Xunlei - Q4 2022

Transcript

Operator (participant)

Welcome, ladies and gentlemen. Thank you for your patience. You've joined Xunlei's 2022 Fourth 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 the host, Investor Relations Manager, Miss Luhan Tang.

Luhan Tang (Investor Relations Manager)

Thank you. Thank you, good day, everyone. Thank you for joining Xunlei's Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. As of now, our earnings re-release is available on our IR website, which is intended to supplement our prepared remarks during today's call. On the call with me today are Eric Zhou, Chief Financial Officer, and Li Wu, Senior Vice President of Finance. For today's agenda, I will first read a prepared remark by our Chairman and CEO, Mr. Jinbo Li, on highlight of our fourth quarter operations and strategies for 2023. Mr. Eric Zhou, our CFO, will walk you through the details on the financial results and wrap up with our guidance for the first quarter of 2023. We'd like to welcome any questions from you after the management's remarks.

Before we get started, I'd 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 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 a prepared statement by Mr. Jinbo Li, Chairman and CEO of Xunlei Limited. "Good morning, everyone. Thanks for joining us today. Fiscal year 2022 was a landmark year for Xunlei, and we're thrilled to end the year with record-setting revenues of $97 million, up 9.8% sequentially in the fourth quarter as compared with the previous quarter. Total revenues for 2022 were $342.6 million, up 43% year-over-year. We announced last quarter that we expected full year profitability in 2022, and we're proudly to say that we did it. For 2022, we achieved net profits of $21.3 million, an increase of 1,825.3% as compared with 2021.

Both the quarterly and annual revenues were the highest in the company's 20-year history. We're pleased with our accomplishments last year, which reflects the resilience of our multifaceted business model, robust R&D capability, and unmatched customer value proposition. Now, I'd like to provide some details on operating results. I will start with our live streaming and IVAS business. In the fourth quarter, the revenue generated from live streaming and IVAS businesses reached $40.2 million, which accounted for 41.4% of total revenues, representing 17.3% quarter-over-quarter growth and 108.6% year-over-year growth. In fiscal year 2022, the revenue reached to $122.4 million, up 128.2% compared to fiscal year 2021.

The growth is driven by not only our efforts to deepen our penetration into existing markets and continuously tap into our users' needs to enlarge user acquisition, but also by increasing users' demand and improving brand recognition and monetization capability. Moving to our cloud computing business. In the fourth quarter, revenue generated from cloud computing business reached to $31.9 million, which accounted for 32.9% of total revenues, up 9.7% sequentially and 13.1% year-over-year. In fiscal year 2022, the total revenue was $119.6 million, up 26.2% as compared with that of fiscal year 2021. Accounted for 34.9% of company's total revenue.

We believe that Xunlei has a unique competitive edge in its shared cloud computing business, which enjoyed uninterrupted growth in both top line and bottom line for a number of quarters, mainly driven by rising demand for the bandwidth for the short video clips and live streaming business and products. Other than that, I like to share some good news of Shenzhen Onething, the operator of cloud computing business and a wholly owned subsidiary of Xunlei. It was reported that in the first half of 2022, Onethingwas ranked 3 with 11.3% of market share in public edge cloud service market, according to the study by International Data Corporation. Shenzhen Onething launched an upgraded EdgeHi hardware product line last year, aiming to construct an autonomous and controllable computing infrastructure through technical improvements to support a broader range of edge application scenarios.

Now turn to our subscription business. In the fourth quarter 2022, subscription business generated $24.9 million in revenue. It edged down 0.2% sequentially and climbed by 5.2% year-over-year. In fiscal year 2022, annual revenue reached to $100.6 million, representing 10.3% year-over-year increase. We've seen some positive outcomes from our continued integration of our product features and cultivation of our user community. The total number of subscribers maintained its solid growth momentum, increasing to nearly five million subscribers by the end of 2022, from 4.39 million at the end of 2021.

The proportion of our premium service subscribers to total subscribers have grown from 29.9% at the end of 2021 to 36.7% at the end of 2022. This is a testament of our product and services gained continuing popularity by fulfilling users' needs over time. Even though we obtained encouraging results last year, we're still facing stiff industry competition and the macro environment uncertainties, which could adversely affect our operations in the future. We will closely monitor regulatory policies and industry trends, and try our best to adopt business strategies to mitigate the risks. We will strictly follow the compliance requirements in a market in which we operate and pursue a sustainable business model going forward.

Before I conclude my remarks, I'd like to say that as you may already know, we relocated to our own headquarters building at end of 2022 and entered 2023 on a high note. We believe we will be better positioned than ever before to explore new and exciting opportunities. Going forward, we're optimistic and will maintain focus as we execute on growth prospects that lie ahead of us. We're confident that our ample cash position and strong overall execution will enable us to capitalize our future growth opportunities, driving sustainable growth and creating value for all of our stakeholders. With that, I'll hand the call over to Mr. Eric Zhou, our Chief Financial Officer. Eric will cover our financial results in detail and share our outlook.

Eric Zhou (CFO)

Thank you. Hello, everyone, thank you again for joining Xunlei's Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. I will now go through the details of our financial results, wrap up with our revenue guidance for the first quarter of 2023. Total revenues were $97 million, representing an increase of 9.8% from the previous quarter. The increase in total revenues was mainly attributable to increased revenues from our live streaming and cloud computing businesses. Revenues from cloud computing were $31.9 million, representing an increase of 9.7% from the previous quarter. The increase of cloud computing revenues was mainly due to the increased demand from major customers of our cloud computing services. Revenues from subscription were $24.9 million, representing a decrease of 0.2% from the previous quarter.

The decrease in subscription revenues was mainly due to lower average revenue per subscriber for this quarter and the depreciation of RMB against the US dollar. The number of subscribers was 4.99 million as of December 31, 2022, compared with 4.37 million as of September 30, 2022. The average revenue per subscriber for the fourth quarter was RMB 35.4, compared with RMB 39.1 in the previous quarter. The lower average revenue per subscriber was due to more promotional activities carried out for our subscription business during the fourth quarter. Revenues from live streaming and other IVAS were $40.2 million, representing an increase of 17.6% from the previous quarter.

The increase of live streaming and other IVAS revenues was mainly driven by the increased demand for our live stream products and by our enhanced monetization capability. Cost of revenues were $59 million, representing 60.9% of our total revenues, compared with $52.8 million or 59.9% of the total revenues in the previous quarter. The increased cost of revenues was mainly attributable to increased sales of our live streaming and cloud computing services. Bandwidth costs that's included in cost of revenues were $26.9 million, representing 27.7% of our total revenues, compared with $25.3 million or 28.6% of the total revenues in the previous quarter.

The increase in bandwidth costs was mainly due to increased demand for our cloud computing services. 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 fourth quarter of 2022 was $37.6 million, representing an increase of 6.8% from the previous quarter. Gross profit margin was 38.8% in the fourth quarter, compared with 39.9% in the previous quarter. The increase in gross profit was mainly driven by the increase in gross profit of our live streaming and cloud computing businesses. 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 fourth quarter were $19.2 million, representing 19.8% of our total revenues, compared with $16.2 million or 18.6% of our total revenues in the previous quarter. Sales and marketing expenses for the fourth quarter were $8.7 million, representing 8.9% of our total revenues, compared with $5.8 million or 6.6% of our total revenues in the previous quarter. The increase was primarily due to more marketing activities held for our subscription and live streaming business during this quarter as a result of our continued user acquisition efforts.

G&A expenses for the fourth quarter were $9.8 million, representing 10.1% of our total revenues, compared with $8.2 million or 9.6% of our total revenues in the previous quarter. The increase was primarily due to the increase in share-based compensation expenses during the quarter. Operating income was $0.4 million, compared with $5.1 million in the previous quarter. The decrease in operating income was primarily attributable to the increase in employee bonuses, marketing expenses and share-based compensation expenses incurred during the quarter. Other income was $0.7 million, compared with other income of $4.7 million in the previous quarter. The decrease was primarily due to the decrease in foreign exchange gains as compared with the previous quarter.

Net income was $1.6 million, compared with $8.3 million in the previous quarter. Non-GAAP net income was $3.5 million in the fourth quarter of 2022, compared with $9 million in the previous quarter. The decrease of net income and non-GAAP net income was primarily attributable to the decrease in operating income and other income, as discussed above. Our diluted earnings per ADS in the fourth quarter of 2022 was approximately $0.02 as compared to $0.12 in the third quarter of 2022. I'd like to walk you through the financial results of the fiscal year 2022. Total revenues were $342.6 million, representing an increase of 43% on a year-over-year basis.

The increase in total revenues was mainly attributable to increased revenues from our live streaming, cloud computing and subscription businesses. Revenues from cloud computing were $119.6 million, representing an increase of 26.2% on a year-over-year basis. The increase in cloud computing was mainly attributable to our expanded service capabilities and increased demand from our major customers. Revenues from subscription were $100.6 million, representing an increase of 10.6% on a year-over-year basis. The increase was mainly due to a growing number of subscribers, which increased from 4.39 million as of December 31, 2021 to 4.99 million as of December 31, 2022.

Revenues from live streaming and other IVAS were $122.4 million, representing an increase of 128.4% on a year-over-year basis. The increase was primarily due to the increase in demand for our live streaming products we launched in 2021 and enhanced monetization capabilities. Cost of revenues were $200.1 million, representing 38.4% of our total revenues, compared with $118.6 million or 49.5% of the total revenues in 2021. The increase was primarily resulted from the significant increase in revenues of our major business lines.

Bandwidth costs as included in cost of revenues were $104.6 million, representing 13.5% of our total revenues, compared with $80.7 million or 33.9% of the total revenues in the previous quarter. The increased bandwidth costs were mainly due to increased demand for our cloud computing services, which was consistent with the increase in cloud computing revenues. The remaining cost of revenue 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 year was $141.4 million, representing an increase of 17.7% on a year-over-year basis. Gross profit margin was 41.3% compared with 50.2% in the previous year.

The increase in gross profit was mainly driven by the increase in gross profit of our live streaming business, cloud computing business, and subscription business. The decrease in gross profit margin was mainly attributed to the decreased portion of live streaming revenues to total revenues, which had a relatively lower gross profit margin and a decreased percentage of subscription revenues to total revenues, which has a relatively high gross profit margin. Research and development expenses for the year were $67.7 million, representing 19.8% of our total revenues, compared with $61.9 million or 25.8% of total revenues in the previous year. The increase was primarily due to increased labor costs as a result of increased headcount as compared with the previous year.

Sales and marketing expenses for the year were $24.8 million, representing 7.6% of our total revenues, compared with $24.6 million or 10.6% of our total revenues in the previous year. G&A expenses for the year were $39.7 million, representing 11.6% of our total revenues, compared with $36.9 million or 15.4% of our total revenues in the previous year. The increase was primarily due to the increased share-based compensation expenses from awarded restricted shares, partly offset by decreased professional consulting expenses incurred during the year. Operating income was $10.1 million compared with an operating loss of $4.3 million in the previous year.

The increase in operating income was primarily attributable to the increase in gross profit of live streaming, cloud computing, and subscription businesses during the year, partly offset by the increase of operating expenses as discussed above. Other income was $13.5 million, compared with other income of $4.7 million in the previous year. The increase was primarily due to the increase in foreign exchange gains and reversal of certain long outstanding payables with a low probability of payment during the year. Net income was $21.3 million in 2022, compared with net income of $1.1 million in the previous year. Non-GAAP net income was $29.5 million in 2022, compared with $7.3 million in the previous year.

The increase in net income was primarily driven by the increase in operating income and other income as discussed above. Diluted earnings per ADS in 2022 was approximately $0.32 as compared with $0.02 in the previous year. As of December 31st, 2022, the company had cash equivalents, and short-term investments of $262.3 million, compared with $239 million as of December 31st, 2021. The increase in cash and cash equivalents was mainly attributed to net cash inflow from operating activities and a bank loan, partly offset by expenditure on R&D activities, the construction of Xunlei headquarters building, and spending on share buybacks. In March 2022, Xunlei announced that its board of directors authorized the purchase of up to $20 million of its outstanding common stocks over the next 12 months.

As of December 31, 2022, we have spent approximately $6.8 million on share repurchases. Turning to our revenue guidance for the first quarter of 2023, Xunlei estimates total revenues to be between $98 million and $104 million. At the midpoint of the range represents a quarter-over-quarter increase of approximately 4.1%. This estimate represents management's preliminary view as of the date of this press release, which is subject to change. Any change could be material. We conclude prepared remarks for the conference call. Operator, we are ready to take questions.

Operator (participant)

Thank you. If you wish to ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Please stand by while we compile the Q&A roster. Please stand by for our first question. Apologies. Your first question comes from the line of Dongdong Zhao from Sincere Capital. Please go ahead. Your line is open.

Luhan Tang (Investor Relations Manager)

I think she lost.

Eric Zhou (CFO)

I only heard the second part of the question. Can you ask, could ask her to repeat the question?

Operator (participant)

Dongdong Zhao. Hello? Your line is open. Please repeat your question.

Dongdong Zhao (Analyst)

Oh I'm sorry, I need to repeat my question, right? yeah OK. [Foreign language]

Eric Zhou (CFO)

Her question is I notice that your live streaming business has been growing very fast and she would like to know which countries we are mainly operating and whether we are going to expand into other countries. Thanks for asking. We are now mainly operate in Middle East, North Africa and Southeast Asian region in a number of countries such as Arab region, Indonesia, Egypt, Turkey and Philippines and some other countries as well. At present, we intend to cultivate in existing markets and improve brand awareness and user loyalty through localized operations. We have no plan at this time to drastically expand into other countries in the near future.

Speaker 5

[Foreign Language]

Dongdong Zhao (Analyst)

[Foreign Language]

Eric Zhou (CFO)

She asked, she wants to know what other plans or key plans Xunlei has. In addition to the live streaming products, we intend to explore other potentially significant and breakthrough opportunities overseas, but I can't disclose any details at this time. We will be happy to share with you our progress when it's appropriate. Thank you.

Speaker 5

[Foreign language]

Dongdong Zhao (Analyst)

[Foreign language]

Operator (participant)

Once again, if you wish to ask a question, please press star one and one on your telephone. We will take our next question. Your next question comes from the line of Deepen. Please go ahead. Your line is open.

Speaker 4

[Foreign language]

Eric Zhou (CFO)

Thank you. He has two questions. Firstly, congratulations on the conference for good quarter. His question is if Xunlei has any deposit at SVB, Silicon Valley Bank, and also he wants to know if Xunlei has been affected by the collapse of the SVB bank. His second question is, you know, Xunlei has started to make money and he wants to know if Xunlei is going to pay any dividend. A good question. First, we don't have any deposit at SVB and are not affected by the incident. The second question, and for the time being, we don't have any plan to pay dividend. We intend to use the cash for potential growth opportunities for the company. Thanks very much for the questions.

Speaker 5

[Foreign language]

Speaker 4

[Foreign Language]

Operator (participant)

There seems to be no further questions, so I would like to turn the conference back to management for closing remarks.

Eric Zhou (CFO)

Thanks again for your time and participation. If you have any questions, please visit us at ir.xunlei.com or send emails to our investor relations. Have a good day. OK, we conclude this conference call. Thank you.

Operator (participant)

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