Xunlei Limited (XNET) Q1 2026 Earnings Report, Transcript and Summary

Welcome, ladies and gentlemen, and thank you for your patience. You've joined Xunlei's First Quarter 2026 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. Thank you. Please go ahead.

Good morning, everyone, and thank you for joining Xunlei's Q1 2026 Earnings Conference Call. With me today are Eric Zhou, CFO; and Lee Li, Vice President of Finance. Our IR website has our earnings press release to supplement our prepared remarks during the call. Today's agenda includes a prepared opening remarks from Chairman and CEO, Mr. Jinbo Li, on Q1 operational highlights, followed by CFO, Eric Zhou's presentation of financial results details of Q1 before opening up the floor to your questions in the Q&A session. Please note that this call is recorded and can be replayed in our Investor Relations website at ir.xunlei.com. Before we get started, I would like to take this opportunity to remind you 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. Such statements are based on our management's current expectations under existing 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 laws. On this call, we'll 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 the Mr. Jinbo Li, Chairman and CEO of Xunlei Limited.

[Interpreted] Good morning, and good evening, everyone. Thank you for joining us today. We're excited to begin 2026 with a strong first quarter, one defined by disciplined execution, strategic clarity and tangible progress in our business transformation. Q1 was a period of decisive action. We delivered robust revenue growth across our core segments, completed a successful corporate restructuring and concentrated our focus on our highest potential business area after carefully balancing our resources and the business opportunities. Total revenue for Q1 2026 reached $98.6 million, a significant 54.1% increase year-over-year. This growth was driven by our strategic emphasis on consumer-oriented businesses, particularly our two key growth engines, subscription services and overseas audio live streaming business. Now let me share with you some insights on these two vital business lines. For our subscription business, it remains Xunlei's stable cornerstone, delivering consistent cash flow and steady growth. In Q1, subscription revenue reached $45 million, a solid 26.2% year-over-year increase. This performance reflects our two focused efforts. Firstly, by thoughtfully enhancing the premium subscription experience, listening closely to user feedback and refining features, we have attracted a record number of users to use our premium services. Their trust is both our motivation and our greatest reward. And secondly, through constructive long-term collaborations with leading mobile phone manufacturers and Internet platform partners, we have expanded our reach naturally and inclusively, bringing our services to new communities while staying true to our mission of enriching everyday digital life. Looking ahead, we're excited to introduce new features designed to make every interaction more intuitive, joyful and personal. With your continued support, we are confident in sustaining this purposeful growth. Our overseas live streaming business and other services have emerged as a powerful growth engine, delivering results in line with our expectations. In Q1, this segment generated $53.6 million in revenue, also an 89.3% year-over-year increase. This exceptional growth validates our strategic focus on overseas markets, especially high-growth emerging regions such as Southeast Asia and the Middle East. These markets benefit from supportive platform policies and growing user demand. We have leveraged our strength in product refinement, user engagement and monetization to enhance local operations. The diverse user base, high engagement levels and increasing willingness to pay in these regions create substantial opportunities. Our ability to adapt services to local market preference, combining geographic and cultural insights with digital entertainment consumption is a key driver for this remarkable growth. We will continue to intensify our overseas expansion, exploring new markets and optimizing service offerings to sustain momentum. That said, given the ever-changing competitive landscape, our rapid growth may experience a modest slowdown in future quarters. In conclusion, Q1 2026 was a transformative period of Xunlei. We achieved strong financial results, executed a strategic restructuring to concentrate fully on To C operations and saw our overseas live streaming business emerge as a leading growth driver. We have demonstrated our ability to make both strategic decisions, adapt to market dynamics and drive growth through focus and innovation. With a clear strategic direction, robust business momentum and optimized resource allocation, we believe we are well positioned to capture growing opportunities in the To C market, sustain our growth trajectory and create long-term value for our shareholders. We remain committed to executing our strategy with discipline and agility, and we're excited about the future ahead. I will now hand the call over to our CFO for a detailed review of our Q1 2026 financial results.

Thank you, Luhan, and thank you all for participating in today's conference call. I will now walk you through our financial results for the first quarter of 2026. Please note that in Q1, we restructured our cloud computing business and it's no longer consolidated in our financial statements. Hence, the following financials exclude discontinued operations. For the first quarter of 2026, our total revenues came in at $98.6 million, up 54.1% year-over-year. This strong top line growth was mainly driven by higher revenue from our subscription business as well as solid gains from our overseas audio live streaming business. Breaking down our revenue performance, subscription revenues reached $45 million, representing a 26.2% year-over-year increase. This growth reflects stronger user demand for our subscription offerings. Our live streaming and other services delivered $53.6 million in revenue, jumping 89.3% year-over-year, thanks primarily to the robust expansion of our overseas audio live streaming business. Our cost of revenues were $40.4 million in the quarter, making up 41% of total revenues. For comparison, we recorded $24.1 million or 37.8% of total revenues in the same period of 2025. The higher cost of revenues aligned closely with our live streaming revenue growth, driven mainly by increased revenue sharing expenses for our overseas audio live streaming operations. The remaining portion of revenue costs mainly came from payment handling fees and bandwidth expenses. Moving to profitability. We generated $57.7 million in gross profit this quarter, up 45.1% year-over-year. Our gross margin stood at 58.5% compared to 61.9% in the prior year quarter. The gross profit improvement was fueled by both our overseas audio live streaming business and our subscription business. The slight margin decline was a structural mix change. Live streaming, which carries a lower gross margin than subscription now accounts for a larger share of our total revenues, which compressed our overall gross margin modestly. On the expense front, our R&D expenses were $20.2 million in Q1 2026, representing 20.4% of total revenues. This compares with $16 million or 25.1% of total revenues in the first quarter of 2025. The year-over-year increase was mainly due to higher labor costs this quarter. Sales and marketing expenses rose to $22.4 million this quarter, flat as a percentage of revenue at 22.8% compared with $14.5 million or 22.7% of our total revenues. The higher absolute spending this year reflects increased marketing investments across our subscription and overseas audio live streaming business as we continue to prioritize user acquisition. G&A expenses came in at $10.9 million, equal to 8.5% of our total revenues versus $10 million or 15.7% of total revenues in Q1 2025. The increase was primarily driven by higher share-based compensation expenses. On an operating level, we delivered operating income of $4.3 million this quarter, improving from an operating loss of $1 million in the prior year period. This turnaround was largely driven by stronger gross profit across our core businesses. We recorded a net other loss of $195.1 million this quarter compared with a net other income of $1.1 million in Q1 2025. This year-over-year shift was mainly attributable to the fair value changes related to our long-term investment in Arashi Vision Inc., which completed its IPO back in June 2025. Turning to discontinued operations, which relates entirely to our Shenzhen Onething business, which we recognized in March and recognized income of $17.7 million in Q1 2026, which comprised the operating loss of $1.8 million from discontinued operations and a disposal gain of $4.3 million as well as the income tax benefits related to the disposal of $15.2 million. Our net loss from continuing operations was $192.4 million this quarter compared with net loss of $0.2 million in Q1 2025. The large net loss was mainly due to the net other loss we just discussed, partially offset by our improved operating performance. On a non-GAAP basis, we achieved solid growth in non-GAAP net income from continuing operations, which rose to $4.1 million, up from $0.9 million in the prior year period. On a per share basis, our diluted loss per ADS from continuing operations was $3.06 for the quarter compared with a diluted EPS of $0 in Q1 2025. Our non-GAAP diluted earnings per ADS from continuing operations increased to $0.10 -- to increased to $0.07 versus $0.02 in the same quarter last year. Finally, on the balance sheet, as of March 31, 2026, our cash, cash equivalents and short-term investments totaled $303.6 million, up from $283.5 million as of December 31, 2025. The increase was primarily driven by positive operating cash flows and proceeds from the disposal of our 50% equity stake in Shenzhen Onething. These gains were partially offset by deferred consideration payments for our Hupu acquisition. This concludes our prepared remarks. Operator, we are now ready to take questions.

[Operator Instructions] You have a question from the line of George Kim.

[Foreign Language]

The first question is he noticed from our annual report that in November last year, Hupu was sued for the alleged unauthorized dissemination of NBA game content and the unauthorized use of the NBA trademark. And the claimed damage amounted to approximately USD 12.1 million in total. And he would like us to provide more details regarding such copyright litigation and he wants to know if it has -- or if it will have any material impact on this business. Thanks for the question. And as it is an ongoing case, we can't comment on it right now. But that said, we have set aside some allowances to cover any potential expenses related to this litigation, and we don't expect this case will have a significant impact on our operations. Thank you.

[Foreign Language]

And the second question is he mentioned that there is a 1940 Investment Act that requires companies to maintain the ratio of investment income to total assets below a certain threshold. And it is expected that equity gains will exceed that ratio. And he would like to know if any measures the company would take to address this regulation by SEC. This is a good question. And you are correct. We will continue to monitor our holdings of our appreciated assets in Arashi Inc. And we've been consulting with relevant advisers. And if needed, we will gradually seek to adjust our holdings so that Xunlei will hold investment in securities with a value not exceeding 45% of the company's total assets, excluding government securities and cash items, in line with the company's intention to mainly engage in our core To C business. And in fact, we never intend to be an investment company. Thank you.

[Operator Instructions] At this time, no further questions from the line. Allow me to hand the call back to Eric for closing.

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

That does conclude today's conference call. Thank you for your participation. You may now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]