Xunlei - Q1 2023

Transcript

Operator (participant)

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

Luhan Tang (Investor Relations Manager)

Thank you. Good morning, everyone. Thank you for joining Xunlei's 2023 first earnings conference call. On the call with me today is Eric Zhou, Chief Financial Officer. 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 first read a prepared opening remarks by our Chairman and CEO, Mr. Jinbo Li, on the highlight of our first quarter operations. Mr. Eric Zhou, our CFO, will go through the details on the financial results and wrap up with our revenue guidance for the 2nd quarter of 2023. 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 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 assumes no obligations 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 US dollars unless otherwise stated. The following is the prepared statement by Mr. Jinbo Li, Chairman and CEO of Xunlei Limited. Good morning, everyone, and thank you for participating in our first quarter earnings conference call. We kicked off 2023 with an all-time record revenue of $99.2 million in the first quarter, representing a year-over-year increase of 25.5%. We have maintained profitable momentum for the fifth consecutive quarter, which we believe demonstrated our strong business resilience despite volatile macro environment. I want to acknowledge the invaluable contribution by all our employees, whose steadfast commitment has been pivotal in achieving. We're encouraged by the progress we have made in our top-line growth, and all of our major businesses achieved robust growth during the first quarter as compared with the same period of last year.

Despite the fierce competition in an industry, our cloud computing business leveraged its competitive edge in Shared Computing to provide reliable, scalable, and cost-effective services to our clients. It achieved an 8.2% year-over-year growth and generated $32.7 million in revenue in the first quarter of 2023. We are continuously conducting proactive research and development of edge computing applications to effectively compete in industry and mitigate pricing pressure on the CDN business. As you may already have known, Onething recently launched two hardware product lines, OES and OEC, aiming to construct an autonomous and controllable cloud computing infrastructure through technical improvements to support a broader range of edge application scenarios for both corporate clients and households. We're glad that user feedbacks are encouraging, and we expect the demand will continue to grow as the industry evolves.

Turn to our subscription business, benefiting from the demand from our loyal users. In revenue in the first quarter of 2023, representing a year-over-year increase of 15.8%. We are delighted to observe a growing propensity among subscribers to pay for the quality of services, as evidenced by the increase in their average revenue per subscriber from CNY 34.9 to CNY 41 in the first quarter 2023, as compared with the same period last year. This is a testament of the effectiveness of our efforts to create a more engaging member community and enhance user experience.

As our growth driver, live streaming and other Internet Value-Added Services generated $37.2 million in revenue in the first quarter of this year, with an increase of 58.4% year-over-year, driven by the high demand for our diverse products in our product portfolio, both domestically and internationally. Our efforts to continuously refine product functions and iterate features enhance our product synergies and improve user experience. Conducting business operations across different countries and regions is always challenging due to volatile geopolitical factors as well as varying compliance and regulatory policies. It's especially so for us as it's one of our newly developing businesses. We're mindful of potential headwinds and even setbacks during the course of our business development.

We will closely monitor the evolving regulatory and operating environment, as well as changing industry trends, while focusing on improving localized operational efficiency and maintaining regulatory compliance. In closing, I'd like to say that at Xunlei, we are constantly striving toward leveraging our competitive edge and the business synergies that can fuel both our top and bottom lines across all of our businesses. Our consecutive growth demonstrated the solidity of our endeavor and its successful results. Going forward, we will focus on exploring new growth opportunities and test innovative ideas, we'll continue to improve our existing products and services to drive sustainable business development. With a healthy balance sheet and solid track record of our recent performance, I'm optimistic about our business for the foreseeable future. With that, I will turn the call over to Eric.

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

Eric Zhou (CFO)

Thank you, Lu Han. Hello, everyone, thank you again for joining Xunlei's 2023 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 2023. For the first quarter of 2023, total revenues were $99.2 million, representing year-over-year. The increase in total revenues was mainly attributable to increased revenues generated from our live streaming, subscription, and cloud computing businesses. Revenues from cloud computing were $32.7 million, representing an increase of 8.4% year-over-year. The increase in cloud computing revenues was mainly due to increased demand for cloud computing service, as well as increased sales of cloud computing hardware devices. Revenues from subscription were $29.3 million, representing an increase of 13.8% year-over-year.

The increase in subscription revenues was mainly due to higher average revenue per subscriber and more subscribers as compared with the same period last year. The number of subscribers was 4.84 million as of March 31st, 2023, compared with 4.61 million as of March 31st, 2022. The average revenue per subscriber for the first quarter of 2023 was CNY 41 compared with CNY 34.9 in the same period of 2022. The higher IVAS revenues was mainly driven by the higher demand from our live streaming services and our enhanced monetization capability. Cost of revenues were $59.3 million, representing 59.6% of our total revenues, compared with $43.9 million, or 55.5% of the total revenues in the same period of 2022.

The increase of were $29.1 million, representing 29.6% of our total revenues, compared with $26.9 million, or 34% of the total revenues in the same period of 2022. The increase in bandwidth costs was mainly due to more Xunlei Cloud users and increased demand for our cloud computing services. The remaining cost of revenues mainly consisted of costs related to the revenue.

Luhan Tang (Investor Relations Manager)

Dear participants, please stand by. We will resume shortly.

Eric Zhou (CFO)

Dear participants, please continue to stand by. Your conference will be resumed shortly. Thank you for your patience.

Luhan Tang (Investor Relations Manager)

All good now? No.

Good.

Eric Zhou (CFO)

Lady, can you hear me?

Luhan Tang (Investor Relations Manager)

I can.

Eric Zhou (CFO)

Okay. Bandwidth costs, as including the cost of revenues, were $29.1 million, representing 29.6% of our total revenues, compared with $26.9 million, or 34% of the total revenues in the same period of 2022. The increase in bandwidth costs was mainly due to more StellarCloud cloud users and increased demand for cloud computing services. The remaining cost of revenue mainly consists of costs related to the revenue sharing costs for live streaming business, payment of penalties, cloud computing hardware devices, and depreciation of servers and other equipment. Gross profit for the first quarter of 2023 was $39.6 million, representing a 13.6% increase from the same period of 2022.

Gross profit margin was 39.9% in the first quarter, compared with 44.1% in the same period last year. The increase in gross profit was mainly driven by the increase in gross profit of live streaming, subscription, and cloud computing business. The decrease in gross profit margin was mainly due to the increased portion of live streaming revenues to total revenues, which has a relatively lower gross profit margin. Research and development expenses for the first quarter of 2023 were $18 million, representing 18.4% of the total revenues, compared with $16.3 million or 19.6% of our total revenues in the same period of last year. The increase was primarily due to increased labor costs incurred during the period.

Sales and marketing expenses for the first quarter of 2023 were $9.3 million, representing 9.4% of our total revenues, compared with $5.3 million or 6.8% of our total revenues in the same period of 2022. The increase was primarily due to more marketing activities held for live streaming and subscription businesses as a result of our continued user acquisition efforts. G&A expenses for the first quarter of 2023 were $11.7 million, representing 11.8% of our total revenues, compared with $9.6 million or 12.4% of our total revenues in the same period of 2022.

The increase was primarily due to the increase in share-based compensation expenses and depreciation of StellarCloud headquarter buildings as we finished construction and then relocated to the new headquarters in December of 2022. Operating income was $0.7 million, compared with $3.9 million in the same period of 2022. The decrease in operating income was primarily attributable to the increase in share-based compensation, marketing expenses, and the labor costs incurred during this quarter. Other income was $1.4 million, compared with $1.2 million in the same period of 2022. The increase was primarily due to higher investment income, partially offset by increased foreign exchange loss as compared with the first quarter of 2022.

Net income was $1.2 million, compared with $5.4 million in the same period of 2022. non-GAAP net income was $5.5 million in the first quarter of 2023, compared with $7.2 million in the same period of 2022. The decrease of net income and non-GAAP net income was primarily attributable to the decrease in operating income and increased income taxes during this quarter. Diluted earnings for ADS in the first quarter of 2023 was approximately two times as compared with . As of March 31st, 2023, the company had cash equivalents and short-term investments of $258.3 million, compared with $260.8 million as of December 31st, 2022.

The decrease in cash equivalents and short-term investments was mainly due to the payment of a bank loan and spending on share buybacks. In March 2022, Xunlei announced that its board of directors authorized the purchase of up to 20 million of shares over the next 12 months. As of March 31st, 2023, the company has spent approximately $7.9 million on share buybacks. Turning to our revenue guidance. For the second quarter of 2023, Xunlei estimates total revenues to be between and $170 million. At the midpoint of range represents a quarter-over-quarter increase of approximately 14.9%. 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 today.

Operators, we are ready to take questions.

Luhan Tang (Investor Relations Manager)

Operator, we're ready to take questions.

Operator (participant)

Perfect. Thank you so much. Dear participants, as a reminder, if you wish to ask a question over the phone, please press star one one on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by. We will compile the Q&A roster. This will take a few moments. Now we're going to take our first question. The question comes from line of Peter Du from BITADU Co Limited. Your line is open. Please ask your question. Excuse me, Peter. Your line is open. Excuse me, Peter. We cannot hear you.

Peter Du (Analyst)

Okay. Hello, hello. Hello. Okay. Okay. Okay. Okay. [Foreign language]

Eric Zhou (CFO)

Thanks, Peter. His question is that lately the percentage of premium subscribers to total subscribers has been increasing. He wants to know, you know, the difference between the premium membership and the VIP membership, and whether our ultimate goal is to convert all VIP members into premium members. The premium members are also called Super VIP members. Among other things, the premium membership offers more storage space, faster uploading and download speed, better media playing quality and more accessible resources. If you want to know more details, you may visit our official website. It has a complete list of differences. We provide various membership options to meet the diverse needs of our users.

For example, you know, some users prioritize affordability and others may value speed and utility and so on. We do, you know, have observed a growing trend of VIP members upgrading to premium membership lately, and we will continue to improve our products and services to provide enhanced values to our users. Thank you, Peter.

Jinbo Li (Chairman and CEO)

[Foreign language] 嗯 回 答 您 的 问 题 哈 就 是 一 般 来 讲 的 话 我 们 超 级 会 员 会 有 更 多 的 储 存 空 间 更 快 的 呃 上 传 和 下 载 的 速 度 也 会 有 更 高 质 量 的 媒 体 的 浏 览 器 -- 播 放 器 和 更 多 的 您 可 以 访 问 的 资 源 。 啊 您 也 可 以 参 考 ， 参 考 我 们 的 官 方 网 站 去 了 解 更 多 会 员 -- 呃 不 同 会 员 呃 级 别 的 这 个 不 同 和 更 多 的 详 情 。 我 们 也 希 望 呢 能 够 提 供 不 同 的 会 员 的 选 择 来 满 足 用 户 的 不 同 的 需 求 。 那 有 些 用 户 也 会 对 价 格 会 比 较 敏 感 ， 有 些 用 户 会 追 求 更 快 的 速 度 等 等 ， 呃 我 们 都 想 去 配 合 他 呃 去 提 供 呃 不 同 产 品 满 足 他 们 的 需 求 。 那 我 们 也 看 到 了 越 来 越 多 的 用 户 从 白 金 会 员 转 啊 转 变 成 了 超 级 会 员 ， 那 我 们 也 希 望 呢 ， 我 们 优 质 的 服 务 会 继 续 受 到 用 户 的 欢 迎 。 感 谢 您 的 问 题 。

Peter Du (Analyst)

喂 你 好 我 这 边 还 有 第 二 个 问 题。

Jinbo Li (Chairman and CEO)

你 说.

Peter Du (Analyst)

OK 好 。 嗯 我 的 第 二 个 问 题 是 就 我 非 常 感 谢 上 述 ， 上 述 的 解 答 ， 辛 苦 了 。 我 第 二 个 问 题 是 因 为 我 自 己 是 会 员 的 原 因 ， 所 以 我 有 观 察 到 公 司 的 官 方 网 站 招 聘 的 职 位 里 面 有 很 多 与 运 营 人 员 的 招 聘 信 息 呢 。 所 以 的 话 ， 我 想 就 这 个 问 题 呢 ， 想 问 一 下 公 司 呃 有 没 有 继 续 扩 张 团 队 的 想 法 ， 所 以 能 不 能 够 这 个 问 题 说 明 一 下 呢 ？ 谢 谢 。

Eric Zhou (CFO)

Oh OK. His question is, I have noticed that Xunlei is actively hiring for audio live streaming operations. He wants to know if the company is expanding in this area. Yes, we are increasing our headcount in this area, including hiring some interns to meet the growing needs of our business. That said, we will take a prudent approach to team expansion to control costs and improve efficiency. Thanks for your question.

Jinbo Li (Chairman and CEO)

[Foreign language] 针 对 你 的 问 题 呢, 我 们 确 实 是 在 招 聘 运 营 相 关 的 人 员, 这 也 是 符 合 我 们 业 务 增 长 的 一 个 需 求 的. 其 中 呢 也 包 括 一 些 实 习 生. 目 前 我 们 也 会 考 虑 到 降 本 增 效 的 这 些 想 法, 所 以 呢 也 在 招 聘 过 程 当 中 呢, 没 有 很 激 进. 感 谢 您 的 问 题.

Peter Du (Analyst)

这 边 没 有 其 他 的 问 题 了. No more questions, thank you.

Jinbo Li (Chairman and CEO)

Thank you.

Operator (participant)

Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star one one on your telephone keypad. Now we're going to take our next question. The question comes through line of Nick Chen from Nice Bridge Asset Management Limited. Your line is open. Please ask the question.

Nick Chen (Analyst)

To dividend management, thanks for taking my questions. My first question is related to the expense ratio. I noticed that in Q1, the three major expense items have all gone up pretty substantially during the quarter, and I would like to know if the company has implemented any measures to manage the cost and also improve operational efficiency. My second question is on share buybacks. As the share repurchase program that was announced last year is now expired. I would like to know will the company roll out any similar programs to buy back more shares in the foreseeable future? Thank you.

Eric Zhou (CFO)

Thanks Nick for asking the question. The increase in expenses during the first quarter was primarily due to increased labor costs, marketing expenditures and share-based compensation expenses, as well as the depreciation of Xunlei's headquarter buildings, which happened this quarter. The increase is largely correlated to our business expansion. As a managerial control process, we will review our expense and cost structure and try to find room for improvement. Going forward, we will continue to focus on optimizing costs and expenses to improve our operational efficiency and achieve sustainable growth. Regarding share buybacks, you know, we announced the share buyback program last March and it has expired.

Considering the current stock price of Xunlei, I believe the board of directors of Xunlei will review factors like the company's operations, capital structure, financial liquidity, as well as its business outlook to decide if a new share buyback plan will be structured. If it does, we will make an announcement in a timely fashion. Thanks for asking.

Operator (participant)

Thank you. Dear participants, as a reminder, if you wish to ask a question over the phone, please press star one one on your telephone keypad. We'll just give a moment for all our participants at the last moment, just to ask last questions. The speakers are on for the questions at this time. I would like now to hand the call over to the management for any closing remarks.

Eric Zhou (CFO)

Thanks again for your time and participation. If you have any questions, please feel free to visit our website at ir.xunlei.com or send email to our investor relations. Have a good day. We conclude today's conference call. Thank you.

Operator (participant)

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