Xunlei Limited (XNET) Q1 2023 Earnings Report, Transcript and Summary

Welcome, ladies and gentlemen, and thank you for your patience. You've joined Xunlei's 2023 First Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the call over to the host, Investor Relations Manager, Ms. Luhan Tang. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining Xunlei's 2023 First Quarter Earnings Conference Call. On the call with me today is Eric Zhou, Chief Financial Officer. Now you can find our earnings press release on our IR website, which is intended to supplement our prepared remarks during today's call. For today's agenda, I will first read our prepared opening remarks by our Chairman and CEO, Mr. Jinbo Li, on the highlight of our first quarter operations. Then Mr. Eric Zhou, our CFO, will go through the details on the financial results and wrap up with our revenue guidance for the second quarter of 2023. We'd like to welcome any questions from you after the management's remarks. Today's call is recorded, and you can replay the call from our Investor Relations website. Before I get started, I would like to take this opportunity to remind you that the discussion today will contain certain forward-looking statements made under 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 that are subject to risks and uncertainties that are difficult to predict, which may cause actual results to differ materially from those made in the forward-looking statements. Please refer to our SEC filings for a more detailed description of the risk factors that may affect our results. Xunlei assumes no obligation to update any forward-looking statements, except as required under applicable law. On this call, we will be using 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. Now the following is the prepared statement by Mr. Jinbo Li, Chairman and CEO of Xunlei Limited.

Good morning, everyone, and thank you for participating in our first quarter earnings conference call. We kicked off 2023 with an all-time record revenue of $99.2 million in the first quarter, representing a year-over-year increase of 25.5%. Further, we have maintained profitable momentum for the fifth consecutive quarter, which we believe demonstrated our strong business resilience despite volatile macro environment. I want to acknowledge the valuable contribution by all our employees whose steadfast commitment has been pivotal in achieving [Technical Difficulty]. We're encouraged by the progress we have made in our top line growth, and all of our major businesses achieved robust growth during the first quarter as compared with the same period of last year. Despite the fierce competition in the industry, our cloud computing business leveraged its competitive edge in shared cloud and technology to provide reliable, scalable and cost-effective services to our clients, and achieved an 8.2% year-over-year growth and generated $32.7 million in revenue in the first quarter of 2023. We are continuously conducting proactive research and development of Edge computing applications to effectively compete in the industry and mitigate pricing pressure on the CDN business. As you may already have known, OneThing recently launched 2 hardware product lines, OES and OEC aiming to construct an autonomous and controllable cloud computing infrastructure through technical improvement to support a broader range of Edge application scenarios for both corporate clients and ourselves. We're glad that user feedbacks are encouraging, and we expect the demand will continue to grow as the industry evolves. Now turning to our subscription business. Benefiting from the demand from our loyal users [Technical Difficulty] revenue in the first quarter of 2023, representing a year-over-year increase of 15.8%. Furthermore, we are delighted to observe a growing propensity among subscribers to pay for the quality of services, as evidenced by the increase in the average revenue per subscriber from RMB 34.9 to RMB 41 in the first quarter of 2023 as compared with the same period last year. This is a testament of the effectiveness of our efforts to create a more engaging member community and enhanced user experience. As our growth driver, live streaming and other international value-added services generated $37.2 million in revenue in the first quarter of this year with an increase of 58.4% year-over-year, driven by the high demand of our diverse products in our product portfolio, both domestically and internationally. Our efforts to continuously refine product functions and iterate features enhanced our product synergies and improve user experience. However, conducting business operations across different countries and regions is always challenging due to volatile geopolitical factors as well as varying compliance and regulatory policies. It's especially so for us as it's one of our newly developing businesses. We're mindful of potential headwinds and even setbacks during the course of our business development. We will closely monitor the evolving regulatory and operating environment as well as changing industry trends, while focusing on improving localized operational efficiency and maintaining regulatory compliance. In closing, I'd like to say that at Xunlei, we are constantly striving for leveraging our competitive edge and the business synergies that can fuel both our top and bottom lines across all of our businesses. Our consecutive growth demonstrated the solidity of our endeavor and its successful results. Going forward, we will focus on exploring new growth opportunities and test innovative ideas, and we'll continue to improve our existing products and services to drive sustainable business development. With a healthy balance sheet and solid track record of our recent performance, I'm optimistic about our business for the foreseeable future. With that, I will turn the call over to Eric. Eric will cover our financial results in detail and provide a revenue guidance for the second quarter of 2023.

Thank you, Luhan. Hello, everyone, and thanks again for joining Xunlei's 2023 First Quarter Earnings Conference Call. I will now go through the details of our financial results and wrap up with our revenue guidance for the second quarter of 2023. For the first quarter of 2023, total revenues were $99.2 million, representing [Technical Difficulty] year-over-year. The increase in total revenues was mainly attributable to increased revenues generated from our live streaming, subscription and cloud computing businesses. Revenues from cloud computing were $32.7 million, representing an increase of 8.2% year-over-year. The increase in cloud computing revenues was mainly due to increased demand for cloud computing service as well as increased sales of cloud computing hardware devices. Revenues from subscription were $29.3 million, representing an increase of 15.8% year-over-year. The increase in subscription revenues was mainly due to higher average revenue per subscriber and more subscribers as compared with the same period last year. The number of subscribers was 4.84 million as of March 31, 2023, compared with 4.61 million as of March 31, 2022. The average revenue per subscriber for the first quarter of 2023 was RMB 41 compared with RMB 34.9 in the same period of 2022. The higher [Technical Difficulty] IVAS revenues was mainly driven by the higher demand for our live streaming service and our enhanced monetization capability. Cost of revenues were $59.3 million, representing 59.6% of our total revenues compared with $43.9 million or 55.5% of the total revenues in the same period of 2022. The increased cost [Technical Difficulty] was $29.1 million, representing 29.3% of our total revenues, compared with $26.9 million or 34% of the total revenues in the same period of 2022. The increase in bandwidth costs was mainly due to more Xunlei Cloud users and increased demand for our cloud computing services. The remaining cost of revenues mainly consisted of costs related to the revenue [Technical Difficulty]

Dear participants, please continue to stand by. Your conference will be resumed shortly. Thank you for your patience.

Bandwidth costs, as included in costs of revenues were $29.1 million, representing 29.3% of our total revenues, compared with $26.9 million or 34.0% of the total revenues in the same period of 2022. The increase in bandwidth costs was mainly due to more Xunlei Cloud users and increased demand for our cloud computing services. The remaining costs of revenues mainly consisted of costs related to the revenue-sharing costs for our live streaming business, payment of handling fees, cloud computing hardware devices and depreciation of servers and other equipment. Gross profit for the first quarter of 2023 was $39.6 million, representing a 13.6% increase from the same period of 2022. Gross profit margin was 39.9% in the first quarter compared with 44.1% in the same period of last year. The increase in gross profit was mainly driven by the increase in gross profit of our live streaming, subscription and cloud computing businesses. The decrease in gross profit margin was mainly due to the increased proportion of live streaming revenues to total revenues, which has a relatively lower gross profit margin. Research and development expenses for the first quarter of 2023 were $18 million, representing 18.2% of our total revenues, compared with $16.3 million or 20.6% of our total revenues in the same period of last year. The increase was primarily due to increased labor costs incurred during the [Technical Difficulty]. Sales and marketing incentives for the first quarter of 2023 were $9.3 million, representing 9.4% of our total revenues, compared with $5.3 million or 6.8% of our total revenues in the same period of 2022. The increase was primarily due to more marketing activities held for live streaming and subscription businesses as a result of our continued user acquisition efforts. G&A expenses for the fourth quarter of 2023 were $11.7 million, representing 11.8% of our total revenues compared with $9.6 million or 12.2 % of total revenues in the same period of 2022. The increase was primarily due to the increase in share-based compensation expenses and depreciation of Xunlei headquarter buildings as we finished construction and relocated the new headquarters in December 2022. Operating income was $0.7 million compared with $3.9 million in the same period of 2022. The decrease in operating income was primarily attributable to the increase in sales-based compensation, marketing expenses and labor costs incurred during this quarter. Other income was $1.4 million compared with $1.2 million in the same period of 2022. The increase was primarily due to higher investment income, partially offset by the increased foreign exchange loss as compared with the first quarter of 2022. Net income was $1.2 million, compared with $5.4 million in the same period of 2022. Non-GAAP net income was $5.5 million in the first quarter of 2023, compared with $7.2 million in the same period of 2022. The decrease of net income and non-GAAP net income was primarily attributable to the decrease in operating income and increased income taxes during this quarter. Diluted earnings per ADS in the first quarter of 2023 was approximately $0.02 as compared with [Technical Difficulty]. As of March 31, 2023, the company had cash, cash equivalents and short-term investments of $258.3 million compared with $260.8 million as of December 31, 2022. The decrease in cash, cash equivalents and short-term investments was mainly due to repayment of bank loans and spending on share buybacks. In March 2022, Xunlei announced that its Board of Directors authorized the repurchase of up to $20 million of shares over the next 12 months. As of March 31, 2023, the company had spent approximately $7.9 million on share buybacks. Turning to our revenue guidance for the second quarter 2023, Xunlei estimates total revenues to be between $111 million and $117 million and the midpoint of range represents a quarter-over-quarter increase of approximately 14.9%. This estimate represents management's preliminary view as of the date of this press release, which is subject to change and any change could be material. Now we conclude prepared remarks for the conference call today. Operator, we are ready to take questions.

Operator, we're ready to take questions.

[Operator Instructions] Now we're going to take our first question and the question comes from the line of Peter Du from DIT ADC Limited. Excuse me, Peter, we cannot hear you.

Okay, hello. [Foreign language]

Thanks, Peter. And this question is related to the nature of the subscription. The premium subscribers has been increasing and he wants to know the difference between the premium membership and the VIP membership. And whether our ultimate goal is to convert all VIP members into premium members. The premium members are also called super VIP members [foreign language]. Among other things, a premium membership offers more storage space, fast uptake and download speed, a better media streaming quality and more accessible resources. And if you want to know more details, kindly visit our official website, it has a complete list of differences. We provide various membership options to meet the diverse needs of our users. For example, some users have preference to affordability and others may value [indiscernible] and so on. However we do have observed an early trend of VIP members upgrading to premium membership lately, and we will continue to improve our products and services to provide enhanced value to our users. Thank you, Peter.

[Foreign language]

[Foreign language]

Okay. This question is, I have noticed that Xunlei is actively hiring for audio live selling operations. They want to know if the company is expanding in this area. Yes, we are increasing our headcount in this area, including handsome income to meet the growing needs of our business. That said, we will take a prudent approach to team expansion to control costs and improve efficiency. Thanks for your question.

[Foreign language]

[Operator Instructions] Now we are going to take our next question and the question comes from the line of Nick Chen from Nice Bridge Asset Management Limited.

My first question is related to the expense ratio. I noticed that in Q1, the 3 major expense items have all gone up pretty substantially during the quarter. And I would like to know if the company has implemented any measures to merit cost and also improve operational efficiency. And my second question is on share buybacks. As the share repurchase program that was announced last year is now expired, I would like to know if the company roll out any similar programs to buy back more shares in the foreseeable future?

Thanks, Nick, for asking questions. And -- the increase in expenses during the first quarter was primarily due to increased labor costs, marketing expenditures and share-based compensation expenses as well as the depreciation of Xunlei headcount, which happened this quarter. The increase is largely correlated to our business expansion, the managerial control process. We will review our expense and cost structure and try to find room for improvement. And going forward, we will continue to focus on optimizing costs and expenses to improve our operational efficiency and achieve sustainable growth. And regarding share buybacks, we announced the share buyback program last March and it has filed. And considering the current stock price of Xunlei, I believe the Board of Directors of Xunlei will review factors like the company's operations, capital structure, financial liquidity as well as its business outlook to decide if the new share buyback plan is in action. And if it does, we will make an announcement in times coming. Thanks for asking.

[Operator Instructions] We'll just give a moment for all our participants at the last moment, so just to ask last questions. Dear speakers, there are no further questions at this time. And I would like now to hand the call over to the management for any closing remarks.

Thank you again for your time and participation. And if you have any questions, please feel free to visit our website at ir.xunlei.com, or an e-mail to our Investor Relations. Have a good day. Operator, we conclude today's conference call. Thank you.

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.