Xunlei Limited (XNET) Q1 2022 Results - Earnings Call
Xunlei Limited (NASDAQ:XNET) Q1 2022 Earnings Conference Call May 17, 2022 8:00 AM ET
Company Participants
Jinbo Li - Chairman & Chief Executive Officer
Eric Zhou - Chief Financial Officer
Conference Call Participants
Welcome ladies and gentlemen, and thank you for your patience. You’ve joined Xunlei’s 2022 First Quarter Earnings Conference Call. At this time, all participants are in the 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. Lohan [ph].
Unidentified Company Representative
Thank you, and good morning, everyone, and thank you for joining Xunlei's 2022 First Quarter Earnings Conference Call. On the call with me today are Eric Zhou, Chief Financial Officer; and Lee Hu, Senior Vice President of Finance. Now you can find our earnings press release on our IR website, which is intended to supplement our prepared remarks during today's call. For today's agenda, I will read a prepared opening remark by our Chairman and CEO, Mr. Jinbo Li, on highlight of our first quarter operations. Then Mr. Eric Zhou, our CFO, will go through the details of financial results and wrap up with our guidance for the second quarter of 2022. We'd like to welcome any questions from you after the management's remarks. Today's call is recorded, and you can replay the call from our Investor Relations website.
Before I 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 under 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 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 obligations to update any forward-looking statements, except as required under applicable law. On this call, we will be using both GAAP and non-GAAP financial measures. A conciliation 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 Mr. Jinbo Li, Chairman and CEO of Xunlei Limited.
Jinbo Li
Good day, everyone, and thanks for your participation in our first quarter earnings conference call. We're thrilled to see our operating and financial results have kept the momentum we saw in the previous quarter. Even we have to operate our business when the city was temporarily locked down in mid-March due to the Omnicron outbreak in Shenzhen, where our headquarters is located, we were able to cope with the challenges and continued to serve our customers without interruption.
In the first quarter, our total revenues reached $79 million, an increase of 11.1% compared to that of the previous quarter. This is also the sixth quarter in which we reached consecutive quarterly revenue growth. Further, we achieved a net income of $5.4 million in the first quarter compared with a net loss of $0.5 million in the fourth quarter of 2021.
We had a good start for 2022, and I'm grateful to our diligent employees and the management for their dedication and successfully controlling costs and implementing our strategy of focusing on our competitive strengths. Our major line of products and businesses achieved solid growth during the first quarter. Cloud computing continues to be competitive in the market where we strive to provide reliable, scalable and cost-effective services to our clients. And it achieved a 7% sequential growth and generated $30.2 million in revenue in the first quarter of 2022. It is especially encouraging that the growth was built upon the momentum we achieved during the previous quarters.
We also made progress on our subscription business, which realized $25.3 million in revenue, an increase of 7% from the previous quarter. In general, the number of our subscribers has been growing since we launched the Cloud Drive function in summer 2020. The total number of subscribers grew to 4.61 million in the first quarter of 2022 from 4.39 million in the previous quarter. We're seeing stable member activities and looking forward to building a more engaging member community to retain and increase our user base.
In the first quarter, our live streaming and other Internet value-added services made a significant improvement, too, which generated $23.5 million in revenue, an increase of 22.1% from the last quarter. In particular, our live streaming business realized an impressive 32.9% sequential increase compared to the previous quarter, driven by increased demand and market expansion. However, our Internet advertising was especially hit by strict regulatory policies, affecting the Internet advertising, Internet services and gaming sectors. We expect our advertising business will continue to face headwinds in the coming quarters. We will closely monitor regulatory policies and industry trend and adopt business strategies to turn this business around, if possible.
Finally, we recently launched our digital collectible product line. So far, it is an significant part of our product portfolio. We are largely relying on our existing resources to explore this new and exciting industry development. And we will strictly comply with relevant laws and the government regulations. We understand it is an emerging business with an untested business model and an evolving regulatory environment, and we also face tremendous competition.
In closing, I would like to say that at Xunlei, we're constantly exploring new and innovative products and services. Our strong performance in the first quarter of 2022 further supports our confidence about the sustainability and the promising outlook of our business. With a strong balance sheet, stable cash flows and improving business, we believe our revenue growth and near-term trajectory will remain optimistic.
With that, I will turn this call over to Mr. Eric Zhou, our Chief Financial Officer. Eric will cover the financial results in detail and share our outlook.
Eric Zhou
Thank you, Anne. Hello, everyone, and thank you again for joining Xunlei's 2022 first quarter earnings conference call. I will now go through the details of our financial results and wrap up with our revenue guidance for the second quarter of 2022.
For the fourth quarter of 2022, total revenues were $79 million, representing an increase of 11.1% from the previous quarter. The increase in total revenues was mainly attributable to increased revenues from our live streaming, cloud computing and subscription business. Revenues from cloud computing were $30.2 million, representing a sequential increase of 7% as compared with $28.2 million in the previous quarter. The increase was mainly driven by increased demand for our cloud computing products. Revenues from subscriptions were $25.3 million, representing an increase of 7% from the previous quarter. The number of subscribers was 4.61 million as of March 31, 2022, compared with 4.39 million as of December 31, 2021. The average revenue per subscriber for the first quarter was RMB 34.9 compared with RMB 34.3 for the previous quarter.
Revenues from live streaming and other IVAS were $23.5 million, representing an increase of 22.1% as compared with $19.2 million in the previous quarter. The increase of live streaming and other IVAS revenues was mainly attributable to increased demand for our live streaming services, partially offset by reduced advertising revenue. Cost of revenues were $43.9 million, representing 55.5% of our total revenues compared with $37.6 million or 52.8% of the total revenues in the previous quarter. The increased cost of revenues were mainly attributable to increased sales of our cloud computing and other IVAS services.
Bandwidth costs, as included in cost of revenues, were $26.9 million, representing 34% of our total revenues compared with $22.8 million or 32.1% of the total revenues in the previous quarter. The increased bandwidth costs were mainly due to increased sales of cloud computing products as well as additional bandwidth usage for the Cloud Drive feature, which has been added to a subscription product since summer 2020.
The remaining cost of revenues mainly consisted of costs related to the revenue sharing costs for our live streaming business and depreciation of servers and other equipment. Gross profit for the first quarter was $34.9 million, representing an increase of 4.9% from the previous quarter. Gross profit margin was 44.1% in the first quarter compared with 46.7% in the previous quarter. The increase in gross profit was mainly due to increased live streaming, cloud computing and subscription revenues. The decrease in gross profit margin was mainly due to increased portion of live streaming revenues to total revenues, which has a lower gross profit margin.
Research and development expenses for the first quarter were $16.3 million, representing 20.6% of our total revenues compared with $16.6 million or 23.3% of our total revenues in the previous quarter. Sales and marketing expenses for the first quarter were $5.3 million, representing 6.8% of our total revenues, compared with $6.6 million or 9.3% of our total revenues in the previous quarter. The decrease was primarily due to decreased marketing and promotional activities carried out for our major products during the quarter. General and administrative expenses for the first quarter were $9.6 million, representing 12.2% of our total revenues, compared with $11.1 million or 15.6% of our total revenues in the previous quarter. The decrease was primarily due to the decreased legal and consulting expenses.
Operating income was $3.9 million compared with an operating loss of $1.7 million in the previous quarter. The increase in operating income was primarily due to increased gross profit and decreased operating expenses, as discussed above. Other income was $1.2 million compared with other income of $1 million in the previous quarter. Net income was $5.4 million compared with a net loss of $0.5 million in the previous quarter.
Non-GAAP net income was $7.2 million in the first quarter of 2022 compared with a net income of $1.7 million in the previous quarter. The increased net income and non-GAAP net income were primarily due to the improved gross profit and decreased operating expenses, as discussed above. Diluted earnings per ADS in the first quarter of 2022 was approximately $0.08 as compared with a diluted loss per ADS of $0.01 in the fourth quarter of 2021. As of March 31, 2022, the company had cash, cash equivalents and short-term investments of approximately $269.9 million compared with $239 million as of December 31, 2021. The increase of cash and cash equivalents was mainly due to increased bank borrowings to support the construction of our new headquarters and research and development building and net cash generated from operations.
Turning to our revenue guidance. For the second quarter of 2022, Xunlei estimates total revenues to be between $77 million and $82 million. And the midpoint of the range represents a quarter-over-quarter increase of approximately 0.6%. This estimate represents management's preliminary view as of the date of this release, which is subject to change and any change could be material.
Now, we conclude the prepared remarks for the conference call. Operator, we are ready to take questions.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from the line of Wendy Kang [ph] from Industrial Investor.
Unidentified Company Representative
[Foreign Language]
Eric Zhou
His question is besides it's Xunlei's traditional business, what other business Xunlei may develop in the future. I answer in English first and then will Yuanyuan will translate into Chinese. The fast cloud computing and subscription business, we strive to seek additional growth opportunities by exploring new and innovative products and services in or to speed up corporate development. Xunlei has its unique competitive edges and years of operating experience. And we hope to incubate and invest in exciting products and services that will meet the customers' needs and to ensure long-term and sustainable development of the company. For example, we have lately added Cloud Drive function to a membership subscription product. We expanded live streaming service to new markets and launched digital collectibles products. And all these products and services are the extension of our value chain or sent around our core competitive strengths. Thank you for asking.
Unidentified Company Representative
[Foreign Language]
Eric Zhou
[Foreign Language]
The question is that recently, the company's stock price reached a historically low level. The company announced a share buyback program to purchase up to 20 million Xunlei stock. And could you please provide some updates?
Thanks for the question. The Board of Directors announced a share repurchase program on March 31. And the company has also signed an engagement letter with a securities book to firm to conduct transactions based on a predetermined trading algorithm. But for the time being, we cannot disclose the specific information. The Board will review the share repurchase program periodically and adjust its size and terms if needed. Thank you.
Unidentified Company Representative
[Foreign Language]
Operator
The next question comes from the line of Jun Gao [ph], individual investor.
Unidentified Analyst
I'm quite interested in the non-fungible token, so that people have a different point of view of NFT. And some of them we guided as an important project matters and something gets only a short-term hype. So I know that many of the top-tier Chinese stock comes that actually already participate in the NFT market. So could you please explain what are Xunlei's assets in NFT artworks, both in China and overseas market?
Eric Zhou
And his question is about NFT. And he said basically, there are different opinions about an NFT. Some people are very positive and some people may not quite positive about it. And in China, there are some big players in this market, and he wants to know what Xunlei is doing and what is our outlook of the future. .
Thanks for asking, and it's a good question. First, I'd like to clarify that overseas people use NFT to describe the product. And we, at home, often use the world's digital collectibles instead. They are similar but are different in several aspects. Xunlei recently launched its digital collectables product line. So far, it is an insignificant part of our product portfolio. We understand that it's an emerging business with a yet untested business model and an evolving regulatory environment. We are largely relying on existing resources to explore this new and potentially exciting opportunity.
Further, we will strictly comply with relevant rules and regulations of the government. In several expects, domestic digital collectibles are different from the NFT in overseas markets. And these differences may determine that they may have different development trends and prospects. Some of the differences include that overseas NFTs use public chains while domestic digital collectibles use alliance chains. In overseas, cryptos can be used as a means of payment; and at home, people use RMB and an equivalent. And in overseas, NFT may be traded freely, while at home, there are restrictions on trading and exchanging.
And finally, in overseas and depending on the host country of the NFT platforms, government oversight is usually open and transparent, while at home, we still yet need to develop or improve relevant laws and regulations, particularly for this new development. And in spite of the difference, I think there are opportunities for this digital credible market at home. Among us, some people enjoy collecting stamps, coins and antiques, et cetera. In a year of digitalization, there will be some people, especially the younger generation, would like to collect digital assets. And the potential market could be huge, of course. This is an emerging market and it needs cultivation as well as the support of pertinent regulations and a reasonable oversight.
Now personally, I think it is an opportunity worth exploring and potentially eroding for the participants of this new industry development. Thank you for your question.
Unidentified Company Representative
[Foreign Language]
Operator
The next question comes from the line of Lee Dang [ph], private investor.
Unidentified Analyst
[Foreign Language]
Eric Zhou
His question is, he wants to know if the domestic COVID policies will affect company's operations and its costs. And in mid-March, there was a large scale one week lockdown in Shenzhen. Xunlei is an Internet company and that we had ample time to prepare for that event at that time. We didn't see any material adverse impact on our operations. In fact, in the early phase of COVID-19 outbreak in 2020, our subscription business actually grew due to an increase in customer demand during a period of extended spring holidays and Spring Festival holidays when people had more time surfing the Internet. Therefore, generally speaking, we don't expect the current Omicron pandemic will have any material adverse impact on our operations, unless something extreme and not foreseeable happens. Thank you.
Unidentified Company Representative
[Foreign Language]
Unidentified Analyst
[Foreign Language]
Eric Zhou
And his question, he noticed the company had declining gross margin rates for the last several quarters. And he also wants to know what is our forecast of the gross margin for the coming quarters. And thank you for your question.
In the past, our subscription business, which has a higher gross margin than other products, was the major revenue component of the company. And in the last several quarters, our new live streaming business has become a significant contributor of the total revenues. Because our live streaming business has a lower gross margin than the subscription business, the overall gross margin was reduced. However, our gross profit grew to $34.9 million. That is an increase of 4.9% from the previous quarter.
The increase in gross profit was mainly due to increased live streaming, cloud computing and subscription revenues. And in the coming quarters, we expect the trend may gradually stabilize. Thank you.
Unidentified Company Representative
[Foreign Language]
Operator
The next question comes from the line of Marcel Munch from Dong [ph].
Unidentified Analyst
Congratulations for a good quarter. I've got several questions. The first one is the company has very large cash reserves. And so what is the reason for borrowing more cash for the new headquarter? The second question would be the growth guidance is quite stable for the next quarter. What's your view on the entire year? Do you think the growth has already peaked? And the third and last question is, which steps are you taking for the potential event of a delisting? Is there any possibility for a secondary listing or anything else that helps current shareholders?
Eric Zhou
Thanks for the question. I try one by one. And for the question, we have healthy cash flows. The reason for borrowing is basic leverage because we believe that we can use the owner's capital for better returns and better investment opportunities. The borrowing rate for us is relatively very low. We are paying less than 5% of the interest rate for the construction loans, I believe, and probably you may agree, the cost of equity is much higher than 5%. And for the second question and regarding the growth outlook. And for the second quarter, we forecast a growth rate -- revenue growth rate of about 0.6% and for a couple of reasons. I think most importantly is the -- usually, the second quarter is kind of seasonally weak, and the first quarter and last quarter is usually strongest. So we take into account this kind of seasonality when we providing the forecast.
And second is we also -- currently, we are trying to adjust and optimize our operations. Probably now there are different -- there are evolving changes in the Chinese industry, and many companies have taken actions. So we are basically trying to take a conservative view approach to our development. And we try to make sure we are able to grow our company on a stable basis and rather than make quite dramatic moves when the environment is not quite stable at this time. And the third question is about delisting. And you know the reason for the delisting possibility is because of the holding folding company accountable Act passed by the U.S. Congress. And Xunlei is audited by a well-known auditor and who's working people cannot be audited or examined completely by the PCAOB. And as a result, Xunlei has been put on the list of the potential divesting in the future.
If for the next three years, the company, we will still be on the list. And for the time being, we are closely monitor this development, and we will closely monitor the negotiations between relevant Chinese and U.S. regulatory agencies. And we may take actions depending on the outcome of the negotiation, and we will keep the market informed in the future. Thank you.
Unidentified Company Representative
[Foreign Language]
Operator
[Operator Instructions] The next question comes from the line of Yushe Zang [ph], and he's a retail investor.
Unidentified Analyst
[Foreign Language]
Eric Zhou
His question is basically because of the lower stock price at this time, and he wants to know in addition to the share back program, the company has any other actions that may take, for example, giving out a dividend. And first, the management fee, the stock price is influenced by a number of factors, and some of us are really beyond our control. And that being said, we -- first, we will continue to stick to our operating strategies and try to grow our business and try to create value for the company out of operations. Second, is the -- for the cash, there are different ways to use it. Paying all the dividend is one way, but the other use of the cash could be like acquisitions, investment in new -- investment in new opportunities and research and development of new and potential innovative products. And these options, we will consider carefully.
And for the paying of the dividend, and thank you for suggesting, and I will bring this method to the meetings of -- the next meetings of the Board of Directors. It's really not in my capacity to make a decision. But anyway, thank you for your question.
Unidentified Company Representative
[Foreign Language]
Unidentified Analyst
[Foreign Language]
Eric Zhou
And his question is about the rental status of the Xunlei headquarter building under construction. And the -- currently, the building is still in the final stage of internal finish-up. And because of some delays due to on plan in spring of this year, the moving date has been delayed, and we expect to move in sometime in around September, October. And because the building has not been completed or not ready for rental yet, and so far, we don't have any tenants yet. Remember, this building is largely for internal use. But we are in the process of the hiring or trying to find the potential tenants for the excess spaces in the building. And we will provide some market updates in the next several months. Thank you.
Unidentified Company Representative
[Foreign Language]
Unidentified Analyst
[Foreign Language]
Eric Zhou
Basically, he said, the -- it's difficult to forecast Xunlei's operating expenses. And he noticed we have some increase in employee headcount and employee expenses, employee-related expenses last year. And he wants to know if we will have a large increase in headcount this year. And basically, the increase in headcount is due to we are exploring new products and services, and we hired additional manpower to do research and development and for marketing purposes, which resulted in an increase in operating expenses. Further, we at Xunlei, we maintained an annual salary increase for the majority of our employees. And we treat our employees first, we respect our employees' contribution, and we respect their hard work. And that's why we, if possible, we will try to treat our employees well and hopefully, they will in return make contributions to the company and to our shareholders.
And regarding the headcount of this year and to my knowledge, and as of now, we don't have any plan for a large increase of headcount this year. On the contrary, we will work hard to control expenses and to optimize our operations this year. Thank you.
Unidentified Company Representative
[Foreign Language]
Unidentified Analyst
[Foreign Language]
Eric Zhou
Basically, his questions with regarding to [indiscernible] business, and he wants to know if there's any rectory pressure on our shared economy model. And so far, we haven't received any government sanctions on business model. And we try to do the way which is based on the share of economy and which will be in compliance with the existing government regulations. And that being said, we will monitor future development and both industrial development and regulatory development and take appropriate actions to maintain our operations. Thank you.
Unidentified Company Representative
[Foreign Language]
Operator
[Operator Instructions] Dear speakers, there are no further questions at this time. Please continue. I would like to hand the call back to the speaker for closing remarks.
Eric Zhou
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 Investors Relations. Have a good day. And operator, we conclude today's conference call. Thank you.
Operator
Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day.
