decreased net loss and non-GAAP net loss were primarily due to net investment income of $2.4 million recognized this quarter, which was related to several long-term equity investments, while there was a onetime write-off in the amount of $14.3 million in the previous quarter. The net investment income consists of an investment in amount of $7.7 million as well as write-offs in amount of $5.3 million.

Diluted loss per ADS in the fourth quarter of 2019 was $0.27 compared with a diluted loss per ADS of $0.36 in the previous quarter.

As of December 31, 2019, the company had cash, cash equivalents and short-term investments of $265.3 million compared with $264.8 million as of September 30, 2019.

For the full year of 2019, total revenues were $181.3 million, down 21.9% on a year-over-year basis. The decrease in total revenues was primarily attributable to a decrease in revenues from cloud computing and other IVAS and mobile advertising services. Revenues from cloud computing and IVAS were $84.1 million, down 31.3% on a year-over-year basis. The decrease in cloud computing and IVAS revenues were mainly attributable to the decreased sales of OneThing Cloud hardware products, a slowdown in live streaming revenues and was partially offset by increased StellarCloud IaaS sales. Revenues from subscriptions were $81.5 million, down 0.4% on a year-over-year basis. Revenues from online advertising were $15.6 million, down 43.7% on a year-over-year basis. The decreases were mainly due to decreased demand for online advertising, primarily by the mobile gaming industry during the year.

Cost of revenues was $99.9 million, representing 55.1% of our total revenues as compared to $115.7 million or 49.8% of the total revenues in 2018. Bandwidth costs is -- as included in cost of revenues, were $57.1 million, representing 31.5% of our total revenues, up from $48.1 million or 20.7% of total revenues in the previous year. The increase was mainly attributable to an increased capacity of our cloud computing nodes.

Gross profit for the year was $80.8 million, representing a decrease of 29.7% on a year-over-year basis. Gross margin was 44.5% compared with 49.5% in the previous year. The decrease in gross profit and gross margin was mainly due to decreased OneThing Cloud hardware sales and lower online advertising revenues generated this year.

Research and development expenses for the year were $68.6 million, representing 37.8% of our total revenues compared with $76.8 million or 33.1% of our total revenues in the previous year. The decrease was mainly due to the optimization of organizational structure, benefits and compensation.

Sales and marketing expenses for the year were $31.8 million, representing 17.6% of our total revenues, down from $35.3 million or 15.2% of our total revenues in the previous year. The decrease was primarily attributable to decreased number of marketing and promotional activities as a result of gradually phased-out OneThing Cloud hardware product promotion activities during the year.

General and administrative expenses for the year were $38.9 million, representing 21.5% of our total revenues compared with $40.8 million or 17.6% of our total revenues in the previous year.

Impairment of assets net for the year was a credit of $2.1 million, representing a net recovery of previously impaired assets compared with $6.3 million in the previous year, which represented receivables write-off after impairment and recoverability assessment.

Operating loss was $56.4 million compared with an operating loss of $44.3 million in the previous year. The increase was mainly due to the decrease in gross margin -- in gross profit resulting from a decrease in revenues from cloud computing and other IVAS and online advertising services.

Net loss from continuing operations was $53.4 million in 2019 compared with a net loss of $40.8 million in the previous year. Non-GAAP net loss from continuing operations was $48 million in 2019 compared with a loss of $35.5 million in the previous year.

Diluted loss per ADS from continuing operations in 2019 was $0.79 compared with a loss of $0.61 in the previous year.

As of December 31, 2019, the company had cash, cash equivalents and short-term investments of $265.3 million compared to $319.5 million as of December 31, 2018.

And finally, I'd like to turn to our guidance for the first quarter of 2020. We expect total revenues to be between $47 million and $51 million for the quarter. The midpoint of the range represents a quarter-over-quarter increase of about 1.4%.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Trista Yang from Noah Hong Kong.

(Operator Instructions)

Question is coming from Ms. Trista Yang from Noah Hong Kong.

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Trista Yang;Noah Hong Kong;Business Development Manager, [2]

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This is Trista Yang from Hong Kong. I have a couple of questions. First, you mentioned that because of the novel coronavirus situation, business visibility is limited. So can you tell us, you have any direct exposure to the epicenter of COVID-19 and how it will affect your business in short-term and long term? And second, revenues from all your product lines declined in 2019. Do you expect any growth this year?

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

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Thank you very much, Ms. Yang. About the situation with coronavirus, we are headquartered in Shenzhen Guangdong province, so we do not have any offices in Wuhan or Hubei province. Our employees today are not personally affected by the coronavirus so far. Our employees started working from home online since February 10 and resumed the normal operation on-site about 2 weeks ago.

In the short term, we have not seen any significant negative impact of the coronavirus on our operations as our users are all over the country. We actually saw some positive impact as part of our business, particularly in cloud computing and the subscription business as people stayed at home more. But in the longer term, we are unable to predict any future impact as the coronavirus situation evolves. Ensuring the health and safety of our employees is always our top priority. We are strictly following the guidance issued by the local government authority and provided our employees with masks and other protective equipment and guidance during this period of time while paying close attention to the development of the virus and will act accordingly to maintain normal operations of the company.

As to growth, Xunlei has been dedicated to the distributed computing technologies and is widely recognized in the cloud accelerated products and services market in China. We lately embarked on transition to shared cloud computing and blockchain to meet individual and enterprise users' emerging and changing needs.

Comparing to 2018, the decrease in revenue primarily was contributed to the lack -- the sales of OneThing Cloud hardware product, which we sold very well in 2018 but not -- haven't sold a lot of units in the -- in 2019. But other aspects of the cloud computing business is growing. In particular, our bandwidth business has been growing very fast in 2019.

We believe shared cloud computing will be an important industry trend and a key driver for our long-term growth. Demand for our cloud computing services remain very strong driven by our success in steadily growing our enterprise client base. This is reflected in the continued growth of our bandwidth sales over the last several quarters. As I mentioned in the prepared remarks, our sold bandwidth in December was more than doubled as compared with the previous year. Ms. Yang, hopefully, that answers all your questions. Thank you very much.

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Operator [4]

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Our next question comes from [Alex Yu].

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Unidentified Participant, [5]

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Okay. So I am a private investor, and I have a question for you guys. And so my question is what competitive advantage does Xunlei have to help it to become the winner of the next cloud war. And the reason I'm asking this is, as you all know, that Xunlei is not the first company investing heavily into the cloud. And the big guys, Amazon, Tencent, Alibaba, they are all investing heavily into this, the cloud, (inaudible), they are investing a lot in the blockchain, they invest a lot in the -- I'm not sure if they have invested already in the distributed computing. But I do see, they have a lot of tremendous advantage on this. Let's give an example. For example, Alibaba, they have a huge network. So for them to sell a hardware unit, for them to use the idle space and then collect them and push it into the enterprise clients, it's very easy for them to do this. So I guess, what Xunlei has to -- what do you think that you guys have to help you to win this war? Because I think a cloud, to what I have seen so far, is the winner takes all. So if you're a big guy, you're fast enough, you can get all -- well, you can get most of the market share. So I guess that's what my question is.

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Lei Chen, Xunlei Limited - CEO & Director [6]

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Thank you very much, [Alex]. If I hear you correctly, you're asking what is the competitive advantage for our cloud computing business. So in the cloud computing business, what -- we're providing a very different style or different type of products to the market comparing to the Alibaba and Tencent Cloud and so on.

What we are doing is we're using small hardware devices to collect bandwidth and other computing power that is at people's homes, so we're reusing redundant computing power and using them in such a way that we can provide high-quality cloud computing service as if we're building our cloud computing network from industry strength, bandwidth and computing resources. So our technology allows us to use more distributed, smaller granularity and less reliable computing resources, including bandwidth, including storage and CPU and so on to build high-quality, industry-strength cloud computing solutions to our enterprise customers. So that has recently developed into a niche market today, and we're seeing new companies entering this market.

A few years back, where -- when we initially launched this product, we are -- we need to educate or we need to convince the enterprises that our product is industry strength, and that takes some time. But today, I think with our asserted effort, this particular market has been established. We are the leader in this market, which is providing lower-cost cloud computing as a replacement of the -- of a normal, if you will, cloud computing developed from the Tencent Cloud and so on. So that's our strength. That's the -- that's what we have so far.

So going forward -- sorry, actually, I probably should let you continue with your question, please.

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Unidentified Participant, [7]

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Oh no, please, go ahead. Yes.

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Lei Chen, Xunlei Limited - CEO & Director [8]

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So going forward, we will continue to expand our shared cloud computing capacity to realize the benefits of the economies of scale. We look forward to implementing a hybrid development strategy to utilize cloud-sourced uplink capacities to reduce our purchase of bandwidth from traditional suppliers.

So we have also cooperated with different third-party service providers to help us scale up our cloud computing capacity in China. And ultimately, these efforts contributed to a solid StellarCloud sales growth in 2019. I'm not sure whether that completely answered your question, but thank you very much for asking.

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Unidentified Participant, [9]

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Just as a follow-up question, I do understand that your business model is to collect the idle bandwidth, and then you supply it to enterprise clients. So -- but I guess my question is do you think the established players, especially like Alibaba, they are able to replicate your strategy. For example, they have existing network. If they want to sell the hardware, they can sell this hardware to everybody in their network. The e-commerce platform, they can get everybody to use their own hardware. So that way, they can just copy your strategy, I guess. So I guess, do you have any ways to defend these guys?

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Lei Chen, Xunlei Limited - CEO & Director [10]

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So we don't comment on other players in the industry, and we don't want to speak about their strategy. And -- but what we know so far is that the market that we're in today, we're the leader in this specific market today. And we have established during the past few years strength in both technology and resource availability because we have built a significant network of bandwidth capacities and computing devices throughout China.

And I think the only way to ensure our success is to continue investment and continually developing our strength, both in technology itself as well as the cloud network that we currently has already established.

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Operator [11]

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(Operator Instructions) Well, there are no further questions at this time. Presenters, please continue.

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Lei Chen, Xunlei Limited - CEO & Director [12]

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All right, that's all for today, and thank you again for your kind attention. Please contact us if you have any questions. Have a good day.

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Zhou Naijiang, Xunlei Limited - CFO [13]

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Thank you. Bye-bye.

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Operator [14]

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This does conclude our conference for today. Thank you for participating. You may all disconnect.