Xunlei Limited (XNET) Q3 2023 Earnings Call

Xunlei Limited (NASDAQ:XNET) Q3 2023 Results Conference Call November 14, 2023 8:00 AM ET

Company Participants

Luhan Tang - IR

Jinbo Li - Chairman and CEO

Eric Zhou - Chief Financial Officer

Operator

Welcome, ladies and gentlemen, and thank you for your patience. You joined Xunlei's 2023 Third 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 your host, Investor Relations Manager, Ms. Luhan Tang. Thank you. Please go ahead.

Luhan Tang

Thank you, and good morning, everyone, and thank you for joining Xunlei's 2023 third quarter earnings conference call. On the call with me today are Eric Zhou, Chief Financial Officer; and [Hu Lee], 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 third quarter operations. Then Mr. Eric Zhou, our CFO, will walk you through the details on our financial results and wrap up with our revenue guidance for the fourth quarter of 2023. After the management's remarks, we would 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 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 assume no obligation 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 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 the preparative statement by Mr. Jinbo Li, Chairman and CEO of Xunlei Limited.

Jinbo Li

Good morning, everyone. Thank you all for joining us for our third quarter earnings conference call. Despite the impact of our downside domestic audio live streaming business on our revenue scale, our total revenues reached $84.2 million and exceeded the upper end of our quarterly guidance, representing a moderate decline of 4.6% compared to the previous year's figure. Meanwhile, we're pleased to report another profitable quarter, marking 8 consecutive quarters of profitability.

Furthermore, our gross profit margin also improved to 44.6% this quarter from 39.9% in the third quarter last year due to the change in the product mix. These results reflected our relentless efforts to mitigate the impact of business adjustments and are on referring commitments to further enhance our existing operations as other major business lines continue to desist year-over-year growth momentum.

Now let me share some insights of our main business operations. In the third quarter, the subscription business yielded solid results with a total revenue of $28.7 million, representing an increase of 15.2% compared to the same quarter last year. Moreover, users also showed increasing willingness to pay for our products, and the number of total subscribers reached a record high level of approximately $5 million in the third quarter. We're pleased with the continuous growth in our average revenue per subscriber, driven by a higher proportion of premium subscribers in the third quarter than in the previous quarter.

At end of September, the proportion of premium subscribers accounted for 63.9% of the total number of this. We believe that each improvement we made to our subscription business validates our exceptional product and service capabilities, enhanced user engagement efforts and refined user acquisition strategy. I expect that both our user base and our operations will continue to improve as a result of our ongoing product enhancements and user acquisition activities.

Our cloud computing business has consistently maintained its competitive advantage in the industry, leveraging our intensive network of edge computing nodes to not only offer higher rewards for household users, but also provide cost-effective solutions for enterprise clients. Despite intensive industry competition, our cloud computing services and hardware devices continue to experience sustained demand among enterprises and customers and generated $29.5 million in revenue with a 1.4% year-over-year increase.

Going forward, we will capitalize on our expertise and competitive edge in shared cloud computing while also allocating resources to R&D in order to explore new applications for growth potential and business development.

In the third quarter, live streaming and other Internet value-added services generated $26 million in revenue, representing a 24.1% decline compared to the same period of last year due to down standing of our domestic audio live streaming operations. Despite that, we remain committed to fostering innovation in products and services to explore new opportunities.

To conclude my remarks today, as a pioneering Internet company of 20-year history, Xunlei has consistently adhered to our core values in every action taken and decision made. This demonstrates our unwavering commitment to providing secure and cutting-edge products and services to our customers. In order to maintain agility amidst the ever-evolving market conditions, we will closely monitor industry trends and customers' demand and adopt corresponding strategies effectively. Our objective is to identify growth opportunities that align with our core competencies and create sustainable value for our shareholders.

With that, I will turn the call over to Eric. Eric will cover our financial results in detail and provide our revenue guidance for the fourth quarter of 2023.

Eric Zhou

Thank you, Luhan. Hello, everyone, and thanks again for joining Xunlei's 2023 third quarter earnings conference call. I will review the details of our financial results and provide the revenue guidance for the third quarter of 2023.

For the third quarter of 2023, total revenues were $34.2 million, representing a decrease of 4.6% year-over-year. The decrease in total revenues was mainly attributable to the decreased revenues generated from our live streaming services as we have downsized our domestic audio live streaming operations since June this year. Revenues from cloud computing were $29.5 million, representing an increase of 1.4% year-over-year. The increase in cloud computing revenues was mainly due to the increased sales of new generation cloud computing hardware devices.

Revenues from subscriptions were $28.7 million representing an increase of 15.4% year-over-year. The increase in subscription revenues was mainly due to higher average revenue per subscriber and an increased number of subscribers as a result of our ongoing efforts on user acquisition and product improvement. The number of subscribers was 5.02 million as of September 30, 2023, compared with 4.37 million as of September 30, 2022. The average revenue per subscriber for the third quarter of 2023 was RMB 39.9 compared with RMB 39.1 in the same period of 2022. The high average revenue per subscriber was mainly due to the continued increase in the proportion of the users opting for premium membership.

Revenues from last from live streaming and other IVAS were $26 million, representing a decrease of 24.1% year-over-year. The decrease in live streaming revenues were primarily attributable to the downsizing of our domestic audio live streaming operations. Meanwhile, other IVAS revenues increased in the third quarter of 2023 as compared with the same period of 2022. Our teams are working diligently towards meeting the impact of the downsizing of our domestic audio live streaming business on our overall revenue through exploration of new opportunities and the continued optimization of our existing businesses.

Cost of revenues were $46.4 million, representing 55.1% of our total revenues compared with $52.8 million or 59.9% of the total revenues in the same period of 2022. The decreased cost of revenues were mainly attributable to the decrease in revenue sharing costs of live streaming, which was consistent with the decline in live streaming revenues.

Bandwidth costs as included in the cost of revenues were $28.1 million, representing 33.4% of our total revenues compared with $25.3 million or 28.6% of the total revenues in the same period of 2022. The increase in bandwidth costs was mainly due to the increased bandwidth usage driven by the development of subscription and cloud computing businesses. The remaining cost of revenues consisted of costs related to revenue sharing for our live streaming business payment of handling fees and cloud computing hardware devices.

Gross profit for the third quarter of 2023 was $37.5 million representing a 6.6% increase from the same period of 2022. Gross profit margin was 44.6% in the third quarter of 2023 compared with 39.9% in the same period of 2022. The increase in gross profit and gross profit margin was mainly driven by an increased proportion of subscription revenues which has high gross profit margin as well as decreased proportion of downsized domestic audio live streaming revenues, which has lower gross profit margin.

Research and development expenses for the third quarter of 2023 were $19.5 million, representing 23.1% of our total revenues compared with $16.4 million or 18.3% of our total revenues in the same period of 2022. The increase was primarily due to the increased labor costs included during this quarter.

Sales and marketing expenses for the third quarter of 2023 were $9.5 million, representing 11.3% of our total revenues compared with $5.8 million or 6.6% of our total revenues in the same period of 2022. The increase was primarily due to the increased marketing activities carried out for user acquisition.

General and administrative expenses for the third quarter of 2023 was $11.1 million, representing 13.4% of our total revenues compared with $8.2 million or 9.3% of our total revenues in the same period of 2022. The increase was primarily due to the increase in onetime impairment of service and network equipment, depreciation of Xunlei headquarters building and share-based composition incurred during this quarter.

Operating loss was $2.5 million compared with an operating income of $5.1 million in the same period of 2022. The decrease was primarily due to the increased operating expenses incurred in the third quarter of 2023 as compared with the same period of 2022.

Other income was $7.3 million compared with $4.7 million in the same period of 2022. The increase was mainly due to the reversal of certain payables related to previously disposed business with low payment probability partially offset by the decrease in net foreign exchange gains as compared with the same period of 2022.

Net income was $4.4 million compared with $8.3 million in the same period of 2022. Non-GAAP net income was $5.5 million in the third quarter of 2023 compared with non-GAAP net income of $9 million in the same period of 2022. The decrease in net income and non-GAAP net income was primarily attributable to the increased marketing expenses, labor costs and depreciation expenses partially offset by the reversal of certain payables with low payment affordability as discussed above.

Diluted earnings per ADS in the third quarter of 2023 was approximately $0.7 as compared with $0.12 in the same period of 2022. As of September 30, 2023, the company had cash, cash equivalents and short-term investments of $464.7 million compared with $258.5 million as of June 30, 2023. The increase in cash, cash equivalents and short-term investments was mainly due to net operating cash inflow and net proceeds from bank borrowings, but partially offset by spending on share of buybacks during this quarter.

In June 2023, Xunlei has announced that its Board of Directors has authorized the repurchase of up to 20 million of the sales over the next 12 months. As of September 30, 2023, the company has spent approximately $2.6 million on share of buybacks under the share repurchase program.

Turning to our revenue guidance. For the fourth quarter of 2023, Xunlei estimates total revenues to be between $70 million and $75 million, and the midpoint of the range represents a quarter-over-quarter decrease of approximately 8.6%. The decline is due to the impact of the downsizing of a domestic live streaming business, where the operations of our subscription and the cloud computing business 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.

Question-and-Answer Session

Operator

[Operator Instructions] First question comes from the line of Nora Wu of HKIFS.

Unidentified Analyst

[Foreign Language] The question is, I've noticed that the number of premium subscribers has been growing steadily in recent quarters, as reported by our financial reports, and we think this upward trend will continue?

Unidentified Company Representative

Nora, yes, you are right. In the third quarter, the proportion of premium subscribers rose to 63.9% of the total number of the subscribers compared to just 39% in the same period last year. We have optimized the certain existing features of our products and carried out a series of measures to improve user experience so as to improve user satisfaction rate and loyalty as we will continue to enhance our own acquisition strategy and try to take advantage of the season of 11.11 and 12.12 short in promotion, we expect to sustain the current growth momentum in Q4. And furthermore, we anticipate a further increase in the conversion rate for premium subscribers in the near future. Thank you.

Unidentified Analyst

[Foreign Language] The question is, we have absorbed the impact of downsizing domestic audio live streaming business during the first 2 quarters resulting in a 24.1% decrease in live streaming and other IVAS revenues in the last quarter. And she would like to know and clarify that if the downsizing of domestic audio live streaming operations has completed? And if not, how many more projects will be affected by this on downsizing and what impact the anticipated on overall revenue in the next quarter?

Unidentified Company Representative

That's a good question, Nora. In the second and third quarter, we successfully complete the downsizing both our domestic audio live streaming business, which has relatively low gross margin. We do not have any plans for further downsizing in the fourth quarter. As mentioned in our revenue guidance for the next quarter, there will be a limited adverse impact on the revenue in Q4. We anticipate this impact to gradually diminish over time. Currently, we are actively exploring potential opportunities with new technology and products to make up the lost revenue. And hopefully, we can see a positive quarter-over-quarter comparison in the near future.

Operator

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

Eric Zhou

Thank you, for your time and participation. If you have any questions, please visit our website at ir.xunlei.com, who will spend e-mails to our investor relations. Let's have a good day.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.