Xunlei Limited
Q4 2015 Earnings Call Transcript

Published: 11 Mar 2016

[Operator:]

Good morning and thank you for standing by for Xunlei's Fourth Quarter and Fiscal Year 2015 Earnings Conference Call. At this time, all participants are in listen-only-mode. After Management's prepared remarks, there will be a question-and-answer-session. Today's conference call is being recorded. I would now like to turn the call over to your host today, Ms. Zhang Dani, IR Manager of Xunlei. Please go ahead.

[Dani Zhang:]

Thank you, Operator. Good morning and good evening. Welcome to Xunlei's fourth quarter 2015 earnings call. I'm Dani Zhang, Investor Relations Manager at Xunlei. With me today on the call are Mr. Sean Zou, our Chairman and CEO; Mr. Lei Chen, our Co-CEO and Mr. Tom Wu, our CFO. Today's conference call is being broadcasted and a replay of the call will be available on our website following the call. Our earnings release was distributed earlier today and it is now available on the IR section of Xunlei's website as well as Newswire service. Before we get started, please note 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. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Please refer to our SEC filings for a more detailed description of the risk factors that may affect our results. We do not assume any obligations to update any forward-looking statement except as required under applicable law. During this call, we will be referring to both GAAP and non-GAAP financial measures. The non-GAAP measures are reconciled to the most recent directly comparable to GAAP measures in the tables attached to our earnings release, which can be found again on our IR website. Please note that all numbers are in U.S. dollars unless otherwise stated. I would now turn the call over to our Co-CEO, Lei Chen. Lei, please.

[Lei Chen:]

Thanks for joining us today for our earnings call for the fourth quarter of 2015. Let me start by commenting on our topline. Our total revenues for this quarter was US$35.1 million which represented 4.8% growth on a sequential basis. It also exceeded the high end of our guidance range. Revenue from Project Crystal which really is Xunlei’s anchor product for cloud computing increased 33.9% on a sequential basis, besides that mobile interne also started to generate significant revenue and became another key growth contributor for the first time. By one measure mobile internet now accounts for 17% of our total revenues, increased from 10% the previous quarter. Tom will provide more details on the financial results in his section. Since this the first earnings call for this year, I would like to take this opportunity for a quick review of last year and more importantly key strategies and the outlook for Xunlei in 2016. For 2015, we achieved a number of strategic milestones; first, we refocused our business by divesting contract. As you may know, it was our video streaming business which was loss making. The divestiture not only reduces financial losses, but more importantly allows management bandwidth to focus on key growth drivers. Second, we made a significant progress on our Project Crystal, our anchor cloud computing product. We successfully achieved a third party sales of cloud sources either bandwidth. It is significant from the product recognition standpoint. Third, we made a meaningful progress in our transition to mobile interne, with both mobile traffic and the revenue reached historical high in the fourth quarter. I will provide more details later. And fourth, our subscription not only stabilized, but it regained the trajectory of growth this year. Most importantly, it is very clear in our mind the positioning of Xunlei. It enables the sharing of computing power to make internet faster and more efficient. For 2016, our strategic priorities are three-folds, and they are in many ways continuations of the path we embarked last year. First; to scale our cloud computing products, principle of which is Project Crystal in terms of revenue size, customer size and new product lines. Second, to take advantage of secular change of mobile user behavior largely as a result of wider adoption of larger screen phones, bigger mobile storage, as well as more popular 4G mobile bandwidth. Xulei already has several mobile apps that are gaining popularity, contributing to our mobile revenue growth that i mentioned in the beginning. Third, to focus our monetization of mobile traffic and the subscription revenue. I will address more details in each business section. Let me first comment on cloud computing business, which Project Crystal is the principle product currently. This particular cloud computing product in our view is innovative and potentially disruptive. It is the cloud computing power by cloud sourcing focusing primarily on streaming live or on-demand. It should help drive growth for Xunlei, execution is obviously the key. Our cloud computing business target to generate revenues since the third quarter in 2015, a milestone attracting market’s initial acceptance of this value propositions. In the fourth quarter, revenue of cloud computing grew 33.9% sequentially. Number of customers also nearly doubled in the same period. Furthermore, revenues from enlisting customers are also showing a steady growth. For example, [Aichi] a thought leader in the streaming sector usage nearly tripled during the quarter. On the path-line of new customers which are in various stages of product testing, customizations and negotiations also looked solid. We expect that number of customers to double again in this current quarter, with a strong diversity of new customers from streaming websites at stores to gaming companies. As we have said before, the sales cycle tends to be longer, given the innovative aspect of the technology. However, once adopted it should be very sticky. Secondly, we continue to progress on the hardware aspect of our cloud business. [Kankan Xunlei] or Crystal Minor has become one of the most popular items of its kind on Taobao and JD.com two of China’s most popular e-commerce website. We used the private funding as a strategy on Taobao to promote the awareness of (inaudible), and the effort was immensely successful. We contacted in total 8 cloud funding promotions on Taobao, and all of which were fully subscribed in less than 30 seconds. I repeat 30 seconds. Subsequent sales on JD.com were also snapped up by enthusiastic users all within 10 seconds. Hardware devices are really part of our cloud computing strategy in terms of infrastructure building. Let me again articulate the value propositions of our cloud products. First, enhance the user experience in terms of smoothness especially for the streaming sector, giving its cloud sourced architecture. Second, added security for company owners also due to cloud source architecture, spreading out components of content which enhances security, and last but not least, competitive cost structure. While we are still in the investment phase of the technology, we clearly have achieved solid progress. For the rest of 2016, the key priorities of cost computing are as follows

[Tom Wu:]

First of all it was a milestone quarter as Lei mentioned the Project Crystal our anchor - our competing product continue to generate revenues with a growth of 33.9% this quarter as Xunlei recorded mobile application revenue for the first time this quarter. Total revenues for the quarter were 35.1 million which exceeded the high end of our guidance range. Compare that to the previous quarter, revenues grew by 4.8%. Growth in IVAS revenues which included revenues from Project Crystal and mobile application revenues were the major contributors for a sequential growth. Subscription revenues were 19.8 million. Excluding currency translation loss, subscription revenues were essentially flat. The number of subscribers at the end of the quarter was 5.02 million, an increase of 80,000 during the quarter. ARPU was RMB25.3, a slight decrease from 25.6 in the previous quarter. IVAS revenues which included cloud computing revenues were 13.3 million for the quarter. This represented 10% increase from the previous quarter and 21.9% increase on a year-over-year basis. Cost of revenues increased by 12.7% to 70.9 million from 15.8 million in the third quarter of 2015. Bandwidth cost increased from 9.5 million to 10.9 million. The operating expenses were 23 million an increase from 19.6 million in the third quarter. The increase was primarily attributable to marketing and promotion expenses related to cloud computing. Net loss from continuing operations for the quarter was 4.6 million. We continue to invest in the range of new technologies and services including our initiatives in mobility as well as cloud computing. These investments are still generating losses. Non-GAAP net loss from continuing operations was 2.2 million. Turning to our balance sheet, we continue to have a strong balance sheet. We ended the quarter with cash, cash equivalent and short-term investment balance of 432.1 million. Our cash value per ADS was $6.37 at the end of the quarter. Our strong balance sheet should continue to support us to execute our growth strategies on cloud computing and mobility that Lei has outlined in his section. Let me finish by going over our guidance range for next quarter. We expect our revenues to be between $35 million to $38 million for the first quarter of 2016. The midpoint of the range represents a year-over-year increase of 20.9%. As Lei pointed out, this is probably the fastest growth rate for Xunlei recently. Cloud computing should be one of the key drivers for the expanded growth, and we look forward to updating everyone in the near future. With that, operator we’ll turn to questions.

[Operator:]

[Operator Instructions] the first question comes from the line of [Trumble Yan], a private investor. Please ask your question.

[Unidentified Analyst:]

The first one is, we see the short term investments increase significantly this year. So could you please expand more on that? The second one would be, can you elaborate more on the Project Crystal and please let us know when this project will really take the profit or when will it gain profit in the future. And last question would be the exchange rates question, just that like Xunlei host US dollars instead of the RMB, so why would there be an exchange [run].

[Tom Wu:]

Let me take questions one and three and I’ll ask either Lei or Sean to comment on your second question which is on the cloud computing. Your question on the short-term investments and the amount of fluctuations, simply put, it’s a function of our cash management. So as we have a strong balance sheet, $432 million on the balance sheet and depends on how we deploy the cash from generating interest income. That’s the primary reason behind the fluctuation in short-term investment. Your question on FX loss, I think it depends on what you mean by that. What we meant in our FX loss when we commented on ARPU fluctuation was primarily a translation loss. So, we hold cash obviously in both RMB and US dollars offshore and onshore. I don’t want to get in to too much in to that. And our reporting currency is US dollar. So it depends on the exchange rate quarter-over-quarter. There is some FX loss based on what currency you’re talking about. So in large it’s not a major issue, all we tried to comment on was in terms of RMB the exchange rate there was some fluctuation that was the whole point of that. And let me turn over to Lei to answer your second question about profitability of Project Crystal.

[Lei Chen:]

The question was when will Project Crystal have profit in the future? Currently the company believes that Project Crystal is a new way of cloud computing and it is innovative and potentially disruptive. Because we have a strong balance sheet today, and we believe we are in the future of Project Crystal and what it represents in the potential of reducing quickly the cost of computation for the years to come. So we are in a position of investing and accelerate the development of this technology. We’re starting monetizing the Project Crystal today, but we are not in a hurry to make profit out of it.

[Sean Zou:]

I’ll just add to that [Trumble], I think what we’re trying to say is really it’s still in the investment phase of the technology, number one. Number two, potentially we believe it’s an innovative and disruptive technology. But the third point really is that what you were getting at. We are still in the investment phase of this technology even though, we achieved very solid milestones for this quarter. So we’re not forecasting for the street yet, but this much I can add, most of the losses for the company if almost all, most of the losses came from our investments in Project Crystal. And we do not believe for the next short run not going to change anytime soon, because we think 2016 remains as an investment for us. But it’s critical for us to invest in it, because we believe the trajectory of the business and we believe that it’s important for us to invest in the growth drivers for the company. Operator, are there other questions?

[Operator:]

Not at this time sir. [Operator Instructions].

[Sean Zou:]

If there are no more questions, thank you for joining us today. And we’ll look forward to updating you in the near future. Thank you. Good morning and good evening.

[Operator:]

Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating, you may all disconnect the lines now. Thank you.