Xunlei Ltd (XNET) 2016 Q3 法說會逐字稿

Good morning, and thank you for standing by for Xunlei's Third Quarter 2016 Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded.

I would like to turn the call over to your host today, Ms. Zhang Dani, IR manager of Xunlei.

Thank you. Good morning, and good evening. Welcome to Xunlei's Third Quarter 2016 Earnings Call. I'm Dani Zhang, Investor Relation Manager at Xunlei.

With me today on the call are Mr. Lei Chen, our co-CEO; and Mr. Tom Wu, our CFO.

Today's conference call is being broadcasted and a replay of the call will be available on our website following the call. Our earnings release was distributed earlier, and it is now available on our IR website as well as Newswire service.

Before we get started, please note that the discussion today will contain certain forward-looking statements made under the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our actual expectation. Please refer to our SEC filings for a more detailed description of the risk factor that may affect our results. We do not assume any obligation to update any forward-looking statements, except as required under applicable law.

During this call, we will be referring to both GAAP and non-GAAP financial measures, and the non-GAAP measures are reconciled to the most recent directly comparable to GAAP measures in this table attached to our earnings release, which can be found, again, on our IR website. Please note that all numbers are in U.S. dollars, unless otherwise stated.

I would now turn the call over to our co-CEO, Lei. Lei, please?

Good morning and good evening, everyone. Thanks for joining us today for our earnings call for the third quarter of 2016. Let me start by briefly summarizing our top line.

Our business underwent significant growth during the third quarter. Total revenue for the quarter was $40.9 million, which grew by 22.1% on a year-over-year basis and 7.4% sequentially. Growth in key segments of subscription, cloud computing and mobile advertising contributed to our growth this quarter.

Subscription business grew by 16.3% on a year-over-year basis and 4.7% on a sequential basis. Mobile Internet grew by 26.1% quarter-over-quarter, and revenue for cloud computing grew by 26.7% on a quarter-over-quarter basis. Revenues for cloud computing include both sale of [crowd-sourced] bandwidth, as well as sale of our hardware devices.

Now let me first comment on our cloud computing business, which is powered by crowdsourcing, utilizing existing idle capacity focusing primarily on streaming. In the third quarter of 2016, revenues from the sale of crowd-sourced bandwidth increased 47.5% compared to the previous quarter. Within that growth, revenues for the live video segment grew particularly strongly by 203% on a sequential basis. As I mentioned previously, we're increasingly focusing our efforts on the live videos industry, which is where the fastest-growing Internet usages in China. We believe that our distributed cloud computing architecture potentially has certain structural advantages for this segment. And we are working in a focused way to serve this market segment by providing customized services. We're pleased to serve leading providers, such as Panda TV. In fact, the bandwidth usage of Panda TV provided by our cloud computing services almost tripled, yet again, on a sequential basis this quarter. We're also working to broaden our customer base so that more providers can benefit from our customized services.

Total number of customers for cloud computing increased almost 30% sequentially, and we're continuing to build a strong pipeline of new customers in various stages of product testing, customization and finalization of arrangements. Let me reiterate our value propositions of our cloud products. First, enhanced user experience in terms of smoothness, especially for the live video and streaming sector, given its crowd-sourced architecture; second, added security for content owners also due to the crowd-sourced architecture, spreading out components of content which enhances security; and last but not least, competitive cost structure.

As you may notice, we accelerated our investment in cloud computing this year, including this quarter which has contributed to increasing loss for Xunlei. In the near future, our key strategies for cloud computing will be focused on, first, to continue to advance on the product and technology front. This is still a fast-evolving technology. There is certainly further optimization and customization to cater to the market; second, to build up a more efficient cost structure; and third, of course, to win more marquee customers like Panda TV.

Let me now briefly comment on our mobility progress. First, on Xunlei Mobile, our own mobile app, this app allows users to search, download and consume content on their mobile devices, and we're increasingly focusing on user-generated content. The DAU on this app peaked at 10 million recently, so there has been some stabilization and moderation in user traffic recently. Revenues from mobile advertising, however, continue to grow at 26.1% on a sequential basis. We achieved this partly by better optimizing advertising space utilization. As importantly, about 30% of all our subscribers for our subscription business join and extend their memberships through the Mobile Xunlei, combining revenues from mobile advertising and subscription revenues through this mobile application channel.

Mobile revenues now accounted for 26% of Xunlei's total revenue during this quarter, which is about the same as the previous quarter but from a larger revenue base.

The other part of our ability strategy is through our partnership with Xiaomi. The installed base of Xunlei's mobile acceleration products in Xiaomi mobile phones continues to increase as a function of Xiaomi's own sales growth. The DAU of the mobile acceleration product continue to be very meaningful, and we still expect to monetize this considerable user traffic in the near future.

Before I turn over to Tom, let me comment on our subscription business, which still represents about 57% of our total revenue. The number of paying subscribers ended September was 5.14 million, down slightly from 5.26 million at the end of the previous quarter but up from 4.94 million at the corresponding previous period last year.

Overall download traffic is declining, but we remained very focused on improving operational efficiency and better customer care, and we are seeing results. Revenues from subscription grew significantly in the third quarter. As we mentioned previously, we're more focused on providing more relevant and differentiated services.

Our Super VIP membership, for example, combines all privileges of our subscription services and continues to be well received. The number of Super VIP continue to grow at a strong rate of 32.4%. ARPU in the third quarter was RMB30.7, comparable to that of the previous quarter, up by 8.9% on a sequential basis.

In conclusion, we will continue to execute our core strategies. First, to further scale up our cloud computing products in terms of revenue size, customer size and new product lines; second, to continue to fully explore potentials for mobile products; third, to focus on the monetization of mobile traffic and subscription revenue. We look forward to updating you on our progress in the near future.

I'll now turn it over to Tom for more detailed financial review. Tom?

Thank you, Lei. Good morning and good evening, everyone.

As Lei pointed out, our business dipped into growth -- significant growth this quarter. Total revenues for the third quarter were $40.9 million, which represented a 22.1% growth on a year-over-year basis and 7.4% sequential basis.

Increase in subscription, cloud computing business and mobile advertising revenues were the major contributors for the year-over-year basis growth. Subscription revenues were $23.7 million. ARPU grew strongly to RMB30.7 per quarter compared to RMB25.6 in the corresponding period of last year. Number of subscribers increased from 4.94 million in the corresponding period of last year to reach 5.14 million. As Lei mentioned in his section, the key reasons for the growth were user demand, our improving customer care and continuing importance of our mobility products.

For our cloud computing business, Project Crystal revenues of crowd-sourced bandwidth sales increased 47.5% on a sequential basis. As Lei mentioned, the growth in live video segment was particularly strong, contributing to the rise in revenues. Overall cloud computing revenues also grew by 26.7% on a sequential basis. We're obviously very focused on executing this business, which is still generating a loss.

Online advertising revenues, which included mobile advertising revenue in this quarter, were $4.7 million. Mobile advertising revenue grew 26.1% compared to the previous quarter when we started to monetize our mobile traffic in terms of advertising sales in the fourth quarter of 2015.

Traffic for mobile app peaked at around 10 million DAU last month. Cost of revenues were $21.1 million compared to $18.6 million in the second quarter of 2016. Gross profit increased 1.7% compared to the first -- previous quarter. Gross profit margin was 48% compared to 50.6% in the previous quarter.

Operating expenses were $30.3 million compared to $24.1 million in the previous quarter. The increase on a sequential basis was due to increased employee compensation and other IVAS development cost.

Net loss from continuing operations for the quarter was $7.6 million compared with an operating loss of $4 million in the previous quarter. Non-GAAP net loss from continuing operations was $5.3 million.

Turning to our balance sheet, we continue to have a strong balance sheet. We ended the quarter with cash, cash equivalent and short-term investments balance of $391.4 million, which is slightly up from $391 million of the previous quarter but down from $432 million from the end of last year. The decline was primarily due to strategic investments that we made during the past quarters, as well as our ongoing share repurchase program.

Cash value per ADS at the end of the quarter remained at $5.86 per ADS.

Let me finish by going over our guidance for the next quarter. We expect our revenues to be between $38 million to $42 million for the fourth quarter of 2016. The midpoint of that range represents a year-over-year increase of about 15%, and we look forward to updating everybody soon.

Operator?

(Operator Instructions) Our first question comes from the line of [Alex Xi]. Please go ahead.

I'm a independent investor. I have three questions to ask. So the questions are -- the first one is, you mentioned that the cloud computing business has grown the customer base by like 30%. I want to know what's -- do we have any number -- exact number of the customers, I mean, now and going forward? [Another], of course -- and then what percentage of revenue comes from the late broadcast as well as the video business?

The second question is regarding to the bandwidth cost as I see in the balance -- in the income statement, the balance sheet is -- the bandwidth cost increased from around 30% to 33% to a point above 38%. I wonder why is it such a dramatic increase this quarter. What's the cost driver behind it?

And last question is about the -- you mentioned that you used some money to do some strategic investments. I want to know what are some of the investments and what are some of the implications of the revenues going forward? Thank you.

Right. Alex, this is Tom here. Thanks for your questions. Let me take a stab at it and see if Mr. Chen would like to add after that.

Your first question is about our cloud computing business. Yes, we did mention that we grew the number of our customers by 30%, but we would decline answering the exact number of our customers for obvious reasons. And in terms of live videos, roughly about 50% of our cloud computing business from the sale of bandwidth come from live video segment. And that is the fastest growth business as we pointed out in our prepared remarks, over 200% growth. The remainder is spread between video on demand as well as businesses like app stores for businesses. So that's your first question.

And second question, you're obviously very thoughtful in pointing out that our bandwidth costs did increase as a percentage of revenues. The reason for that is some experimentations that we were making in our cloud computing business, and you could treat that as almost as R&D costs. It's not because of other reasons, so we expect that to be a onetime increase. We do not see that, at least from where we are today, as a trend in terms of increasing cost structure.

And your last question, on the types of investments, it is a range of investments that we made over the quarters this year. And as I pointed out in our remarks, that was one of the key reasons why our cash balance declined to $391 million.

A variety of investments, one of which that we made was in the VR business. We believe potentially, there can be some synergy depending on how the VR industry continue to unfold in terms of delivering content for the VR space but obviously, it's still in a very early stage. So it is the number of investments in a variety of segments, but one of which that I can point out is in the video virtual-reality space. I think that's all of your questions, and I hope the answers were helpful. Operator?

(Operator Instructions) There are no further questions at this time. I'd like to hand the conference back to our presenters. Please continue.

Right. Thank you, everyone, for your continued interest in our company. And we are focused on executing our strategies and we look forward to updating everybody in the coming quarters. Thank you, and have a good evening.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.