Xunlei Limited (NASDAQ:XNET) Q3 2019 Earnings Conference Call November 14, 2019 8:00 AM ET
Charlene Lu - Investor Relations Manager
Lei Chen - Chief Executive Officer
Eric Zhou - Chief Financial Officer
Conference Call Participants
Steve Chang - Private Investor
Ladies and gentlemen, thank you for standing by and welcome to the Xunlei's Third Quarter of 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will have a Q&A session after management remarks.
I will now turn the conference over to your host today, our IR manager, Ms. Charlene Lu. Please go ahead, Ma'am.
Thank you. Good morning and good evening and thank you all for joining us today. Welcome to Xunlei third quarter of 2019 earnings conference call. I'm Charlene Lu, Investor Relations Manager at Xunlei.
With me today are Mr. Lei Chen, our CEO, and Mr. Eric Zhou, our CFO. We will be happy to take your questions after our presentations. Please be limited to two questions at a time, so others can get their questions in as well. Today's conference call is being recorded and a replay of the call will be available on our IR website afterwards. Our earnings press release was distributed earlier today and is now also available on our IR website.
Before we get started, please know that the discussions 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 and are subject to the risk 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 descriptions of the risk factors that may affect our results. We do not assume any obligations to update any forward-looking statements, except as required under applicable laws.
During this call, we will refer to both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to the comparable GAAP measures can be found in our earnings press release. Please note that all numbers are in U.S. dollars unless otherwise stated.
With that, let me hand over to our CEO, Mr. Lei Chen, for prepared remarks.
Good morning and good evening, everyone. Thank you all for joining us today. Let me start with our recent corporate developments and the financial highlights of the third quarter of 2019. Then Eric will provide more details on the financial results and take you through the guidance for the fourth quarter of 2019.
Our total revenue was approximately $43.8 million in this quarter, which is below our quarterly earnings guidance range. This was mainly due to lower than expected subscriptions revenues and the live streaming revenue due to seasonal factors and the lack of promotional activities. However, we are delighted to see that cloud computing revenues remain strong and continue to increase, driven by a growing demand for our shared cloud computing resources.
Going forward, we will focus our resources on further building our presence in the cloud computing market where we see high growth opportunities and great potential in accompanying our enterprise clients and their course of development. Xunlei is deeply committed to our strategic initiatives for business development and transformation, and we will continue to advance our mission to empowering individuals through technological innovation and development of a shared cloud computing and the blockchain-based ecosystem. Shared uplink capacities, our valuable resources that we target to commercialize and utilize through technological innovation.
Recently our phone-based shared cloud computing smart device, OneThing Cloud mini, went through public beta testing. This device can be easily plugged into use to mobile phones and leverages this phone's idle computing resources including bandwidth, CPUs and storage. Previously, OneThing Cloud mini was a twice a pick -- twice picks a words winner at CES 2019.
We also conducted research in developing machine learning and AI models in our shared cloud computing and the blockchain ecosystem. Recently, we were recognized by the first china artificial intelligence multimedia information recognition technology computation. Including two highest class A certificates from near-duplicate video retrieval near-duplicate image retrieval.
These awards will provide further momentum for our continuing efforts to leverage shared cloud computing and AI technologies. As for our blockchain services, we obtained blockchain registration numbers from the Cyberspace Administration of China, also called CAC for our key blockchain projects. Recently CAC released a list of registered blockchain information services companies and related products, which included our main operating entities and projects in China Xunlei -- Shenzhen Xunlei Networking Technologies Corporation Limited for its ThunderChain and the Shenzhen Onething Technologies Corporation Limited for its ThunderChain Open Platform.
During the third quarter, a U.S district court judge dismissed the securities class action complaint against Xunlei. This class action complaint was initially filed at the Southern District Court of New York in January 2018. The court granted our motion to dismiss the class action complaint in its entirety with prejudice and the case is now closed.
Now I will briefly highlight our momentum and innovation across our businesses. We are a innovator in shared cloud computing and operate an extensive distribution of nodes through sharing economy. In essence, we are creating a shared cloud computing network by encouraging millions of participants to share their idle computing resources. With this shared cloud computing network, we provide a high-quality cost-effective cloud services for clients, and more importantly our shared computing model cost-saving energy and reduces CO2 omission compared to computing data centers.
We believe the shared cloud computing will be an important market for us that cannot be ignored, and will be a key driver for our long-term growth. We are continuously expanding our portfolio of competitively priced high-quality solutions in cloud computing services.
StellarCloud, an important part of our developing the shared cloud -- shared computing and the blockchain ecosystem provides cloud computing services, including edge computing, functional computing, shared CDN, edge storage and data communications solutions to enterprises that are at a much lower cost than the industry average.
Like the previous quarters, in the third quarter the demand for our cloud computing services remain strong, driven by our enterprise client base, such as Baidu, Youku, iQiyi, Qutoutiao, Xiaomi, etcetera. With a speedy rollout of 5G mobile networks, we expect more intelligent devices with higher computing resources to be developed. These devices could become potential cloud computing nodes for our shared cloud computing network.
We believe, our advanced technologies will enable StellarCloud to provide its enterprise users with efficient and cost-effective access to powerful cloud computing solutions and can help companies in their transition to cloud computing, including content delivery, live streaming, data storage and artificial intelligence.
As more companies go digital, we anticipate significant growth in the IoT space and other related industries, which in turn will drive up the demand for edge computing and can lead to a variety of applications. Therefore, we believe our shared cloud computing model and advanced technology will redefine cloud computing and bring more possibilities to the industry's future developments.
According to IPR Daily, a Chinese intellectual property news website, who surveyed all the disclosed blockchain products in the first half of 2019, China has taken a considerable lead in the adoption of blockchain technology. The public domain and the financial industry are the leading adaptors of this technology. Particularly in the financial industry where supply chain finance, payments, secured and banking are the hottest areas in term of leveraging blockchain technology.
In our own business we have extensive experience in implementing blockchain based solutions for a number of market sectors, such as copyright protection, visibility, public welfare, insurance, transportation, supply chain and the new retailing etcetera. ThunderChain is a blockchain solution to -- partnered to more than 30 businesses and current organizations, including Chinese Internet emergency center, the Copyright Protection Center of China, and we recently have a unique opportunity to provide blockchain services to a network of about 500 clinics and community based hospitals in Thailand.
The fact that these medical facilities are geographically dispersed together with a sheer size of the patient information and different health information system standards makes it difficult for data interconnection and management among them, resulting in information silos for patient records. Further, data retrieval among different HIS [ph] system could lead to a patient privacy being compromised, therefore leading to adverse impact on either patient experience and/or medical service quality.
[Indiscernible] technical support, the implementation of HIS that offers both interconnection and visibility in addition to patient privacy protection was facilitated in Thailand. While we were discussing potential opportunities with our customers in the financial sector, we see three barriers to widespread adoption of blockchain. First, the blockchain system must be high-performing, banks and the financial institutions generally require systems capable of handling exceptionally high volume of transactions.
Secondly, perhaps more importantly is that data protection must be addressed. This is particularly paramount in financial services. However, public blockchains are decentralized were all information is available to everyone. Even when this information is stored on the chain crypted transaction information is known to all the nodes participating in the bookkeeping process. This is often unacceptable to bankers, brokers and their clients.
Last but not least, use of blockchain will likely lead to increased scrutiny. Use of blockchain needs to conform to the regulations of the financial industry. So this is -- so in the blockchain space, we are proud of our accomplishments. Last year, we launched ThunderChain as part of our strategy in building a blockchain powered shared cloud computing ecosystem. And have been making continuous efforts on the advancements of blockchain technology.
To address some of the key issues of blockchain adoption, we have developed a proprietary solution through zero knowledge verification of transactions to protect user privacy and at the same time, [indiscernible] regulatory considerations. I believe our proprietary blockchain solution will be instrumental in advancing both blockchain theory and applications. Recently our blockchain project ThunderChain and ThunderChain open platform has successfully obtained blockchain registration numbers from the Cyberspace Administration of China.
We are dedicated to exploring practical adoptions of blockchain in a number of industries and sectors and in providing tools, frameworks and guidelines for blockchain development. We are being improving the performance of ThunderChain and have applied four blockchain patents based on our recent blockchain progresses.
We hope ThunderChain with its high performance and its enhancements in cryptography can foster the implementation of blockchain technology in more industry and commercial applications.
So far, we’ve partnered with companies in several industries to develop blockchain applications with real world users such as with institutions like the National Computer Network Emergency Response Technical Team, Coordination Center of China, as well as the members of the supervisory network nodes for the blockchain powered National Electronic contract recording and depository platform. With High Link Digital Solutions Corporation Limited in developing a blockchain powered consumer value platform to improve digital marketing performance.
With copyright protection center of China in supporting operations of their Digital Copyrights Identifier System, with Guangdong, South New Media Corporation Limited in providing technical solutions in digital media copyright protection. And with Hong Kong University of Science and Technology in establishing a joint laboratory on blockchain technology. ThunderChain aims to provide a platform for developers across various sectors and addresses the difficulty as they face, we are applying blockchain, thus enabling them to focus on application innovation and development of functions.
Compared with the previous quarter, revenues from live streaming business declined mainly due to seasonal conditions and fewer promotional activities held in this quarter. We will continue to focus on the bottom line of our live streaming business and expect some improvement on such metric.
During this quarter, we have made some changes in terms of branding and product range, and hope these adjustments will improve our live streaming user experiences and boost the numbers of active live broadcasters and viewers on our platforms.
Revenues from subscriptions were US$19.2 million in Q3, down approximately 10% from the previous quarter. The decrease was primarily attributable to decline in the subscriber base. Our subscriber base was 3.8 million as of September 30, 2019, down from 4.3 million as of June 30, 2019. The average revenue per subscriber for the third quarter of 2019 was RMB35.1, up from RMB33.9 as of June 30, 2019.
Over the years, our membership subscription business has provided us with cash flows to pursue growth and innovation opportunities. We will continue to try to increase user engagement and improve product performance. Revenues from online advertising were US$3.7 million, down 4.4% from the previous quarter, primarily due to a decline in mobile advertising revenues.
In summary, despite the weakness in total revenues, we are glad to see continued revenue growth from cloud computing, driven by improved technology and capacity expansion. As a result, we believe we’re maintaining a more robust and a symbiotic relationship with our business partners and clients.
Recently, the importance of blockchain as a core technology to achieve breakthroughs in technological innovation in China was highlighted. We are both excited by the opportunities and mindful of the challenges of this emerging industry. As always, we will strive to maintain our leading position in technology and provide high quality services for our clients.
With that, I will now turn the call over to Eric to review the financial results and the guidance for fourth quarter 2019. Eric, please.
Thank you, Lei. Hello, everyone and thank you again for joining Xunlei's third quarter 2019 conference call. And now I would like to go through the details of our financial results.
Total revenues were $43.8 million, down 8.3% from the previous quarter. Revenues from cloud computing and other IVAS combined to $20.9 million representing a decrease of 7.4% on a sequential basis. This decrease was mainly due to a decline in our other IVAS income from reduced promotional activities and seasonal factors impacting our live streaming revenues.
Revenues from subscriptions were 19.2 million, down 9.9% from the previous quarter. The number of subscribers was 3.8 million as of September 30, 2019 compared to 4.3 million as of June 30, 2019. And the average revenue per subscriber was RMB35.1 compared with RMB33.9 in the previous quarter. Revenues from the advertising were US$3.7 million, down 4.4% from the previous quarter.
Cost of revenues was US$24.5 million, representing 55.8% of our total revenues. Bandwidth costs in the third quarter of 2019 were US$15.8 million, representing 36.1% of our total revenues, compared with US$12.7 million or 26.6% of the total revenues in the previous quarter. The remaining cost of revenues mainly made up of cloud computing products costs and revenue sharing costs for our live streaming products.
Gross profit for the third quarter was US$19.3 million, down 13.6% from the second quarter. Gross margin was 44.1% in the third quarter compared with 46.7% in second quarter. The decrease in gross margin and the gross profit was mainly due to the drop in our subscription revenues.
Research and development expenses for the third quarter of 2019 was US$17.6 million, representing 40.1% of our total revenues, compared with US$17.8 million, or 37.3% of our total revenues in the previous quarter.
Sales and marketing expenses for the third quarter of 2019 were US$6.2 million, representing 14.2% of our total revenues, down from US$6.8 million or 14.3% of our total revenues in the previous quarter.
General and administrative expenses for the third quarter of 2019 were US$9.1 million, representing 20.8% of our total revenues, compared with US$10.2 million or 21.4% of our total revenues in the previous quarter. The decrease was mainly due to reduced legal fees and rental expenses.
Impairment of assets, net for the third quarter of 2019 was a credit of US$0.4 million, representing a net recovery of previously impaired assets, compared with a credit of US$0.7 million in the previous quarter.
Operating loss for the third quarter was US$13.2 million, compared with an operating loss of US$11.8 million in the second quarter of 2019. Net loss was approximately US$24.6 million in the third quarter of 2019, compared with a net loss of US$2 million in the previous quarter.
Non-GAAP net loss was US$23.1 million in the third quarter compared with non-GAAP net loss of US$0.7 million in the second quarter. The increased net loss was primarily due to a one-time noncash write-off in the amount of US$14.3 million, which was related to a long-term investment the company made in a VR company in 2016. Diluted loss per ADS in the third quarter of 2019 was US$0.36, compared with a diluted loss per ADS of US$0.03 in the previous quarter.
As of September 30, 2019, the Company had cash, cash equivalents and short-term investments of US$264.8 million.
And finally, I would like to turn to our guidance for the fourth quarter of 2019. We expect total revenues to be between US$45 million and US$50 million for the next quarter. The midpoint of the range represents a quarter-over-quarter increase of about 8.4%.
With that, we conclude our prepared remarks today. And I will now turn the call over to the operator for your questions. Operator, we will now take the questions.
Thank you, sir. [Operator Instructions] We have our first question coming from the line of Steve Chang, an Investor. Please go ahead, sir.
Thank you for taking my question. I have two questions. First, have you already generating any material incomes from the blockchain related products, blockchain business. Secondly, based on your current visibility, when do you expected from a company's perspective and also from industry perspective, we can see that we are generating material revenues from the blockchain business. And what are the major roadblocks, major obstacles to reach such a sizable large application blockchain to the real economy? Thank you.
Thank you very much, sir. Let me take this chance to express our view on blockchain and its ability to generate income. Blockchain technology provides many potential business benefits, including greater transparency, enhanced security and improved visibility, increase the efficiency and speed up transactions, and reduce costs and so on. As a integral part of our cloud computing ecosystem, blockchain technology has helped us generate revenues, while our blockchain based products and services such as StellarCloud, OneThing Cloud and ThunderChain Open Platform. As one of the early starters in cloud computing and blockchain, we are dedicated to exploring practical adoptions of blockchain in a number of industries and sectors, and in providing tools, frameworks and guidance and guidelines for blockchain development. So far we have provided for, and as this, dozens of blockchain applications developed. The business model of blockchain services is somewhat, I think it can be categorized or at least very similar to a SaaS deployment for customer. So in the beginning of the project there is a project fee that’s as the -- as part of the development of the application per se. And then in the long run, there's the technical maintenance fee usually charged for a variety of different applications. So we have provided the pricing information on our company's product website, but we don't currently segment the income from blockchain. So far the income from blockchain is -- it has not being very large. Has not become a large portion of the -- of our revenue. So after increased transaction volume, our blockchain projects, however we have not yet generated material revenues for us. We’ve been continually improving the performance of ThunderChain and the proposed multi cryptography algorithms and zero knowledge proof of ThunderChain, which can validate transactions without revealing personal and private information. We are also able to provide immutable audit trails to authorize users and regulators for these transactions if required. We believe this unique capability open the doors for the application of blockchain, technology in many of the financial industry application scenarios, which prior to this is not acceptable for blockchain technology to be applied [ph]. And our efforts have been gaining increased recognition by the industry. Looking ahead, we’ve growing concerns over data privacy and security. We believe our high performance enhancements of ThunderChain could be a potential solution for the financial and other sectors where added confidentiality and privacy are desired. I believe we have achieved significant progresses in terms of blockchain performance, its scalability, privacy protection, monitoring mechanism and user experiences among other things. And I believe in order of blockchain to be widely used, we need government policy support as well as strong motivation by industries to upgrade the existing business structure under the IT systems.
As I’ve said in the prepared remarks, China from the information that we can see, public information that we can see, research information that we can see, China has taken the lead this year to become the top country where blockchain applications are developed and released. So overall, ThunderChain aims to provide a platform for developers across various sectors and address the difficulties they face when applying blockchain technology, thus enabling them to focus on application innovations and function developments. In that sense we welcome opportunities for further engagements with blockchain community and regulators across sectors to improve understanding of the underlying technology of blockchain. We expect accelerated development of industry and we will continue research and development to take advantage of these exciting opportunity. Thank you very much, sir. And I hope that answered all your questions.
Thank you for the answer. I have a follow-up question. Previously you mentioned blockchain business very similar to the SaaS business model. So is there any number you can disclose here regarding the enterprise cloud customers have already been on ThunderChain?
I’m not sure whether I completely -- can you repeat the question. In Chinese first, then English.
The audio is not very -- its not perfect. I probably missed a couple of words during a sentence. I’m sorry.
Okay. Let me repeat my question. So can you discuss the number of the enterprise class customers who have already been on your ThunderChain?
So the -- so the ThunderChain Open Platform provides blockchain solutions to primarily enterprise customers. We currently don't disclose all the enterprise customers that we have, but in the prepared remarks I’ve talked about a few. For example, the National Computer Network Emergency Response Technical Team, Coordination Center of China, High Link Digital Solutions Corporation Limited, the Copyright Protection Center of China, the Guangdong South New Media Corporation Limited and we also have clients in Thailand, which is also enterprise customers. So all the customers leverage our ThunderChain technology for their enterprise through our ThunderChain Open Platform, those customers are - I think can all be categorized as enterprise or institutional customers. By the way the blockchain technology in Xunlei has two different roles when it comes to revenue generation. The ThunderChain Open Platform, as I said, it is somewhat SaaS business model where we take income from project fees as well as the maintenance fees. But also blockchain technology is part of our shared computing ecosystem. It complements our shared cloud computing system. So it also has helped us to generate revenue from our cloud computing business as well. Hopefully that answers your question?
Yes. Thank you.
Thank you very much.
Thank you, sir. [Operator Instructions] Pardon me, we do not have any further questions at this point. Back to you sir.
With no further questions, I think we will conclude our call today. Thank you very much for your interest in Xunlei.
Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may disconnect now.