Xunlei Limited (XNET) Q3 2016 Earnings Report, Transcript and Summary

This is Lei Chen, the Co-CEO of Xunlei Limited. I will go back to the top of my brief and so we don’t miss that -- because we don’t know where did we cut off. So I will go all the way to the top. So let me start by briefly summarizing our top line, our business underwent significant growth during the first quarter. Total revenue for the quarter was $48.9 million which grew by 22.1% on a year-over-year basis and 7.4% sequentially. Growth in key segments of subscription, cloud computing and mobile advertising contributed to our growth this quarter. Subscription business grew by 16.3% on a year-over-year basis and 4.7% on a sequential basis. Mobile internet grew by 26.1% quarter-over-quarter and revenue for cloud computing grew by 26.7% on a quarter-over-quarter basis. Revenues for cloud computing include both sale of cloud sourced bandwidth as well as sale of our hardware devices. Now let me first comment on our cloud computing business which is powered by cloud sourcing utilizing existing ideal capacity focusing primarily on streaming. In the third quarter of 2016 revenues from the sale of cloud sourced bandwidth increased 47.5% compared to the previous quarter. Within that growth revenues for the live video segment grew particularly strong by 203% on a sequentially basis. As I mentioned previously we’re increasingly focusing our efforts on the live video industry which is one of the fastest growing internet usages in China. We believe that our distributed cloud computing architecture potentially has certain structural advantages for this segment, and we’re working in a focused way to serve this market segment by providing customized services. We’re pleased to serve leading providers such as Panda TV. In fact the usage of Panda TV provided by our clock computing services almost tripled yet again on a sequential basis this quarter. We're also working to broaden our customer base so that more providers can benefit from our customized services. Total number of customers for cloud computing increased almost 30% sequentially and we're continuing to build a strong pipeline of new customers in various stages of product testing, customization and finalization arrangements. Let me reiterate our value propositions of our cloud products. First you have the user experience in terms of smoothness especially for the live video and streaming sector, given it's cloud source architecture. Second, added security for content owners also due to the cloud source architectures spreading out components of content which enhanced the security. Last but not least competitive cost structure, as you may notice we accelerated our investment in cloud computing this year including this quarter which has contributed to increasing loss for Xunlei. In the near future our key strategies for cloud computing will be focused on first to continue to advance on the product and technology front. This is due a fast evolving technology. There is certainly further optimization and customization to cater to the . Second, to build up more even efficient cost structure third of course to win more marquee customers like Panda TV. Let me now briefly comment our mobility progress. First our Xunlei Mobile, our own mobile app. This app allows users to search, download and consume content under mobile devices and we're increasingly focusing on user generated content. The DAU on these app peaked at 10 million recently. So there have been some stabilization and moderation in user traffic recently revenues from mobile advertising however continue to grow at 26.1% on a sequential basis. We achieved that this partly by better optimizing advertising space utilization as importantly about 30% of all our subscribers for our subscription business drawing and expand their memberships through the mobile Xunlei. Combining revenues for mobile advertising and subscriptions revenues through these mobile application channel. Mobile revenue is now accounted for 26% percent of Xunlei total revenues during this quarter which is about the same as the previous quarter but from a larger revenue base. Data part of our mobility strategy through our partnership with Xiaomi. In stock base of Xunlei's mobile acceleration products in Xiaomi mobile phones continues to increase as a function of Xiaomi's own sales growth. The DAU of the mobile acceleration product continue to be very meaningful and we still expect to monetize this considerable user traffic in the near future. Before I turn over to Tom, let me comment on our subscription business which still represents about 57% of our total revenue. The number of paying subscribers ended September was $5.14 million found slightly from 5.26 million at the end of the previous quarter but up from 4.94 million at the corresponding previous period last year. Overall download traffic is declining but we remain very focused on improving operational efficiency and better customer care and we are seeing results revenues from subscription grew significantly in the third quarter. As we mentioned previously we’re more focused on providing more relevant and appreciative services. Our Super VIP membership for example combines all privileges of our subscription services and continues to be well received. The number of Super VIP continued to grow at a strong rate of 32.4%. ARPU in the third quarter was RMB30.7 comparable to that of the previous quarter up by 8.9% on a sequential basis. In conclusion we will continue to execute our core strategies first to further scale up our cloud computing products in terms of revenue size, customer size, a new product, a new product line. Second to continue to fully explore potentials for mobile products. Third, to focus the monetization of mobile traffic and subscription revenue. We look forward to updating you our progress in the near future. I will now turn it over to Tom for more details of the financial review. Tom?

Thank you, Lei. Good morning and good evening everyone. As Lei pointed out our business [indiscernible] significant growth this quarter. Total revenues for the third quarter were $40.9 million which represented a 22.1% growth on a year-over-year basis and 7.4% sequential basis. Increase in subscription, cloud computing business and mobile advertising revenues would have major contributors for the year over year basis growth. Subscription revenues were 23.7 million, ARPU grew strongly to RMB30.7 per quarter compared to RMB25.6 in the corresponding period of last year. Number of subscribers increased from 4.94 million in the corresponding period of last year to reach 5.14 million. As Lei mentioned in his section the key reasons for the growth were user demand, our improving customer care and continuing importance of our mobility products. For our cloud computing business Project Crystal revenues of cloud sourced bandwidth sale increased 47.5% on a sequential basis. As Lei mentioned the growth in live video segment was particularly strong contributing to rising revenues. Overall cloud computing revenues also grew by 26.7% on a sequential basis. We’re obviously very focused on executing this business which is still generating a loss. Online advertising revenues which included mobile advertising revenue in this quarter were 4.7 million, mobile advertising revenue grew 26.1% compared to the previous quarter. When we started to monetize our mobile traffic in terms of advertising sales in the fourth quarter of 2015. Traffic for mobile APP peaked at around 10 million DAU last month. Cost of revenues was 21.1 million compared to 18.6 million in the second quarter of 2016. Gross profit increased to 1.7 compared to the first previous quarter, gross profit margin was 48% compared to 6.6% in the previous quarter. Our operating expenses were 30.3 million compared to 24.1 million in the previous quarter. The increase of a sequential basis was due to increase employee compensation and other IVS [ph] development costs. Net loss from continuing operations for the quarter was 7.6 million compared with an operating loss of 4.4 million in the previous quarter. Non-GAAP net loss from continuing operations was 5.3 million. Turning to our balance sheet, we continue to have a strong balance sheet. We ended the quarter with cash, cash equivalents and short term investment balance of 391.4 million which is slightly up from 391 million of the previous quarter but down from 432 million from the end of last year. The decline was primarily due to strategic investments that we made during the past quarters as well as our ongoing share repurchase program. Cash value per ADS at the end of the quarter remained at $5.86 per ADS. Let me finish by going over our guidance for the next quarter. We expect our revenues to be between $38 million to $43 million for the fourth quarter of 2016. The midpoint of that range represents a year over year increase of about 15% and we look forward to updating everybody soon. Operator?

[Operator Instructions]. Our first question comes from the line of Alex Chei [ph]. Please go ahead.

I'm an independent investor, I’ve three question to ask. So the questions are the first one is you mentioned that the club computing business has growing the customer base by like 30%. I want to know what's -- do we have any number exact number for customers I mean now and going forward and another question, and then what's the percentage of revenue comes from the late broadcast as well as the video business. The second question is regarding to the bandwidth cost [ph], as I see in the income statement the balance sheet is the [indiscernible] increased from around 30 to 33 to 38. I wondered why is there such a dramatic increase that quarter, what's the cost driver behind? And last question is about the you mentioned that you used some money to do some investment, I want to know what are some of the investments and what are some of the implications of the revenues going forward. Thank you.

So let me take a stab at it and see if Mr. Chen would like to add to that. Your first question is about our cloud computing business. Yes we did mention that we grew the number of our customers by 30% but we would decline answering the exact number of our customers for obvious reasons. In terms of live video so roughly about 50% of our cloud computing business from a sale of bandwidth come from live video segment and that is the fastest growth business as we pointed out that in our prepared remarks over 200% growth. The remainder is spread between video on demand as well as businesses like outsource for businesses. So that's your first question. And second question, you're obviously very thoughtful in pointing out our bandwidth cost did increase as a percentage of revenues. The reason for that is some experimentations that we were making in our cloud computing business and you could treat that as almost as R&D cost. It's not because of other reasons. So we expect that to be a onetime increase. We do not see that at least from where we are today as a trend in terms of increasing our cost structure. And your last question on the types of investments, it is a range of investments that we made over the quarters this year and as I pointed out in our remarks that was one of the key reasons why our cash balance declined to 391 million, a variety of investments one of which that we made was in the VR business. We believe potentially there can be some synergy depending on how VR industry continues to unfold in terms of delivering content for the VR space but obviously it's still in a very early stage. So it is a number of investments in a variety of segments but one of which that I can point out is that in a video virtual reality space. I think that's all your questions and I hope the answers were helpful. Operator?

[Operator Instructions]. There are no further questions at this time. I would like to hand the conference back to our presenters. Please continue.

Thank you everyone for your continued interest in our company and we are focused on executing our strategies and we look forward to updating everybody in the coming quarters. Thank you and good evening.

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