Xunlei Limited (NASDAQ: XNET) Q1 2020 Earnings Call Transcript

Xunlei Limited (XNET) Q1 2020 earnings call dated May. 14, 2020

Corporate Participants:

Charlene Lu — Investor Relations Manager

Jinbo Li — Chairman and Chief Executive Officer

Naijiang (Eric) Zhou — Chief Financial Officer

Analysts:

Steve Chen — Stellar Chain Group — Analyst

Trista Yang — Noah Group — Analyst

Cheng Chu — — Analyst

Presentation:

Operator

Good day, ladies and gentlemen. Thank you for your patience. You have joined Xunlei’s First Quarter of 2020 Earnings Results Conference Call. [Operator Instructions]

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

Charlene Lu — Investor Relations Manager

Thank you, operator. Good morning and good evening and thank you all for joining us today. We welcome you to this conference call to discuss Xunlei’s first quarter of 2020 earnings. For our agenda today, Mr. Jinbo Li, 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,

Please be limited to two questions at a time, so others can get their question in as well. 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 discussion today will contain certain forward-looking statements made under the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995. Such statements are based on management’s current expectations on the 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 the 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 comparable GAAP measures can be found in our earnings press release. Please note that all numbers are in US dollars unless otherwise stated.

And with that, let me pass to our CEO, Mr. Jinbo Li for prepared remarks.

Jinbo Li — Chairman and Chief Executive Officer

[Foreign Speech] Good morning and good evening everyone. Thank you for joining us for our first quarter of 2020 earnings call. I’m very happy to rejoin Xunlei to be its Chairman and CEO and look forward to having more opportunities to talk with you in the future. We are going through an unprecedented time. And I’m proud of our employees’ efforts during the past quarter.

Now I would like to share our business goals, recent developments and financial highlights of the first quarterof 2020.

[Foreign Speech] We began the year 2020 with steady revenue despite unfavorable economic conditions as a result of the COVID-19. Our revenues remain steady at $48.3 million, up about 10.1 percentage compared to the fourth quarter of 2019 that is an increase of 17 percentage compared to the same period last year. Further, the net loss was significantly reduced from $18.1 million in the fourth quarter of 2019 to a loss of $5.5 million this quarter.

[Foreign Speech] Amongst our product lines, I would like to highlight the performance of our StellarCloud service and membership subscription service.

[Foreign Speech] As part of our cloud computing and IVAS service, we are pleased to see the continued growth of revenue from our StellarCloud service. During the first quarter, our relationship with our corporate clients remained strong and demand for our CDN service kept its previous chain of growth. The overall cloud computing and IVAS revenues dropped 14.2% compared with the previous quarter. And the decline is due to the decrease in live streaming revenues, other IVAS revenues and the lack of cloud hardware sales this quarter.

[Foreign Speech] Our subscription revenue grew 18.1 percentage quarter-over-quarter and grew $10.4 million — 10.4 percentage year-over-year to $23.4 million and contributed 48.3 percentage of our revenues this quarter. Our subscriber base also increased from approximately $4 million to about $4.6 million compared to the previous quarter. As subscriptions revenue is an important source of our cash flow and a substantial part of our gross profit, we are very pleased with such growth. The growth was mainly attributable to the extended Chinese New Year holiday, but we will strive to retain as many of these new subscribers as possible.

[Foreign Speech] The overall revenue performance in the first quarter was within our expectations. Performance by business segments are also consistent with our overall strategy, which means that cloud computing surveys drive our growth and the traditional subscription business provides steady cash flow and profit.

[Foreign Speech] Our StellarCloud’s cloud computing service has experienced continued growth for the last several quarters and will remain one of the main growth drivers of the company. Going forward, while seeking growth and the scale of the business, we will also try to improve operating efficiency.

[Foreign Speech] Generally subscriptions membership survey has always been a core part of our business. Our subscriptions business brought in steady cash flows and the substantial amount of gross profit for the company. And 4 million [Phonetic] also subscribers our precious and integral to our brand value. As one of Xunlei core competencies, it’s critical that we focus our efforts on maintaining our leadership predictions in large scale distributed edge computing capacity and continue to improve our service to boost the membership satisfactions.

[Foreign Speech] One of our main goals this year is to enhance membership experience for our subscriber to retain our current members and widen our user base in order to build our subscription numbers. Several members of our new management team were integral in the initial creations of our subscription service product that launches in May as a leader in the cloud accelerations business. Now they are rejoining Xunlei and will bring in fresh perspective and additional experience. We will leverage this experience to further what has made Xunlei successful with the traditional user base and we will also create new features to attract more diverse users to generate synergies and expand our total user base.

[Foreign Speech] Ultimately, our goal is to expand the capabilities of our subscription service, especially on the mobile front. As more and more users move from PC to mobile service, we plan to expand our mobile subscription service through product innovations to bolster our user base and increase our membership numbers.

[Foreign Speech] In the future, we will continue to pursue blockchain technology innovations based on our ThunderChain infrastructure.

[Foreign Speech] As you may be aware, Xunlei recently had such evictions in leadership. Our goal is to fully cover Xunlei business potential and achieve profitability as soon as possible. One option a core competency is in our leading provisions in large scale distributed edge computing capacity, which is the foundation of our cloud computing and subscription business. Going forward, we will concentrate on this core competencies and capitalize our competitive advantage. Particularly, we will continue to expand our 2B business, while improving profitability and at the same time expand our 2C product range and improve overall operating efficiencies to ensure growth and the continued operations of the company with a strong balance sheet and abundance resources. We are optimistic about achieving this goal.

[Foreign Speech] Having said that, I will now turn the call over to Eric to review the financial results and the guidance for the second quarter of 2020. Eric please.

Naijiang (Eric) Zhou — Chief Financial Officer

Thank you, Jinbo. Hello, everyone, and thank you [Technical issues] for the previous quarter. All subscription revenues increased substantially this quarter, but this increase was offset by the decrease in live streaming and the cloud hardware sales revenue. Revenues from subscriptions were $23.4 million, up 18.1% from the previous quarter. The number of subscribers were approximately 4.6 million as of March 31 2020, up from about 4 million as of December 31, 2019. The average revenue per subscriber for the first quarter of 2020 was RMB35.9, up from RMB35.1 for the previous quarter. Revenues from cloud computing and other IVAS combined to $21.2 million, representing a decrease of 14.1% on a sequential basis. The decrease was mainly due to decreased live streaming revenue and reduced cloud computing hardware product sales.

Revenues from online advertising were $3.8 million, representing a decrease of 1.3% from the previous quarter. Cost of revenues was $24.4 million representing 50.4% of our total revenues, compared with $30.3 million or 62.7% of our total revenues in the previous quarter. The decrease was mainly due to a write-down of our inventory of $3.2 million in the previous quarter and the decrease cloud computing products costs and live streaming revenue sharing costs which was in line with the decrease of such revenues. Bandwidth costs in the first quarter of 2020 were $18 million representing 37.1% of our total revenues, compared with $17.8 million or 36.8% of our total revenues in the previous quarter. The remaining cost of the revenues mainly made up of the revenue sharing costs for our live streaming business.

Gross profit for the first quarter of 2020 was $23.8 million, up 33.1% from the previous quarter. Gross margin was 49.3% in the first quarter compared with 37.1% in the previous quarter. The increase in gross profit and gross margin was mainly due to the growth of our subscription business this quarter and a decreased caused this quarter as there was a write-off in the amount of $3.2 million for OneThing Cloud hardware inventory in the previous quarter.

Research and development expenses for the first quarter of 2020 were $16.8 million, representing 34.8% of our total revenues, compared with $14.3 million or 29.6% of our total revenues in the previous quarter. The increase was mainly due to the costs associated with optimizing organizational structure, benefits and competition during the quarter.

Sales and marketing expenses for the first quarter of 2020 were $6.7 million, representing 13.9% of our total revenues. Compared with $11.1 million or 23.1% of our total revenues in the previous quarter. The decrease was mainly due to less marketing and promotional activities we conduct in the first quarter.

General and at the administrative expenses for the first quarter of 2020 were $8.4 million representing 17.5% of our total revenues, compared with $10.2 million or 21.2% of our total revenues in the previous quarter. The decrease was mainly due to less professional consulting expenditures. There was no impairment of assets in the first quarter of 2020 compared with a credit of $0.1 million in the previous quarter, which represented a net recovery of impaired assets.

Operating loss for the first quarter of 2020 was $8.1 million, compared with an operating loss of $17.7 millin in the previous quarter. The decrease in operating loss was primarily due to higher gross profits and less operating expenses incurred. Net loss was approximately $5.5 million in the first quarter of 2020, compared with a net loss of $18.1 million in the previous quarter.

Non-GAAP net loss was $4.5 million in the first quarter of 2020, compared with a non-GAAP net loss of $17 million in the previous quarter. Diluted loss per ADS in the first quarter of 2020 was $0.08 compared with a diluted loss per ADS of $0.27 in the previous quarter. As of March 31, 2020, the company [Technical Issues] compared with $265.3 million as of December 31, 2019.

And finally, I’d like to turn to our guidance for the second quarter of 2020. We expect total revenues to be between $42 million and $47 million for the quarter. The midpoint of the range represents a quarter-over-quarter decrease of about 7.9%. This estimates represents the management’s preliminary view as of today and is structured to change and any change could be material.

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

Questions and Answers:

Operator

Thank you, ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have a question, it is from the line of Steve Chen [Phonetic] from Stellar [Phonetic] Chain Group. Please go ahead.

Steve Chen — Stellar Chain Group — Analyst

Hello. [Foreign Speech]

Jinbo Li — Chairman and Chief Executive Officer

[Foreign Speech] So first of all, our hopes is to continue to work with our employee and our staff to continue to grow our business and we hope that we will be able to see some growth and generate good returns for our investors for the remainder of the year. So the year has been, there is about half a year to the year-end from now onwards and there are many things that we still want to do, but with such a short period of time, our focus will be on our core competitive advantages. We hope to focus on this, while increasing our operating efficiency in order to generate revenues for our shareholders and our company.

[Foreign Speech] So through our focus on our core competitive advantages and our increases in efficiency we are hoping to to achieve in the remainder of the year. We hope to work with our employees and our fellow staff to increase the profitability of the company. And to do this, we believe that for our employees, we will — we hope to see more input for them and more of an entrepreneur spirit from our fellow staff. The shareholders will continue to support the company as always and support our current business lines. Thank you. The next question please.

Operator

Thank you. The next question comes from Trista Yang of Noah Group. Please go ahead.

Trista Yang — Noah Group — Analyst

Hi, this is Trista from Noah Hong Kong. [Indecipherable] First, if you could tell us at what price [Phonetic] Xiaomi [Phonetic] from Xunlei, will Xiaomi continue to operate with Xunlei in the future? And the second one is, we still like to see the capitalization or having [Indecipherable] in our Hong Kong stock exchange with a complete five [Indecipherable]. Thank you.

Naijiang (Eric) Zhou — Chief Financial Officer

I’ll take the question. Okay, this is Eric. Regarding Xiaomi’s exit price, it was a private transaction among the shareholders. Xunlei was not involved with the details of the transaction. And we will continue to carry out our existing contracts and cooperation with Xiaomi and at the same time explore potential new opportunities. We hope to take at advantage of respective strengths and expand our cooperation. As we have cooperated successfully with Xiaomi for several years and we are optimistic about continued operation — cooperation in the future. And in terms of privatization, so far, the Board of Directors as not discussed this issue. Regarding [Indecipherable] it’s not on our agenda. And regarding stock buybacks. We will closely monitor the development of the capital market. The company’s cash position and the capex needs and make an informed decision in a timely fashion. Thank you for your questions.

Operator

Thank you. [Operator Instructions] We have a question from the line of Cheng Chu [Phonetic]. Please go ahead.

Cheng Chu — — Analyst

[Foreign Speech] Okay. So the question asked, he stated that he is a very small shareholder of Xunlei, and because for the past several years, Xunlei has been in a loss position, and he is wondering whether Mr. Li has anything to say to the smaller shareholders of Xunlei with regards to these losses.

Jinbo Li — Chairman and Chief Executive Officer

[Foreign Speech] So first, we would like to thank all of the minority stockholders and their continued support with Xunlei even through our low prices and we would like to thank them for their past belief of our development. As the current CEO of Xunlei and one of the initial founders of the company, we will do everything in his power in order to get — to try to get good growth and good profitability from the company from now onwards. We will — we hope — we will, we hope to awaken all the entrepreneurs here and entrepreneurship of our current staff and work together to make sure that our business will generate higher rates of return in the future. Thank you for your question.

Operator

Thank you. [Operator Instructions] At this time, there are no more questions from the line. I would like to hand the call back to the management for closing.

Naijiang (Eric) Zhou — Chief Financial Officer

Okay. Thank you all for your participation today and please contact us if you have any questions in the future. Have a good day.

Operator

[Operator Closing Remarks]