Sean Shenglong Zou - Chairman and Chief Executive Officer Tao Thomas Wu - Chief Financial Officer.

Ella Ji - Oppenheimer Alex Yao - JPMorgan.

Good morning. And thank you for standing by for Xunlei's Third Quarter 2014 Earnings Conference Call. At this time all participants are in listen-only-mode. After managements prepared remarks there will be a question-and-answer-session. As a reminder today's conference call is being broadcast live via webcast.

In addition, the replay of the call will be available on our website following the call. Our press release for the third quarter financial results was distributed on November 25, 2014 after market closed Eastern Time and is now available on the Investor Relations section of Xunlei's website ir.xunlei.com.

Before we get started, let me review the Safe Harbor Statement regarding this conference call. 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.

To understand the factor that could cause results to materially differ from those in the forward-looking statements, please refer to our prospectus filed with the Securities and Exchange Commission's on June 24, 2014. We do not assume any obligations to update any forward-looking statements except as required under applicable law.

During this call we will be referring to both GAAP and non-GAAP financial measures and the non-GAAP measures are reconciled most result directly comparable to GAAP measures in this tables attached to our earnings release which can be filed on our Investor Relations website. Please note that all numbers are in US dollars unless otherwise stated.

Today's conference call is being recorded. I would now like to turn the meeting over to you host today Ms. Vicki Feng [ph] Vice President Finance of Xunlei..

Thank you, operator. Good morning and evening. Welcome to Xunlei's third quarter earnings call. I am Vicki, Finance VP of Xunlei. With me today on the call are Sean Zou, our Chairman and CEO, and Tao Wu, our CFO. Now, I will turn the call over to Sean..

Thank you, Vicki. Good morning and good evening everyone. Thank you for joining us today for our second earnings call as a public company. Let me start by briefly commenting our financial results. Our revenues of $49.2 million where we exceed the guidance range we provided for the street.

The results were currently impacted by the current market environment, but we were pleased that we were able to deliver revenues growth both on a sequential basis and on a year-over-year basis. Tom will provide more details on financial results in his section. Now let me again start by briefing you on the top two strategic initiatives for the company.

Our mobile initiative through our cooperation with Xiaomi and our continued innovation in Project Crystal both of which are critical to the future growth of Xunlei. Our cooperation with Xiaomi has continued to divest since the end of the second quarter. A few weeks ago our acceleration software was officially adopted by MIUI 6.

As you may know, MIUI is strongest operating system for its smartphones and MIUI 6 is the latest version. While sharing software will continue to improve and evolve, the official adoption by MIUI 6 was a milestone for us, both in terms of our product development for the mobile phones and our cooperation with Xiaomi.

Our installed base have now reached $28 million of Xiaomi's smartphones. Part of the growth comes from the MIUI 6 launch since the end of October. Let me just be clear, all of the MIUI 6 users comes from system upgrade from MIUI 5 Xiaomi will start to ship new phones, including MIUI 4 with MIUI 6 in near future.

However, we are very pleased to notice that the very active user is sure are the MIUI 6 users appears to be higher than what we have observed previously. An active user refers to a user who uses our ex solution service when performing a download task, such as downloading apps from Xiaomi app store.

We are working on sustaining if not improving those active user ratio by continuing to improve our products, especially now our installed base is starting to scale. Going forward, our installed base will increase from three areas. First, continuing upgrade to MIUI 6 from existing Xiaomi phone users.

Second, all new Xiaomi phone sales pre-installed directly with MIUI 6. And third, some of new Xiaomi phones which is still shipped with MIUI 5 apparently we will work also with other smartphone makers to further broaden our user base. And this was apparently very early stage in terms of execution of our concession to mobile internet.

I wanted to reiterate our fourth key phases of our mobile strategy. First to adapt our technology to the mobile end. Second, to expand our installed base. Third, to generate active user traffic and last but not least, to look for potential monetization opportunities.

While we do not want to and estimate the challenges along the way, we are making progress on some of the important tasks. Just a few words in terms of the performance of our acceleration software or rather user experience we're using our services on our mobile phones.

The most recently adopted version of our acceleration software not only continues to help accelerate at levels similar to what we have shared with you previously, but also on many occasions the software can enable users to utilize the networks pivotal [ph] capacity.

In this case there is some similarity between acceleration on the PC and on the mobile phones, that our acceleration will allow users to fully utilize the pivotal capacity of their last mail [ph] connections, especially Wi-Fi connections. What we are also focusing on currently is the performance consistency of our products.

The consistency of our products performance broadly speaking also depends on both operating environment and hardware all types of Xiaomi phones. For example, our acceleration seems to perform fast in a Wi-Fi environment, as we believe most resemble to the fixed line network also seen in a 3G or 4G environment.

How we can prove the consistency in a variety of network environment, is apparently important in terms of user experience and acceptance of our products. Let me now provide a quick update on Project Crystal, which is our ongoing innovation in crowd sourcing idle bandwidth and potentially it starts from a user base.

As mentioned previously, we are testing this technology to process bandwidth at a lower rate for not our interest, [ph] own usage, but potentially to accelerate to third party online content providers with bandwidth need at a competitive price.

At the end of the third quarter, the apps, amount of bandwidth costs was about twice as much as I had shared with you on our previous phone call and it is now supplies about 10% of the total bandwidth by Xunlei users for its own acceleration service.

While Project Crystal have not generated meaningful cost saving yet, as we are paying participants close to the market rate to promote this product. We're increasing confidence about reliability and a stability of our crowd sourcing technology.

In order to further scale this business, we are also negotiating sales and distribution arrangements for external sales by our service bandwidths either directly to our prior companies or to other third party buyers through partnership with existing series from its providers.

We expect these external sales to take place on a trial basis within the next quarter. In other words, we're paired out processing both on the technology aspect of the Project Crystal and the sales and distribution fronts of the product. Let me just be clear in terms of the potential financial impact of Project Crystal.

It can not only reduce Xunlei's own balance cost because of a good supply some of our own balance usage at a lower rate, but also generating revenues by selling balance to third party users at a competitive price. We are currently very focused on our execution of this important project.

In the coming December, we'll published a mobile app which will allow crystal users to remotely control their participation and monitor their competitions.

In other words, users can use the app to manage their Crystal MIND Software running on their home PCs, small routers to participate in crowd sourcing remotely and track their crystals or monitor conversation in real time. As you know, we actually pay users to constitute their balance for Project Crystal and potentially to storage as well.

We think that that would be an exciting app as it further encourage user participation and enhance our user affinity. Project Crystal and our mobility initiative are two most important growth strategy for Xunlei and it will be looking – we will look forward to continuing to up in marketplace going forward.

Finally, I would like also to give you a brief update on the Kuaipan acquisition. As you know, we signed a definitive agreement to Acquire Kuaipan Personal start business from the Kingsoft Corporation and the transaction was closed during the third quarter.

Longer term, we believe Kuaipan is been adjusted with other products Xunlei offers, such as through a VIP, which potentially allow us to offer VIP users with small higher quality start service.

In the meantime, we are focused to enhance present core value proposition to its target end users who have data synchronization need for multiple devices in a cost competitive and efficient way. We are apparently still in early stage of innovating pipeline into our product lines.

Before I turn over to Tom, I would like to again welcome our new CTO, Chen Lei. Chen Lei is joined us with ample of background in the Internet industry. He was previously Generally Manager of Tencent Cloud business. Before that he spent over 10 years at Google and Microsoft in the United States.

Even though Chen Lei has been with us for less than month, I have been personally impressed with his tremendous interact, deep internet experience and strong leadership. We are very excited that he has joined us. It is a strong addition to our whole management team.

And that we look forward to his contribution in driving some of the key initiative at Xunlei. With that let me turn over to Tom, to provide the details of our financials.

Tom?.

Thank you, Sean. Good morning and good evening everyone. Again we would like to welcome all of you to our second earnings call, since we became a public company. I would also like to highlight a couple of metrics before we delve into our financials. First of all, our user base.

Our user base or MUV as of the end of the September was roughly about 309 million according iResearch. This continues to rank Xunlei as one of the top 10 internet platforms in terms of user traffic. Obviously this will provide us with further monetization opportunities going forward.

Second, I would also like to reinforce Sean's earlier comments on our mobile initiatives and Project Crystal, while these initiatives have not produced meaningful financial impact they ARE undoubtedly the two most important strategic initiatives for the company.

In terms of financials, all of the growth rates and comparison that are besiding [ph] will be on a year-over-year basis unless indicated otherwise. As Sean mentioned, our revenues for the quarter was $49.2 million which in line with our own guidance range.

The current operating environment has obviously impacted our existing businesses, but we were pleased that we delivered both positive growth on a year-over-year basis and sequential basis. Advertising and IVAS revenues both grew offsetting a moderate decline in subscription revenues on a sequential basis. Let me now go through each of the businesses.

Subscription revenues continue to be the most important segment for us, representing about 51% of our total revenues. As expected, subscription revenues declined on a sequential by about 1.7%. Number of subscribers at the end of the quarter was $5.1 million, down by about 3% or above 150,000 subscribers on a quarter-over-quarter basis.

And quarterly ARPU was RMB29.4 moderately lower than that of the previous quarter. We continue to offer temporary suspension of services to about 300,000 subscribers. This number has remained relatively stable over the last three months. And we are stepping up our sales and marketing efforts, as well as cross selling to improve user stickiness.

Advertising revenues were $12 million for the quarter, which increased 20.6% on a sequential basis but declined by 7% on a year-over-year basis. That was partly because of seasonality as third quarter typically is a strong quarter for this business. We also maintained our investments, including content purchases according to our plan.

Both number of advertisers and ARPU increased on a sequential basis. However, as we mentioned previously this business continues to generate an operating loss. IVAS revenues were $12.4 million for the quarter, 17.6% increase on a sequential basis. Growth in online games contributed to the growth in the segment.

We launched a new client game during the quarter which contributed to revenues growth this quarter. Web games on the other hand remained relatively flat, but the predictability of web games is better due to the diversity of our games portfolio and the shorter life cycle of these games, help you reduce the volatility of this business.

Our pay per view subscription also grew significantly this quarter due to the popularity of some of the content offer.

Cost of revenues increased by 12.1% to $25.7 million, bandwidth cost increased from $9.3 million to $9.7 million, this was primarily driven by the growth of our subscription businesses with subscriber growth over 12% on a year-over-year basis.

As Sean mentioned, cost savings through Project Crystal is still small but it did help reduce bandwidth cost moderately. Gross margin improved on a sequential basis from 42.6% to 46.5%. The improvement was primarily driven by bandwidth cost declining as a percentage of revenues.

Payment handling fees as a percentage of revenues also declined as the mix of payments shifting to online payment channels which charged lower commissions. Sales and marketing expenses for the quarter were $8.5 million, accounting for 17.2% of total revenues, and increased from 17% on a year-over-year basis.

This is primarily because of the growth of staffing cost outpacing rather revenues. General and administrative expenses for the quarter were $8.1 million, representing 16.5% of total revenues, an increase from 11.4% in the same period last year. This again was driven by rises in staff compensations, including share-based compensation.

Research and development expenses for the quarter were $9.1 million, accounting for 18.4% of total revenues as compared to 15.6% from the same period last year. Net income attributable to Xunlei Limited was $0.3 million, a decline from $9.3 million from the previous quarter.

I will like to remind everybody that the last quarter or the second quarter results were benefiting from a one time gain of accounting of roughly about $7.9 million, purely as a result of our IPO. Non-GAAP net income attributable to Xunlei was $2.3 million compared to $2.5 million from the previous quarter. Our balance sheet remained strong.

As of the end of the quarter we had cash and short-term investments of $436 million compared to $464 million at the end of the previous quarter. The decline was entirely driven by the Kuaipan acquisition which Sean mentioned that we closed during the quarter. Cash value per ADS basis is $6.7 per ADS.

Our guidance for the fourth quarter, we expect our revenues to be between $44 million to $47 million. The midpoint of the range represents about 4.5% growth on a year-over-year basis. With that, Sean and I will be happy to take questions that you may have.

Operator?.

Thank you. [Operator Instructions] Your first question comes from the line of Ella Ji from Oppenheimer. Please ask your question..

Yes. Good evening, Sean and Tom. Thank you for taking my question. So my first question is actually relating to the active users for your – your active users that you have acquired through Xiaomi.

What are the primary purposes to use Xunlei when they use their cell phone? You mentioned that apps downloads, are there any other things that they do a lot when they use your app?.

Thanks, Ella. I will translate the question for Sean and – or address your question. [Foreign Language].

[Foreign Language].

Yes. Thanks, Ella for question. Let me just make couple of points. One is that as you know our acceleration software is embedded in MIUI 6 operating system.

As I mentioned that this past quarter marked a milestone for us because we were officially adopted by MIUI 6 and as an engineer it means a lot because as I mentioned it not only signifies the product development progress that we made, but also our cooperation with Xiaomi.

But now in terms of your actual question, once the value add or what's the functionality of our software embedded in the smartphones, and I wanted just to go over on based to value proposition very quickly.

One is that, whether on PC or for that matter our mobile devices, Xunlei's core value proposition has always been content delivery in terms of speed, okay, that acceleration. So, what I mentioned on the previous call is that based on the technology that we have adopted we can accelerate download speed anywhere from about 89%, okay.

So, in addition to being able to accelerate apps downloads there are number of tasks that users would benefit from the use of a software, for example Max, for example downloading games or system upgrade.

I think I may have quoted some figures on the previous call that if you do a system upgrade without software that we have it may take you 20, 25 minutes, but with the software that we have you know, you could probably reduce that to almost by half, to about 10 to 15 minutes. So, let me just wrap my answer. So the value proposition remains the same.

The value proposition is access of content in a very efficient manner. So, specifically its speed and acceleration. I hope I've addressed your – some of your questions..

Yes. Thank you. That’s very helpful. Then my second question is relating to international market opportunity. As we know, Xiaomi is expanding to other Asian, other Asian countries.

I wonder if you can talk about maybe the market situation in those other countries like India and using this also strong opportunities for Xunlei to also maybe add more users in those Asian countries?.

Right. Thanks. I'll translate this question for Sean. [Foreign Language].

[Foreign Language].

Thanks, for your question Ella. That’s an excellent question. Just a couple of points. One is that the cooperation of pre installation agreement we have with Xiaomi is a global agreement. And second is that, if you look at the growth plans for Xiaomi, obviously we don’t want to diverge unnecessary information here.

But most of their growth next year at least will be taken place in China. I think it’s about 80% of the growth is in China. So, for Xunlei our focus will first and foremost remain in China for obviously – for obvious reasons.

One is that, the size of opportunities at home, and second we have relative competitive advantages, that along the legacy business that we have.

But make no mistake about it, as we stabilize the technology, as we demonstrate our value add of our product offering, it is a global agreement with Xiaomi and in the future we look forward to assisting Xiaomi as part of their global expansion as well..

Got it. Thank you again. If I can sneak in one more, and I'll get back to the queue. Relating to your advertising revenue, we are seeing a nice trend-up sequentially. Can you provide some colors and that do you can also expect these advertising revenue will continue to go up in the following quarters? Thank you very much..

Right. If I may, I'll take a stab at the question and then I'll see if Sean will have addition. You're absolutely correct, the ad revenue increased on a quarter-by-quarter basis, I believe by 20%. Let me just explain why it increased. And I've stated this in my script; it grew by essentially two reasons. Number one is seasonality.

Third quarter typically is when advertisers allocate a lot of their advertising budget dollars for the year. So there is a seasonality issue there. And second is that, as I mentioned that we continue to invest in content, according to our plan, okay.

So let me be clear about it though, in India forecast that we have provided for the fourth quarter of $44 million to $47 million, what has been based in is actually sequential decline of advertising dollars, okay. It’s for several reasons.

Number one is that essentially by now we have fairly good visibility of the advertising dollar as the annual budget of these advertisers. So we don’t see that to increase for the fourth quarter. And second, by now content, content market for the entire year essentially is near an end.

So we do not expect that to be a growth driver for us, for the fourth quarter. And I – let me pause and see if there are any comments Sean wants to make on that..

No, I don’t have anything to add..

Okay.

Operator, next question please?.

Thank you. The next question comes from the line of Alex Yao from JPMorgan. Please ask your question..

Hi, good evening everyone. Thank you for taking my question. The first question is on the sales and marketing expense for the quarter, which seems to increase pretty strongly in 3Q. What other areas that you guys are spending, what are the key focus area in terms of investments? Thank you..

Yes. Thanks for that question. I'll take a stab at it, because it’s primarily related to financials. I think most of the increases in sales and marketing as in other fixed cost components comes primarily from a staff, okay. So what we are doing is a number of things.

So not only on the sales and marketing side of it for subscription, but for all of the other businesses that we have. But in a nutshell, its staff compensation, as you know that the competition for talent is strong and its entirely coming from mostly staff compensation increases..

What type of staff are you hiring during the quarter?.

What type of staff? I think the number of employees – I need to double check the number a little bit Alex. The number of employees doesn’t necessarily increase that much and third quarter is our annual salary increase if you will. So a lot of that is from the annual increase that we implemented early part of August.

So it’s fairly broad based, rather than particular area of concentration..

Okay. Got it. The second question is about the monetization initiative on the new user clauses through the Xiaomi cooperation, any initiative you guys are doing or sourcing to the coming quarters? Thank you..

Yes. I'll translate that question for Sean [Foreign Language].

[Foreign Language].

I'll translate Sean's. Yes. Thanks, Alex. It’s a great question. Perhaps I can step back a little bit in terms of our overall strategies before I talk about monetization opportunities. We've said this and we've said this consistently. We have four pronged strategy on our mobility transfer.

Number one is really the technology and demonstrate our value add and user experience. So obviously I cannot over emphasize the importance of being accepted as part of MIUI 6 recently. It certainly is a milestone. So that’s the first phase. And the second phase is really to expand our installed base.

As I mentioned just now, we've now reached $28 million total installed base and we are quite optimistic about the growth trajectory of that installed base. I believe the Xiaomi plan for next year maybe close to $80 million if not $100 million and most of which is I mentioned earlier in my question, my answer to Ella about 80% will be in China.

So installed base, we continue to be very optimistic about this. And the third aspect is really user traffic.

So I mentioned that for the MIUI 6 users, we've noticed that actually an elevated user active – active user ratio and my personal take on that is why its more active compared to what we have observe over last three to six months, is that, that once we're actively upgrading to MIUI 6 arguably are the most internet savvy users, therefore our tools, our value add is more obvious to these people, okay.

So, acquiring traffic, focusing on active ratio that’s certainly the third focus. And I've said this many times, if you have a killer app, if you have the traffic monetization with come, but that’s not the focus certainly for the next quarter or two.

As far as public markets are concerned, we think we want to lay the solid foundation of technology installed base and active ratio before we venture into monetization effort. I hope that answers some of your questions..

Yes, it does. Just quick follow up question. You guys right now have a $28 million user from Xiaomi cooperation, is that number entirely driven by the smartphone user or does that number also includes some of the Xiaomi router or TV user? Thank you..

I'll answer that question. It’s entirely smartphone users, not including other devices..

Okay. Got it. Thank you very much..

Thank you for the question. [Operator Instructions].

I guess operator, if there are no further questions, should we pause for another few seconds or so? End of Q&A.

If not, both Sean and I would thank you for your participation. Thanks for you support and we look forward to updating you in a timely basis going forward. Thank you and good evening and good morning..

Thank you very much..

Thank you, ladies and gentlemen. That concludes our conference for today. Thank you for your participation. You may now disconnect the lines..