Xunlei Q3 2023 Earnings Call Transcript

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November 14, 2023

There are 3 speakers on the call.

Operator

Welcome, ladies and gentlemen, and thank you for your patience. You've joined Xunlei's 2023 Third Quarter Earnings Conference Call. At this time, all participants are in 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.

Operator

Luhan Chang. Thank you. Please go ahead.

Speaker 1

Thank you, and good morning, everyone, and thank you for joining Xunlei's 20 20 Q3 earnings conference call. On the call with me today are Eric Zhou, Chief Financial Officer and Liu Li, 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'll first read our prepared opening remarks on behalf of our Chairman and CEO, Mr. Jingbo Li, on highlight of our Q3 operations.

Speaker 1

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 Q4 of 2023. After the management's remarks, we would like to welcome any questions from you in our Q and A session. Today's call is recorded and you can replay the call from our Investor Relations website at ir.xinlui.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.

Speaker 1

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 obligation to update any forward looking statements except as required under applicable law.

Speaker 1

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. Dollar or less otherwise stated.

Speaker 1

Now the following is the prepared statements by Mr. Jinbo Li, Chairman and CEO of Xinyue Limited. Good morning, everyone. Thank you all for joining us for our Q3 earnings conference call. Despite the impact of our downside domestic audio live streaming business on our revenue scale, our total revenues reached $84,200,000 and exceeded the upper end of our quarterly guidance, representing a moderate decline of 4.6% compared to the previous year's figure.

Speaker 1

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 Q3 last year due to the change in the product mix. These results reflected our relentless efforts to mitigate the impact of business adjustments and our recurring commitment to further enhance our existing operations as our major business lines continue to exhibit year over year growth momentum. Now, let me share some insights of our main business operations. In the Q3, the subscription business yielded solid results with a total revenue of $28,700,000 representing an increase of 15.2% compared to the same quarter last year.

Speaker 1

Moreover, users also showed increasing willingness to pay for our products and the number of total subscribers reached a record high level of approximately 5,000,000 in the 3rd quarter. We're pleased with the continuous growth in our average revenue per subscriber, driven by higher proportion of premium subscribers in the 3rd quarter than in the previous quarter. At the end of the September, the proportion of premium subscribers accounted for 63.9% of the total number of subscribers. 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 strategies. I expect that both our user base and our operations will continue to improve as a result of our ongoing product enhancement and user acquisition activities.

Speaker 1

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 $29,500,000 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 and D in order to explore new applications for growth potential and business development. In the Q3, live streaming and other Internet value added services generated $26,000,000 in revenue, representing a 24.1% decline compared to the same period of last year due to downsizing of our domestic audio live streaming operations. Despite that, we remain committed to fostering innovation in products and services to explore new opportunities.

Speaker 1

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.

Speaker 1

Eric will cover our financial results in detail and provide our revenue guidance for the Q4 of 2023.

Speaker 2

Thank you, Muhan. Hello, everyone, and thanks again for joining Xunlei's 2023 Q3 earnings conference call. I will review the details of our financial results and provide the revenue guidance for the Q4 of 2023. For the Q1 of 2023, total revenues were $84,200,000 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.

Speaker 2

Revenues from cloud computing were $29,500,000 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 subscription were $28,700,000 representing an increase of 15.2% 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 5,020,000 as of September 30, 2023, compared with $4,370,000 as of September 30, 2022.

Speaker 2

The average revenue per subscriber for the Q3 of 2023 was RMB 39.9 compared with RMB 39.1 in the same period of 2022. The higher average revenue per subscriber was mainly due to the continued increase in the proportion of the users opting for premium membership. Revenues from live streaming and other RBS were $26,000,000 representing a decrease of 24.1 percent year over year. The decreased live streaming revenues were primarily attributable to the downsizing of our domestic audio live streaming operations. Meanwhile, other IVAS revenues increased in the Q3 of 2023 as compared with the same period of 2022.

Speaker 2

Our teams are working diligently towards mitigating 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 $46,400,000 representing 55.1% of our total revenues, compared with $52,800,000 or 59.9 percent 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 $28,100,000 representing 33.4 percent of our total revenues compared with $25,300,000 or 28.6 percent 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 our subscription and cloud computing businesses.

Speaker 2

The remaining cost of revenues mainly 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 Q3 of 2023 was $37,500,000 representing a 6.6% increase from the same period of 2022. Gross profit margin was 44.6% in the Q3 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 had high gross profit margin as well as decrease proportion of Samsung's domestic audio to high streaming revenues, which has lower gross profit margin. Research and development expenses for the Q3 of 2023 were $19,500,000 representing 23.1 percent of our total revenues, compared with $16,400,000 or 18.3 percent of our total revenues in the same period of 2022.

Speaker 2

The increase was primarily due to the increased labor costs incurred during this quarter. Sales and marketing expenses for the Q3 of 2023 were $9,500,000 representing 11.3 percent of our total revenues, compared with $5,800,000 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 Q3 of 2023 were $11,100,000 representing 13.4 percent of our total revenues compared with $8,200,000 or 9.3 percent of our total revenues in the same period of 2022. The increase was primarily due to the increase in one time impairment of servers and network equipment, depreciation of Xunle headquarters building and its share based compensation incurred during this quarter.

Speaker 2

Operating loss was $2,500,000 compared with an operating income of $5,100,000 in the same period of 2022. The decrease was primarily due to the increased operating expenses incurred in the Q3 of 2023 as compared with the same period of 2022. Other income was $7,300,000 compared with $4,700,000 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 $4,400,000 compared with $8,300,000 in the same period of 2022.

Speaker 2

Non GAAP net income was $5,500,000 in the Q3 of 2023, compared with non GAAP net income of $9,000,000 in the same period of 2022. The decrease in net income and the non GAAP net income was primarily attributable to the increased marketing expenses, labor costs and depreciation expenses, partly offset by the reversal of certain payables with low payment probability as discussed above. Diluted earnings per ADS in the Q3 of 2023 was approximately RMB0.07 as compared with RMB0.12 in the same period of 2022. As of September 30, 2023, the company had cash, cash equivalents and short term investments of 200 and $64,700,000 compared with $258,500,000 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 buybacks during this quarter.

Speaker 2

In June 2023, FinLink announced that its Board of Directors had authorized the purchase of up to $20,000,000 of the shares over the next 12 months. As of September 30, 2023, the company has spent approximately $2,600,000 on share buybacks under the share repurchase program. Turning to our revenue guidance. For the Q4 of 2023, Xunlei estimates total revenues to be between 70,000,000 dollars $75,000,000 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 our domestic live streaming business, whereas the operations of our subscription and the cloud computing business are not affected.

Speaker 2

This estimates 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.

Operator

Thank you. First question comes from the line of Nora Wu of HKIFS. Please go ahead.

Speaker 2

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. Yes, you are right. In the Q3, the proportion of premium subscribers rose to 63.9% of the total numbers of the subscribers compared to just 89 percent in the same period last year. We have optimized 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.

Speaker 2

As we will continue to enhance our user acquisition strategy and try to take advantage of the season of 1111 and 12 short term 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. And the question is, we have observed the impact of downsizing domestic audio live streaming business during the 1st 2 quarters, resulting in a 24.1% decrease in live streaming and other IVS 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 downsizing and what impact overall revenue in the next quarter?

Speaker 2

That's a good question, Naron. And in the second and third quarter, we successfully complete the downsizing of our domestic audio live streaming business, which has relatively low gross margin. We do not have any plans for further downsizing in the 4th 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.

Speaker 2

Currently, we are actively exploring potential opportunities with new technology and products to make up the lost revenue and hopefully we can see positive quarter over quarter comparison in the near future. Thank you.

Operator

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

Speaker 2

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 Investor Relations. Have a good day.

Operator

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

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Key Takeaways

  • Q3 total revenue was $84.2 million, down 4.6% year-over-year but above guidance, marking the eighth consecutive quarter of profitability with gross margin improving to 44.6%.
  • Subscription business revenue rose 15.2% to $28.7 million, driven by a record ~5 million subscribers and a 63.9% share of premium members, boosting average revenue per user.
  • Cloud computing revenue grew 1.4% to $29.5 million, supported by strong demand for edge computing hardware, with ongoing R&D investment to explore new applications.
  • Live streaming and IVAS revenue declined 24.1% to $26.0 million due to downsizing of domestic audio live streaming operations, which management says is now complete.
  • Q4 guidance projects total revenue of $70 million to $75 million, down about 8.6% quarter-over-quarter primarily reflecting the effect of live streaming downsizing.
A.I. generated. May contain errors.
Earnings Conference Call
Xunlei Q3 2023
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