Xunlei Limited (XNET) Q1 2017 Earnings Report, Transcript and Summary

Good morning, and thank you for standing by for Xunlei's First Quarter 2017 Earnings Conference Call. [Operator Instructions]. Today's conference call is being recorded. I would now like to turn the call over to your host today, Ms. Jang Dani [ph], IR Senior Manager of Xunlei. Thank you, please continue.

Thank you, operator. Good morning, and good evening. Welcome to Xunlei's First Quarter 2017 Earnings Call. I'm Dani Jang [ph], Investor Relations manager at Xunlei. With me today on the call are Mr. Sean Zou, our Chairman and CEO; Mr. Lei Chen, our co-CEO; and Mr. Tao 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's now available on our 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 the table attached to our earnings release, which can be found again on our IR website. Please know that all numbers are in the U.S. dollars unless otherwise stated. I will now turn the call to our CEO. Sean, please.

Thank you, Dani. Good morning, and good evening, everyone. Thanks for joining us today for earnings call for the first quarter of 2017. Let me start by commenting on our top line. Our total revenues for this quarter were $39.6 million, which represented a 2.9% increase on a year-over-year basis. Progress in key segments of cloud computing and the mobile advertising contributed to this growth. Cloud computing grew by 86.5% and the mobile advertising grew by 39.9% on a year-over-year basis. Tom will provide more details on the financial results in his section. I would like to start with our cloud computing business, which is powered by crowdsourcing, utilizing existing idle capacity, focusing primarily on streaming sector, including live videos or video on demand, and then possibly short videos in 2017. We have made meaningful progress on several fronts this quarter. First of all, the size of our cloud computing business. Revenues from our cloud computing business increased 86.5% compared to the corresponding period, 36.3% on a sequential basis. You would probably agree that the size means a lot for a lot of business, let alone an innovative technology. This represents customer acceptance and it also signifies our progress and the tenacity in this business. A number of industry leaders within streaming sector, including both live and the VoD have users started or expanded their relationships with us. For example, [indiscernible], one of the largest social platforms in China began to adopt our CDN service in their live video services a few months ago. And our relationship since then have expanded significantly month by month. As of the end of the quarter, [indiscernible] has become 1 of our top 3 customers for cloud computing businesses. And most recently, iQIYI, a leading player in the streaming sector more than doubled its business with us. As you may recall, we have been working with iQIYI for quite some time now. It is one of the most successful streaming companies in China with over 600 million active users. So the fact that a leading player was not only massive user base but highly complex demand scenarios significantly expanded business with us is a further testimony of our value proposition and an increasing trust customers are placing with us. We obviously do not take their trust lightly. On the technology front, we have also made meaningful progress recently. We were able to deepen our technology by utilizing a wider network of contributors and their crowdsourced bandwidth. We are obviously very focused on this. If we could scale this deeper technology, which utilizes a wider network of contributors, it would be another key milestone for our technology innovation, and it will also provide us with structural and sustainable advantages compared to other players in the market. We will update you accordingly as things progress. In the next few months, we will also be very focused on our sales and our marketing strategy to concentrate on our key and [indiscernible] customers. Industry leaders' postadoption of our technology may help us better monetize our marketing effort. Before I leave the topic of cloud computing, I would like to point out again that this business is still in the early stage and we're still generating losses [indiscernible] as a whole. As we mentioned last quarter, we are also experimenting in short video sector, which is a fast growing business in China and this business is primarily within our mobile apps space and is more related to UGC content distribution as opposed to a downloading tool. We have achieved a few milestones for short video business. It not only enhances our user interactive on our apps and [indiscernible], it also tracks utilization on our products and our services, for example, live videos. Given the type of contents on both short videos and live videos are mainly the same, this will be a great opportunity for further leverage such as user tracking. As April, the highest of [indiscernible] of short videos was about 200 million per day. We're working on providing more short videos, shooting and editing tools to encourage users to generate more videos from our app. We believe, through our encouraging machine-learning technology, especially in content distribution, our [indiscernible] of short video will be increased later this year. Let me now briefly comment on our subscription business, which represented about 52.6% of our total revenues in the first quarter of 2017. We were very focused on operational efficiency and better customer care. ARPU in the first quarter was RMB35.01, relatively flat from a sequential basis, but increased 9.3% at the corresponding year last year -- last time. The number of subscribers ended in March was 4.08 million down from 4.18 million last quarter. We will continue to be very focused on providing better customer care and a differentiated services. As I said previously, this is a fairly traditional and, in some ways, a mature business. We did a reasonable good job in 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 increasing on our smartphones, but provides Xunlei with its biggest source of revenue, profit and the cash flow, which allows us to continue to invest in new growth areas. Therefore it is critical for us to continue to manage this business well and balance it with new growth initiatives. With that, I would now turn it over to Tom for more detailed financial review. We look forward to updating you on our progress soon. Tom?

Thank you, Sean. Good morning, and good evening, everyone. For the first quarter, total revenues were $39.6 million, which represent a 2.9% growth on a year-over-year basis. Increases in cloud computing and mobile advertising business were the major contributors for the year-over-year base of growth. Subscription revenues were $20.8 million, number of subscribers slightly decreased from 4.18 million, in the end of the last quarter, to 4.08 million. ARPU declined slightly to RMB35.01 compared to RMB35.07 in the last quarter. As Sean mentioned in his section, we are very focused on our execution and customer care, the continuing importance of our mobile products was also a factor. For cloud computing business, Project Crystal, revenues of household bandwidth increased 35.9% on a sequential basis. As Sean mentioned, the growth in live video segments was strong, contributing to the rising revenues. We're obviously very focused on executing this business, which is still generating losses. Online advertising revenues, which included mobile advertising revenue in the first quarter were $3.8 million. Mobile advertising revenue grew by 39.9% compared to the corresponding period of last year. Traffic for this particular mobile app peaked at around 10 million DAU, daily active user, last year. Cost of revenues was $23.3 million compared to $20.2 million in the fourth quarter of 2016. Gross profit margin was 40.8% compared to 48.2% in the previous quarter. Operating expenses were $20.64 million compared to $29.1 million in the first -- previous quarter. The decrease on a sequential basis was mainly due to a decline in sales and marketing expenses. Net loss from continuing operations for the quarter was $6.7 million compared with operating loss of $7.1 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 strong balance sheet. We ended the quarter with cash, cash equivalents and short-term investments balance of $370.9 million, which is down slightly from $381.5 million as of the end of previous quarter. The decline was mainly due to the operating loss during the past quarter. Cash and short-term investments varied per ADS at quarter end was $5.60 per ADS. Let me finish by going over our guidance for the next quarter. We expect our revenues to be between $39.5 million to $42.5 million for the second quarter of 2017. The midpoint of the range represents a year-over-year increase of about 6.6%, and we look forward to updating you soon. Operator? Operator, we will open for questions.

[Operator Instructions]. Your first question comes from the line of Ming Hu, a private investor.

I like to know, like -- last year, Xunlei announced $20 million buyback plan, and is this still going or do you...

Yes, Ming, it's Tom here. You're actually correct. The board has approved a repurchase program. But I'm not going to comment on whether we're executing on a day-by-day basis. And that authorization actually expired for the current time.

Okay. So it's already been done, right?

That's right.

Okay, got you. And the second question is, SNL, the content delivery network is facing a kind of government regulatory issue? Do you have any update on that?

What specifically are you referring to in terms of government regulations, Mr. Hu?

Yes, like, in the beginning of this year there was a news, like, Chinese government will hack AVM player to have certificate, kind of, certificate. So that was a concern about the -- do you know about it?

Sure.

Just to translate that for the rest of the audience. Yes, there were government regulations at the beginning of this year. But the target was primarily against illegal buying and selling of bandwidth in the industry. And it's very different from what we're doing, which is crowdsourcing in that technology fashion. And the last point is that we've been in the regular contact with the relevant authorities. I think we are quite comfortable with where we are vis-à-vis the regulatory regime. Next questions, operator?

[Operator Instructions]. Your next question comes from the line of Zhen Zhu [ph] from 233.com.

[Foreign Language]

I'll translate the question for the benefit of the rest of the audience, first of all. The question, again, is on our repurchase program, especially, Mr. Zhu pointed out, our stock price is below that of our cash value. So I'll take that question, it's Tom here. So basically, the upshot of this is that, yes, there was a repurchase authorization of $20 million, as we previously addressed and that authorization had expired. The board continuously evaluates various options in terms of enhancing shareholder value. And that also includes additional repurchase plan. But there's no current authorization. We'll obviously update the market should that change in the future.

[Operator Instructions]. There is a follow-up question from Zhen Zhu [ph] from 233.com.

[Foreign Language]

The question is on our headquarter. Basically, we are in the process of constructing a headquarter for the company. And it's a very valuable land concession granted by the government a few years ago to Xunlei. So we have embarked on the construction project and obviously, we're very excited -- look forward to having even a better environment in 2, 3 years. Operator, next question?

[Operator Instructions]. There is another follow-up question from Mr. Zhen Zhu [ph] from 233.

[Foreign Language]

The question was about annual shareholder meeting. Obviously, we'll make such announcement in terms of the specifics time and location when we have that shareholder meeting for fiscal 2017.

[Operator Instructions]. There are no further questions at this time. And for participants who aren't able to ask a question or if you have follow-up questions, you may e-mail them through at ir@xunlei.com. I would like to hand the conference back to today's presenters. Please continue.

Thank you for your participation and your continued interest in Xunlei. We are very excited about the prospects and the progress we have made, especially, in our cloud computing business. We very much look forward to giving you a further update the next quarter. Thank you. Good morning, good evening.

Thank you. Good night.

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