Xunlei Limited (NASDAQ:XNET) Q2 2023 Earnings Call Transcript

Xunlei Limited (NASDAQ:XNET) Q2 2023 Earnings Call Transcript August 15, 2023

Operator: Welcome, ladies and gentlemen, and thank you for your patience. You’ve joined Xunlei’s 2023 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. 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.

Luhan Tang: Thank you, and good morning, everyone, and thank you for joining Xunlei’s 2023 second quarter earnings conference call. On the call with me today are Eric Zhou, Chief Financial Officer; and [indiscernible] Vice President of Finance. Now our earnings press release is available 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 on behalf of our Chairman and CEO, Mr. Jinbo Li on highlight of our second quarter operations. Then Mr. Eric Zhou, our CFO, will walk you through the details on the financial results and wrap up with our revenue guidance for the third quarter of 2023. After the management remarks, we’d like to welcome any questions from you in our Q&A session.

Today’s call is recorded, and you can replay the call from 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 management’s current expectations on the 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 full 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 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 and prepared statements by Mr. Jinbo Li, Chairman and CEO of Xunlei Limited.

Jinbo Li: Good morning, everyone, and welcome to our 2023 second quarter earnings conference call, and thanks a lot for your ongoing support, despite the challenges to our domestic automation (ph) business, we delivered a strong second quarter with a total revenue of $104.3 million, up 33.3% compared to last year and $5 million in the net income. Our top line growth was well balanced across three base business segments, demonstrating our operational resilience amidst an ever evolving environment. We also achieved a year-over-year growth of 35.9% in gross profit and improved gross profit margin. This serves as evidence of our dedicated efforts to capitalize on the economies of scale and enhanced operations management. Now I would like to add some color to the performance to each of the three business segments.

In the second quarter of 2023, our Subscription business generated $29.7 million in revenue, reflecting a 17% year-over-year increase. Throughout this period, we observed a consistent upward trend in premium subscriber conversion rate, which rose from 35.1% in the second quarter of last year to 59.2% this quarter among all paying subscribers. Additionally, the average revenue per subscriber increased from RMB37.8 to RMB42.9 compared to the same period in 2022. I’m glad that our unwavering focus on providing convenient, secure and quick access to our subscription business has yielded encouraging results. On top of that, through engaging initiatives carried out by the team we gained additional and valuable understanding of the users’ needs and boosted retention rates accordingly.

And I expect that the growth momentum will continue as we keep exploring and testing new ideas and innovating on existing products. Despite strong competition, our Cloud Computing business effectively utilized its competitive edge in shared cloud technology to deliver reliable, scalable and cost effective services to our clients. As a result, we achieved a year-over-year growth of 8.2% and generated $30.7 million in revenue during the second quarter of 2023. The increased sales of our cloud computing hardware OEC in second quarter was the primary factor fueling this growth as this new generation of smart device outperformed earlier version under similar conditions and brought higher rewards to users, and we intend to keep integrating our technology and product features while pursuing sustainable business development.

As a key driver of our growth, Live Streaming and other Internet value added services contributed to a significant 79.1% increase in revenue, reaching $43.9 million. However, during the second quarter of 2023, we encountered challenges posted by the evolving industry environment for our domestic audio live streaming business and proactively downsized its operations. We intend to further downsize domestic live streaming services in the second half of this year. We anticipate that the downsizing of this business line will significantly reduce our revenue in the upcoming quarters. Whereas our Subscription and Cloud Computing businesses will remain unaffected. We intended to reallocate the resources and explore new opportunities to offset the impact of the business adjustment.

Wrapping up my remarks. Xunlei is committed to advancing core technological innovation and delivering top-notch products and services for our clients and users. We will keep harnessing our strengths and maintain product competitive edge and expand our value chain while legalizing years of managerial experience and the technical know-how to drive future growth. With a strong financial position and a proven track record of operating performance, we firmly believe that Xunlei will emerge from the current endeavor as a more focused company. We positioned to seek long-term growth opportunities and create sustainable shareholder value. 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 third quarter of 2023.

Eric Zhou: Thank you, Jinbo. (ph) Hello, everyone, and thank you, again for joining Xunlei’s 2023 second quarter earnings conference call. I will walk you through the details of our financial results and wrap up with our revenue guidance for the third quarter of 2023. For the second quarter of 2023, total revenues were $104.3 million, representing a year-on-year increase of 33.3%. The increase in revenues primarily attributed to the enhanced performance of our Live Streaming, Subscription and Cloud Computing business. Revenues from cloud computing reached $30.7 million, representing an increase of 8.2% compared to the second quarter of last year. The increase in cloud computing revenues were mainly driven by higher sales of hardware devices for cloud computing during this quarter.

Revenues from subscription were $29.7 million, representing a solid 17% increase year-over-year. This growth was attributed to both higher average revenue per subscriber and an increased number of subscribers when compared to the same period last year. As of June 30, 2023, we had a total of 4.72 million subscribers, up from $4.46 million on June 30, 2022. In the second quarter of 2023 alone, each subscriber growth in an average revenue of RMB42.9 million, which is significantly higher than RMB37.8 during the same period last year. This increase in average revenue per subscriber is primarily due to more users opted for premium membership. Revenues from cloud streaming and other Internet value-added services or IVAS were $43.9 million, an increase of 79.1% year-over-year.

The increase of cloud streaming and other IVAS revenues was mainly driven by higher demand for our Live Streaming services. As we mentioned in our press release, we started to downsize our domestic audio live streaming services in the second quarter, and as a result, we expect revenues from this segment will experience a significant decline sequentially in the third quarter. And to mitigate this impact on our total revenues we will strive to strengthen our existing product lines and explore new opportunities. Cost of revenues were $58.1 million, representing 55.7% of our total revenues compared with $44.3 million or 56.6% of the total revenues in the same period of 2022. The increase in costs was primarily attributable trough the higher sales from our live streaming subscription and cloud computing services and products.

Bandwidth costs as included in cost of revenues were $28.9 million representing 27.7% of our total revenues compared with $25.5 million or 32.6% of the total revenues in the same period of 2022. The increase in bandwidth cost was mainly driven by the increased demand for our cloud computing services. The remaining cost of revenues mainly consisted of costs related to revenue sharing costs for a live streaming business, payment of handling fees and cloud computing hardware devices. The gross profit for the second quarter of 2023 reached $45.9 million, reflecting a significant increase of 35.9% compared to the same period in 2022. Furthermore, the gross profit margin was 44% during the second quarter of 2022, expecting a slight improvement from 43.1% in the previous year.

This growth in gross profit was primarily attributable to the increase in gross profit in our Live Streaming and Subscription business. Research and Development expenses for the second quarter of 2023 were $17.2 million representing 16.5% of our total revenues compared with $16 million or 20.4% of total revenues in the same period of 2022. The increase was primarily due to higher labor costs incurred during this quarter. Sales and marketing expenses for the second quarter of 2023 were $15.4 million, representing 14.7% of our total revenues compared with $5 million or 6.4% of our total revenues in the same period of 2022. The increase was primarily due to more frequent marketing activities resulting from our ongoing user acquisition efforts.

G&A expenses for the second quarter of 2023 were $12.4 million or 11.9% of our total revenues compared with $12 million or 15.4% of our total revenues in the same period of 2022. The increase was primarily due to the increase in depreciation of Xunlei’s headquarters building as we finished the construction and relocated to the new headquarters in December 2022. Operating income was $0.9 million compared with $0.7 million in the same period of 2022. Other income was $4.7 million compared with $7 million in the same period of 2022. The decrease in other income was mainly due to less reversal of certain payables due more than three years with low payment probability as compared with the same period of 2022. Net income was $5 million (ph) compared with $6 million in the same period of 2022.

Non-GAAP net income was $8.4 million in the second quarter of 2023 compared with $9.8 million in the same period of 2022. The decrease in net income and non-GAAP net income was primarily attributable to the decreased other income as discussed above. Diluted earnings per ADS in the second quarter of 2023 was approximately $0.08 as compared with $0.09 in the same period of 2022. As of June 30, 2023, the company had cash, cash equivalents and short-term investments of $258.5 million compared with $258.3 million as of March 31, 2023. The increase in cash, cash equivalents and short-term investments primarily resulted from positive net of cash inflows during this quarter partially offset by the repayment of bank loans, expenditures on share buybacks and devaluation of the Chinese RMB against the U.S. dollar.

In June 2023, Xunlei announced that its Board of Directors authorized the repurchase of up to $20 million of shares over the next 12 months. As of June 30, 2023 the company has spent approximately $1 million on share buybacks under the new share repurchase program. Turning to our revenue guidance. For the third quarter of 2023, Xunlei estimates total revenues increased between $79 million and $84 million, and in the midpoint of the range represents a quarter-over-quarter decrease of approximately 21.9%. The decline is largely due to the impact of the continued downsizing of our domestic live stream business whereas the operations of a subscription and the cloud computing businesses are not affected. 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. Operator, we are ready to take questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Retail Investor, Jack Lu (ph). Please go ahead with your question.

Unidentified Participant: [Foreign Language] [Interpreted] Thanks for the question. And the caller asked that he looks at the company is downsizing, its domestic audio, live streaming business and he’d like to know what’s the percentage of revenue for the domestic audio live streaming business to the total revenues. And he also would like to know that the anticipated impact of the future overall revenue and whether Xunlei plans to continue downsizing its business in the future.

Eric Zhou: In the second quarter, we started to downsizing our relatively low gross margin domestic audio live streaming business. And this business accounted for approximately 12.4% of the total revenues in the first half of the year and going forward, we will continue to assess our live streaming and IVAS business and may continue to downsize our domestic live steaming business to improve operations. And we anticipate a declining of about 21.9% in total revenues for the third quarter as compared with the second quarter and that said, I’d like to mention that our Subscription and the Cloud Computing business remains unaffected. Thankyou.

Unidentified Participant: [Foreign Language]

Operator: Thank you. There are no further questions at this time. So I’ll hand the call back to Eric Zhou for closing remarks.

Eric Zhou: Well, thank you, again for your time and participation. And 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.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect. Speakers, please standby.