Sean Shenglong Zou - CEO Tao Thomas Wu - CFO Vicki Feng - Vice President of Finance.

Ella Ji - Oppenheimer Binbin Ding - JPMorgan.

Good morning and thank you for standing by for Xunlei's First Quarter 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. As a reminder, today's conference call is being broadcast live by webcast.

In addition, a replay of the call will be available on the website following the call. Our press release for the first quarter financial results was distributed on May 20, 2015 after market close, Eastern Time, and it is 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 factors 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 on June 24, 2014. We do not assume any obligation 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 to the most directly comparable GAAP measures in the tables attached to our earnings results, which can be found on our Investor Relations website. Please note that all numbers are in U.S. dollars unless otherwise stated.

Today's conference call is being recorded. I would now like to turn the meeting over to your host for today's conference, Vicki Feng, Vice President, Financials, Xunlei. Please go ahead..

Thank you, operator. Good morning and good evening. Welcome to Xunlei's first quarter 2015 earnings call. I am Vicki, Finance VP of Xunlei. With me today on the call are Sean Zou, our Chairman and CEO; and Tom Wu, our CFO. Now, I will turn the call over to Sean..

Thank you, Vicki. Good morning and good evening everyone. Thanks for joining us for our earnings call for the first quarter of 2015. Let me start by briefly commenting on our financial results for the first quarter of 2015. Our revenues of $39.7 million were within the guidance range we provided to the market.

Because of the pending disposal of Kankan, which is our video streaming business, the results were presented according to the related accounting requirements and which therefore Tom will provide more details on our financial results in his section. Let me start by reiterating Xunlei's strategy focuses for 2015 which I have shared with you previously.

First, to ensure execution of Project Crystal, our ongoing innovation; second, to execute our mobility strategies; and third, to refocus ourselves by optimizing existing businesses to achieve greater focus. But I would like to first again articulate the positioning of Xunlei in today's Internet world.

Xunlei sees itself as a content delivery company, meaning that our products and services have improved content delivery in terms of the speed, success rate and disruptive cost savings for their users and the Internet content providers. If we do this well, we are uniquely positioned to benefit from China's increasing Internet usage.

I am particularly pleased with the government's recent focus on improving Internet speed in China. Xunlei should benefit from these initiatives. Because the carriers would most likely try to improve internet speed by spending large amounts connections or bandwidth.

The bigger the balance for the last month the more room there is for Xunlei to help accelerate. As you may note, Xunlei's value proposition is partly to help users to fully utilize its last month action. This applies to both, PC and the mobile phones.

And the more Internet usage on PC and the mobile phones in itself should help Xunlei to expand the bases for acceleration as well. And I think this again highlights Xunlei's positioning in the Internet eco system as a crowd source content delivery company by affording [ph] users across the wide [indiscernible].

Now maybe let me show on the three initiatives to execute our strategies for 2015. I would start by updating you on Project Crystal. As you may recall, Project Crystal is our ongoing innovation in crowd sourcing idle bandwidth and potentially storage from our large user base.

It could potentially become disruptive [ph] innovation by improving efficiency, providing crowd source bandwidth without actually investing in hard assets. As Internet usage continues to grow in China, so would the demand for the bandwidth usage.

We think that Xunlei's innovative technology, smart hardware product strategy and a competitive business model will make Xunlei uniquely positioned to succeed with Project Crystal. First the technology in Project Crystal is similar to that of our acceleration technology which is based on crowd sourcing users reduce [ph] power in content indexing.

Project Crystal is intending to crowd source users' idle bandwidth for content delivery. This is for our natural extension our long haul [ph] technology roadmap to verify [ph] crowd sourcing technology to gain endless computing power, in this case bandwidth from our massive existing user base.

Secondly, we have started to expand Project Crystal's popularity from software service to smart hardware. The smart hardware directly connected to the home routers and accessible there is most app is positioned to sell users idle bandwidth and make money for users in 7 x 24 model.

The introduction of the smart hardware has been well received during our fair. If and when any problem, it could be deployed and then connected into a content delivery network. We believe the implications of the usage of such user participated network will bode well beyond just the computing model.

At last, but not least, 3D market is a well defined commercial market with strong secular growth of China's Internet. Project Crystal gives better comparatives simply because it has reinvented the way of procuring bandwidth from both users and the carriers instead of just from carriers.

The bandwidth procurement we mentioned will be to again tender [ph] because it is roughly be changed with the cost base for offering CTO [ph] service to content providers. And in the meantime, it is natural to further imagine the potential value or part of those participating active users.

Now let me share with the progress that we're making on Project Crystal. First of all its scale. The amount of bandwidth crowd sourced as of now is about 30% higher compared to the last time I spoke to you.

And now it is about 27% of total bandwidth that Xunlei uses by contract services, meaning that instead buying balance from traditional carriers we are now able to supply some of the balance using crystals at large in a competitive cost base.

So bigger volume crowd sourced Project Crystal has further demonstrated stability and viability from a technology standpoint. We have also improved own cost benefit in providing the services for users. Secondly, we have also taken on new power strategy. As I mentioned, we are getting earlier product response.

Xunlei started to sell our home hardware device called smart crystal miner [ph], or money making machine to complement existing devices that our usage using.

We launched premarketing of the smart crystal miner [ph] which is also called [indiscernible] in Chinese and within the first two minutes and 50 seconds we booked over worth of $400,000 of the device. Arguable the smart device was well received the users and it is a strong indication of potential user enthusiasm for Project Crystal.

Certainly we are in various phases of [indiscernible] with over 20 potential customers. And some of the – some in more advanced stages than the others. These encompass a wide range of companies from the leading video company to mobile app stores, to online game companies.

We continue to think that it is realistic to generate third party sales in 2015 which will be the milestone for us. Third party sales will be a testimony in providing product viability as well as value proposition for our customers.

Before I leave the topic on Project Crystal, I would like to point out that ongoing investments are required to fully scale Crystal. This is not only in technology but also in areas of sales and marketing. The Smart Crystal Miner [ph] is an example of the types of investments required.

What we are seeing is, although we expect Crystal to potentially generate revenues this year, it probably would not contribute in terms of profit this year yet. Now let me move on to Xunlei's Mobility strategy.

As we have said on various occasions, transitioning to mobile Internet is one of the most important priorities for Xunlei and our cooperation with Xiaomi is an anchor for our mobile strategies. As you may know, our mobile acceleration software benefits from our pre-installation agreement with Xiaomi.

All Xiaomi phones will be preinstalled with Xunlei's mobile acceleration software.

Since reaching a milestone of being officially a target by Xiaomi's operating system late last year we are continuing our three-step strategies; first, to refine our mobile acceleration products in its performance and consistently, second to expand installed base and increase user traffic, and finally, to gain user interface and potentially monetize that user traffic.

Our global installed base is continuing to expand at a rapid rate. As of the end of last month, our mobile acceleration software has reached about 75 million mobile phones or about 50% increase compared to what we have shared with you on the previous earnings call. All of the phones are Xiaomi phones.

We are also actively negotiating with other smartphone makers to consider using Xunlei's mobile acceleration services. Several of the negotiations are ongoing and are progressing well. We have hopeful that we can further expand our smartphone promise [ph] in addition to Xiaomi in the second half of this year.

The goal is to make Xunlei's mobile acceleration product a benchmark feature for all mobile phone users in China, to gain traffic and opportunities for monetization. It is reasonable to assume that our installed base should exceed 100 million by the end of the year.

Out of the 75 million installed users, daily active users have exceeded 50 million as of the end of last month or about 20% of our installed base. These are users who use Xiaomi's download functions for its app stores, game centers or system upgrades which triggers Xunlei's embedded solution software.

We are also working on to gain a user interface which will help gain greater user awareness of our product and then potentially provide a foundation for possible monetization. We are exploring various possibilities on that end and we will update our investors on ongoing business.

Before I get to the topic of mobile products, I would like again to highlight Xunlei Mobile which is one of our best [ph] mobile apps. The daily active user of Xunlei Mobile has continued to expand surpassing 7 million up from 6 million, the last time I spoke to you.

Bigger screens and a greater storage capacity, our mobile devices probably contribute the most for the demand for this mobile app Xunlei Mobile. Finally, I would like to update you on the pending disposal of Kankan our video streaming business.

As of now, we have signed a legally binding agreement in March to sell the entire space in Kankan to a third party. Since that announcement, we have completely and the final documentations including the sales and purchase agreement last week.

The sale of Kankan is important because it would provide us with greater focus and help to improve our financial profile and our profitability. We expect the transition to close in a couple of months. As a summary, I would like again to express my enthusiasm for the future of Xunlei.

I think the management team has clearly defined strategies and are very well focused on their executions. With that, let me turn over to Tom to comment on the details of our financial results.

Tom?.

Thank you, Sean. Good morning and good evening everyone. First of all I would like to draw your attention to our financial statements. We are treating assets and liabilities related to Kankan which is a pending divestiture as we classified as held-for-sale.

And results of our operations related to Kankan including comparatives are also reported as loss from the discontinued operations. This is in accordance with the accounting standards.

Obviously financial results related to continuing operations and their comparisons are more relevant the net impact of the pending divesture of Xunlei's financials is that our revenue will be approximately 25% smaller.

The composition of our revenues will also be different, but most importantly, profitability would improve as a result of the pending sale. As Sean mentioned, the strategic reason for this divestiture is to sharpen our focus to execute our long-term growth initiatives.

So all the numbers I will be sharing with you are on ongoing operations basis including their comparatives which as usual will be on a year-over-year basis unless indicated otherwise. For the first quarter, our revenues were $30.2 million excluding Kankan.

Including Kankan, our revenues were $39.3 million which is about midpoint of the guidance range we have provided. Let me now go through each of the segments. Subscription revenues were $21.2 million, which continued to be the most important segment for us, now representing about 70% of our total revenues.

This segment declined on the sequential basis and on a year-over-year basis. Number of subscribers at the end of the quarter was $4.88 million, which is about $70,000 less compared to that of the previous quarter end. However, the magnitude of the decline this quarter was only about 40% of the previous quarter.

But we are not ready to call this a bottom for our subscription business yet. ARPU was RMB26.5 moderately lower than that of the previous quarter. We continue to offer [indiscernible] of services to about 390,000 subscribers, up from 350,000 subscribers at the end of the last quarter.

As mentioned in our previous calls, the current operating environment continues to have an impact on our subscription business. IVAS revenues were $8million for the quarter. This represented 18.2% increase on a year-over-year basis. Growth in online games was the primary reason for growth in IVAS revenues.

Cost of revenues decrease by 14% to $12.1 million from $14.1 million. Bandwidth cost decreased from $8.8 million to $7.4 million primarily due to the decrease of bandwidth cost in subscription services. As Sean mentioned, Project Crystal did contribute to bandwidth cost savings.

Crow source bandwidth now represents about 27% of the total bandwidth usage for our subscription services. Gross margin improved from 54.5% to 59.7%. This improvement was primarily driven by declining bandwidth cost as a percentage of revenues. Again, Project Crystal contributed to margin expansions.

The operating expenses were $19.5 million, up 38.1% on a year-over-year basis, primarily driven by an increase in staff compensation expenses including share-based compensations. GAAP net income from continuing operations was $2.4 million. With Kankan we would have made a loss.

Non-GAAP net income from continuing operations was $4.6 million compared with a net income of $5.5 million for the same period last year. Turning to our balance sheet. We ended the quarter with cash, cash equivalent and short-term investments balance of $431 million, essentially flat compared to the end of the previous quarter.

Our balance sheet remained strong. Cash value on the per ADS basis is $6.47. Strong balance sheet should continue to allow us to execute our growth strategies that Sean has outlined in his section. Guidance for the next quarter, we expect our revenues to be between $25 million to $29 million excluding discontinued operations.

The mid-point of the range represents about 10% decline on a sequential basis. With that, Sean and I will be happy to take questions that you may have.

Operator?.

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

Good evening, Sean and Tom. First a question is relating to your partnership with Xiaomi, so the current conversion rate is about 20%. Do you think you can improve the conversion rate going forward and if so, what type of strategies will you apply? And then second question is relating to your headcount.

We noticed that you mentioned the staff compensation cost growth year-over-year. Could you kindly break it down may be by different segments and going forward where are we going to see most headcount increases, what are the businesses that they are going to work for? Thank you..

Thank you, Ella. This is Sean. I will try to address the first question. The commercial rate is 20%. Currently the users are trying to use Xunlei's software from using app store, gaming centre and system upgrades. But we are rolling out SDK for third party applications. We believe the conversion rate will continue to improve.

So yes, the answer is we can improve the conversion rates and the strategy is to offer SDKs to third party applications..

So Ella, I want to address your second question in terms of headcount. First of all you should probably realize the fixed cost I think that's what you're referring to. This is a pre-rationalization of any fixed cost that will be associated with Kankan.

Obviously the cost associated with Kankan which is included in the one line of discontinued operations was only up to the operating cost of Kankan without the platform back office cost.

So I think the way that we can think about this is that we will progress this in a sequential manner, meaning that one we will close the divestiture first, which we should expect probably by the end of this quarter, next month or two and after that we will make some rationalizations for the cost that would no longer be needed for a smaller platform.

I think to quantify that at this stage, but roughly the total headcount associated with Kankan was roughly about 25% to 30% of the total headcount of Xunlei pre-divestiture. So obviously you probably cannot assume the same amount of reduction in fixed cost, but some reduction should also be expected.

And lastly, part of the increment in terms of cost was our investment in Project Crystal, which has not produced revenues yet, but obviously we have been very aggressive in terms of investing in the technology, people and the R&D. So thank you for your question.

Operator, your next question?.

[Operator Instructions] The next question comes from the line of Binbin Ding from JPMorgan. Please ask your question..

Hi, good evening management, thanks for taking my question. My first question is regarding your probability. It seems that the probability of the company after the deconsolidation of Kankan is too below our estimate, is just still loss making our debt level.

So, I am wondering if management can share some color about the future trend of your margin of where operating level going forward and what could be the key reason dragging down the margin? The second question is in terms of the monetization of the Crystal Plan.

So you mentioned that now 27% of your total bandwidth is contributed by this product sales to bandwidth. So, I am wondering is there any like monetization plan in terms of Crystal and what the revenue percentage could be coming from the Crystal by the end of the year? Thank you..

Okay, thanks Binbin, it is Tom here. I'll take a stab at both of your questions. First of all, I think you may have read the financial statements incorrectly. Stripping out the pending transaction, Xunlei was profitable on the GAAP basis and certainly more profitable on a non-GAAP basis.

I realized that it's a very complex set of financial statements because of the accounting treatment and a lot of numbers, but we were profitable on a GAAP and non-GAAP basis number one. And second that, profitability at the gross margin level as I commented on improved actually significantly by almost 4%, 5% points, which is a lot for any business.

So, but I do want to be a little bit cautious in terms of profitability for the remainder of the year. I think as Sean pointed out, there will be additional investments required for Project Crystal and so that may drag down profitability, especially in the second half a little bit okay.

Now, which goes into your next question in terms of revenues for Crystal, first of all the 27% bandwidth contribution from Crystal has directly impacted our margin, I can quantify that, because of the cost savings from the cost structure of crowd source bandwidth we were able to - out of that 4%, 5% improvement in gross margin, about 1% which came from bandwidth alternative sourcing.

That's point number one. And point number two, we do expect revenues to come in, in terms of monetization for Crystal, second half of the year.

We have not phased in, in terms of guidance for revenues for the second quarter and it's too early for us to quantify that, but we did share with you that over 20 various customers are in various phases of testing already.

So we are hopeful that we will be able to produce revenues most likely in the second half of the year, but I am not going to quantify that at this stage yet, but as soon as we're able to see some visibility, reasonable certainty, we'll provide that guidance to the marketplace..

Thank you. That's helpful..

Are there any other questions?.

[Operator Instructions] Thank you for your questions. There are no further questions at this time. I would like to hand the call back to the management for closing remarks..

Thank you for all your participations and continued interest in Xunlei and we look forward to speaking with you next quarter. Thank you..

Thank you..

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