Xunlei Limited (NASDAQ:XNET) Q3 2024 Earnings Call Transcript

Xunlei Limited (NASDAQ:XNET) Q3 2024 Earnings Call Transcript November 14, 2024

Operator: Welcome ladies and gentlemen, and thank you for your patience. You’ve joined Xunlei’s Third Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. Please be advised that today’s conference has been recorded. I would now like to turn the call over to the host, Investor Relations Manager, Ms. Luhan Tang. Please go ahead.

Luhan Tang: Good morning everyone, and thank you for joining Xunlei’s Q3 2024 earnings conference call. With me today are Eric Zhou, CFO; and Lee Li [ph], 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 remark from Chairman and CEO, Mr. Jinbo Li on Q3 operational highlights. Followed by CFO, Eric Zhou, presentation of financial results details and the revenue guidance of Q4 2024 before we open up the floor to your questions in the Q&A session. Please note that this call is recorded and can be replayed on 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 and 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 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 prepared statements by Mr. Jinbo Li, Chairman and CEO of Xunlei Limited.

Jinbo Li: Good morning, and good evening, everyone. Thank you all for joining us today. In the third quarter 2024, we achieved continued profitability, while total revenues declined 4.9% due to the lingering impact from last year’s downsizing of our domestic audio live streaming business and reduced cloud computing sales due to the changing market landscape for our cloud computing business. We were able to partially mitigate the impact by expanding our overseas operations. Moving forward, we intend to continue to invest in overseas projects, including live streaming business, explore new opportunities and restructure our overall product mix to develop a more stable and growth-oriented business. Now, I’d like to review the performance of our major business segments for the third quarter of 2024.

Let me start with our subscription business. Our subscription business enjoyed continuous growth and generated $33.2 million in revenue, up 15.6% year-over-year. We’re very pleased with the progress achieved by our talented product team. Their efforts on product refinement and marketing strategies led to improved user engagement, loyalty and more premium membership purchases. During the third quarter, premium subscribers accounted for 78% of total paying users compared to about 60% in the same period last year. Going forward, we will proactively explore synergy within our product ecosystem to pursue sustainable growth. For example, we will seek further collaboration with a leading cell phone maker for partnerships to use pre-installed Xunlei products to support their mobile phone browsers to drive meaningful growth and expand our user base.

In the third quarter, our cloud computing business faced significant challenges and our revenue declined to $25.3 million, representing a 14.4% year-on-year decrease. We expect the cloud business to continue to face headwinds due to intense market competition and evolving regulatory environment. We will evaluate options to stabilize this business and minimize the impact of the revenue reduction on our total revenues as well as the bottom line. Revenue from our live streaming and IVAS business reached $21.6 million, representing a quarter-over-quarter increase of 6.7% and a year-over-year decrease of 16.7%. The consistent quarter-over-quarter increase over the last three quarters was due to the growth of our overseas live streaming operations, which partially neutralized the impact of downsizing of our domestic audio live streaming business.

Our new product mix is well positioned to tap into both existing markets and new targeted regions. We are incubating a number of products to search a star product with controlled operational risks. This approach allows us to explore different avenues while minimizing potential setbacks. Before I conclude, I want to emphasize our high confidence in Xunlei. Throughout the past decades, our dedication to innovation and market adoption has been a driving force behind our success in an ever-evolving environment. In this fast-paced digital era, where technology advances at an unprecedented rate, we understand the importance of staying ahead of the curve. And for this reason, we will continue investing in research and development of initiatives that bring about groundbreaking solutions and products and services.

Looking ahead, we are committed to pushing boundaries even further and exploring untapped potential with a relentless determination and ultimately creating value for our shareholders. With that, I will now pass the call over to Eric. Eric will give a detailed review of our Q3 financial results and provide revenue guidance for the fourth quarter of 2024.

Eric Zhou: Thank you, Luhan, and thank you all again for participating in Xunlei’s conference call to discuss financial results of the third quarter of 2024. In the third quarter, our total revenues were $80.1 million, representing a decrease of 4.9% year-over-year. The decrease in total revenues was mainly attributable to the decrease in our revenues from live streaming and cloud computing business. Revenues from cloud computing were $25.3 million, representing a decrease of 14.4% year-over-year. The decrease in cloud computing revenues was mainly due to the reduced sales of our cloud computing services and a decline in sales of cloud computing hardware devices as a result of heightened competition and evolving regulatory environment.

Revenues from subscription were $33.2 million, representing an increase of 15.6% year-over-year. The increase in subscription revenues was mainly driven by the increase in the number of subscribers. The number of subscribers was 5.51 million as of September 30, 2024, compared with 5.02 million as of September 30, 2023. The average revenue per subscriber for the third quarter was RMB 40.9 compared with RMB 39.9 in the same period of 2023. The higher average revenue per subscriber was mainly attributable to an increase in the proportion of users who signed up for our premium membership services. Revenues from live streaming and other IVAS were $21.6 million, representing a decrease of 16.7% year-over-year. The decrease of live streaming and other IVAS revenues was mainly due to the downsizing of our domestic audio live streaming operations since June 2023, which was partially offset by the increase in the revenues from our overseas audio live streaming business.

Cost of revenues were $39.4 million, representing 49.1% of our total revenues compared with $46.4 million or 55.1% of our total revenues in the same period of 2023. The decrease in cost of revenues was mainly attributable to the decrease in bandwidth costs as well as revenue sharing costs for our live streaming business incurred this quarter. Bandwidth costs as included in cost of revenues were $24.8 million, representing 31% of our total revenues compared with $28.1 million or 33.4% of our total revenues in the same period last year. The decrease was primarily due to the decrease in revenues from cloud computing services during the quarter. The remaining cost of revenues mainly consisted of costs related to the revenue sharing from our live streaming business, payment handling charges and cost of inventory sold.

Gross profit for the third quarter of 2024 was $40.5 million, representing an increase of 7.8% year-over-year. Gross profit margin was 50.5% in the third quarter compared with 44.6% in the same period of 2023. The increase in gross profit was mainly driven by the increased gross profit from our subscription business. The increase in gross profit margin was primarily due to the higher weighting of subscription revenues in our total revenue mix, which has a high gross profit margin. Research and development expenses for the third quarter were $17.7 million, representing 22.1% of our total revenues compared with $19.5 million or 23.1% of our total revenues in the same period of 2023. The decrease was primarily due to the decrease in labor costs.

Sales and marketing expenses for the third quarter were $11.5 million, representing 14.3% of our total revenues compared with $9.5 million or 11.3% of our total revenues in the same period of 2023. The increase was primarily due to more marketing expenses incurred for our subscription and overseas audio live streaming businesses. General and administrative expenses for the third quarter were $11.4 million, representing 14.2% of our total revenues compared with $11.1 million or 13.2% of our total revenues in the same period of last year. The increase was primarily due to the increase in labor costs, partially offset by the decrease in one-off impairment of servers and network equipment. Operating loss was $0.2 million compared with an operating loss of $2.5 million in the same period last year.

The decrease in operating loss was primarily attributable to the increase in gross profit of subscription business, partially offset by the increase in marketing expenses during the quarter. Other income net was $4.8 million compared with other income net of $7.3 million in the same period of 2023. The decrease was primarily due to less reversal of payables with low payment probability as compared with the same period of 2023. Net income was $4.4 million, same as in the third quarter of last year. Non-GAAP net income was $4.9 million in the third quarter of 2024 compared with $5.5 million in the same period of 2023. Diluted earnings per ADS in the third quarter of 2024 was approximately $0.07, same as in the third quarter of 2023. As of September 30, 2024, the company had cash, cash, equivalents and short-term investments of $272 million, compared with $263.4 million as of June 30, 2024.

The increase was mainly due to the net cash inflows from operating activities, partially offset by the repayment of bank loans and spending on share buybacks. Now turning to our share repurchase program. On June 4, 2024, Xunlei announced that its Board of Directors had authorized a new plan for the repurchase of up to $20 million of its ADS over the next 12 months. As of September 30, 2024, the company had spent approximately $1.5 million on share buybacks under the new share repurchase program. During the quarter ended September 30, 2024, the company had repurchased a total of 588,025 ADS for a total of about $1 million and the share repurchase program is ongoing. Finally, for the fourth quarter of 2024, Xunlei estimates total revenues to be between $77 million and $82 million, and the midpoint of the range represents a quarter-over-quarter decrease of approximately 0.7%.

This estimate represents management’s preliminary view as of today, 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 so much. [Operator Instructions] And now we’re going to take the first question. And it comes from line of Yuki Chen [ph] from Retail Investor. Your line is open. Please ask your question

Unidentified Analyst: [Foreign Language] And the cores question is congrats on maintaining a double digit year-over-year growth rate in subscription business. And the question is, can the company sustain its growth trend in the subscription business for future quarters? As for the last several quarters the sequential growth was basically flat and how can we overcome the bottleneck of reaching an 6 million subscribers?

Jinbo Li: Thank you for your question. Our subscription business has generally kept its growth momentum, maintaining a user base between 5 million and 6 million since the beginning of this year. We are encouraged that we observed a continuous year-over-year growth in our active paying users over the past few quarters. The portion of premium subscribers among paying users increased from about 60% in the third quarter of last year to about 78% in the third quarter of this year. And as a result, there was an increase in the average revenue per subscriber from approximately RMB 39.9 in the third quarter of last year to about RMB 40.9 this quarter, which indicates, I believe, a healthy trend for our subscription business. And in the coming days, we intend to further expand our marketing channels continue to improve user benefits and experience and conduct more promotional campaigns to acquire new users.

And by taking these measures, we hope to achieve breakthroughs in our user base in the future. Thank you.

Unidentified Analyst: [Foreign Language]

Luhan Tang: [Foreign Language] The questions, I noticed that in the third quarter of this year, the Chinese government implemented a series of policies to stimulate the stock market, which resulted in improved performance for many Chinese stocks. And she would like to know if Xunlei has any strategies in place to enhance its share price and address the undervaluation of its stock situation.

Jinbo Li: Yes, we have also noticed the Chinese government recently introduced a number of market favorable policies, aimed at resolving certain domestic economic issues and boosting investors’ confidence. We will continue to prioritize business development. Further, our share buybacks – enhance communications with the capital market and actively monitor market and regulatory environment and adopt corresponding strategies as necessary to hopefully ultimately generate value for our shareholders. Thank you.

Luhan Tang: [Foreign Language]

Operator: Excuse me, Yuki any further questions? Thank you. Thank you. [Operator Instructions] Dear Speakers, there are no further questions for today. I would now like to hand the conference over to the management team for any closing remarks.

Jinbo Li: Thank you, again, for your time and participation. And if you have any questions, please visit our website at ir.xunlei.com or send us e-mails to our Investor Relations. Have a good day. Operator, we conclude today’s conference. Thank you.

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