Dani Zhang - Investor relations Manager Sean Shenglong Zou - Chief Executive Officer Lei Chen - Co-Chief Executive Officer Tao Thomas Wu - Chief Financial Officer.

Analysts:.

Good morning and thank you for standing by for Xunlei's Third 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. Today's conference call is being recorded. I would now like to turn the call over to your host today, Ms.

Dani Zhang, IR Manager of Xunlei. Thank you. Please go ahead..

Thank you, operator. Good morning and good evening. Welcome to Xunlei's third quarter 2015 earnings call. I'm Dani Zhang [ph] Investor Relations Manager at Xunlei. With me today on the call are Mr. Sean Zou, our Chairman and CEO; and 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 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 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 CEO, Sean. Sean, please..

Thank you, Dani. Good morning and good evening, everyone. Thanks for joining us today on our earnings call for the third quarter of 2015. Let me start by commenting on topline. Our total revenues for this quarter were $33.5 million, which exceeded the high end of our guidance range. It also represented 7.5% growth on a sequential basis.

Revenue from Project Crystal was a key competitor to the sequential growth. Let me first comment on Project Crystal, which as you may know now is one of the most important and innovative product potentially for Xunlei.

For the Crystal's which a milestone in the third quarter has started to generated revenues through steady crowd-sourced out of bandwidth to third-parties. We had including crowd-sourced bandwidth internally [indiscernible] for a while now. To have external sales, thus represent a milestone from the product developed upon a deal.

It is also early testimony money of market initial perception of the product’s value propositions. In magnitude of Project Crystal revenues is still small, but customers target this quarter with fairly broad based [indiscernible] a leading video streaming site to app store and online gaming companies and we're continuing to build our pipeline.

Let me reiterate the core value proposition of Project Crystal. First, the crowd-sourced bandwidth helps to enhance user experience for streaming websites and online key companies, in terms of its smoothness, because of its architecture.

Second, bandwidths from Project Crystal also provides added security features, which is important consideration for content owners. And third, its competitive cost structure. This quarter represents the initial success of market acceptance of this innovative technology and its value propositions.

We are also building up a solid pipeline of potential customers, which are in various stages of product testing and customizations. I would like to point out that Project Crystal is a new technology and a service for each customers do need to be customized. What that means is our sales cycle tends to be longer given this technology and architecture.

So, revenues ramp make take some time. However, once adopted we think customer stickiness should be strong and revenues would almost new recurring in nature. Going forward the key priorities for Project Crystal are as follows.

First, to continue to advance on the product and the technology front, it is a new technology we need to refine that and advances to the new phases. Second, to gain more and more key customers like IGE. These customers not only have scale but they are thought leaders in their respective industries.

Their acceptance is important to [indiscernible] in terms of a product viability and a value propositions. And third, to scale and ramp the business, we will accomplish this through not only adding new customers, but also more wallet shares from existing customers.

I’m delighted to have reached this milestone and we like to thank the project team for their hard work. Let me now make some quick comments on our subscription business, which represented over 60% of our total revenues. The number of our paid subscribers was 4.9 million, slightly down from the end of previous quarter.

As I said in the previous quarter, we think the subscriber base has largely stabilized. After all, users have been over a year to adjust Internet content regulations in China.

I would like to share with you that the fast side of the growing segment within our subscriber base is users with 50 megabyte bandwidth, which is almost the highest bandwidth available in China.

The fact that users with high speed bandwidth continues to subscribe to our services illustrates Xunlei’s basic value proposition, which is to allow users to fully utilize their large amount of connections. And in fact there are [indiscernible] back bones should render our service value for many years to come.

In fact, subscribers with 50 megabyte large amount of connections now represents the highest percentage in our subscriber base. We are also trying to leverage the subscriber base which amounts to the largest of its kind on the Chinese Internet market.

We are increasingly thinking to value-added services and cross-selling [indiscernible] to our subscriber base. This is relatively in the early stage, but part of the revenue growth this quarter was driven by value-added services from subscription business. [indiscernible] marketplace as we formulate coherent strategies on this [indiscernible].

Let me briefly comment on the mobility progress, I would like to highlight Xunlei mobile which is currently in-house mobile app has been generating significant user traffic in 2015. This app allows users to search, consume and download all within the same app.

It is a strong product which really takes advantage of Xunlei’s substantial downloading and a common accessibility. While on mobile end [indiscernible] is approximately 8 million and we are starting to experiment with possible monetization.

Given this expansion in user base, importantly we have now bring about 40% of new subscribers for our VIP member services, expanding our subscription services to the mobile end. On the other hand a quick update on our corporation with Xiaomi.

[indiscernible] since last year, we have been continuing to referring our mobile acceleration product in its performance and its consistency. As of the end of September our daily active users were about 22 million, which represents roughly 20% of total installed base of our service and software, up from 18 million when I spoke to you last.

We are continuing to see the potential monetization of these mobile traffic. Last but not east, I would like to take this opportunity to close my comments by introducing Chen Lei, our new Co-CEO..

Hi everyone. This is Lei..

As part of our earnings release, we announced that our Board has appointed Chen Lei to new position Co-CEO effective immediately. Chen Lei has joined the company about a year ago as our CTO. He came with a wealth of industry experiences in cloud computing, software architecture from his previous roles at Tencent, Google and Microsoft.

Over the last year, I have witnessed personally Chen Lei’s impressive technology and product insights and prowess. And his energy and leadership skills were critical for the success of Project Crystal this past year. By naming him Co-CEO, we hope that Chen Lei will extend his leadership skills to guide Xunlei at large.

With that I'm now turning it over to Tom for more financial details. Tom..

Thank you, Sean. Good morning and good evening everyone. First of all it was a milestone quarter as Sean mentioned. That Project Crystal our innovation in crowd-sourcing out of bandwidth generated revenues for the first time this quarter.

Although still in the early stage of ramping, Project Crystal contributed to a total revenue growth, which grew by 7.5% on a sequential basis.

Before I dive into the numbers, let me draw your attention to our financial statements, again due to the divestiture of Kankan, the video streaming business all the numbers I’ll be sharing with you are operations that are ongoing this includes the comparatives which will be on year-over-year basis unless indicated otherwise.

The financial results of Kankan who’s divestiture was closed this quarter are reported in discontinued operations in accordance with accounting standards. For the third quarter, total revenues were $33.5 million which exceeded the high end of our guidance range. Compared to the previous quarter revenues grew by 7.5%.

growth in IVAS revenues which included revenues from Project Crystal were the key contributor for the sequential growth. Subscription revenues were $20.4 million; excluding currency translation loss subscription revenues were essentially flat.

The number of subscribers at the end of the quarter was 4.94 million down by about 116,000 during the quarter. ARPU was RMB25.6 a slight decrease from RMB25.8 in the previous quarter. IVAS revenues which includes the Project Crystal revenues were 12.1 million for the quarter.

This represented 32.1% increase from the previous quarter and a 68.1% increase on a year-over-year basis. As Sean mentioned earlier we have reached the milestone for Project Crystal where we generated revenue from selling crowd-sourced bandwidth for the first this quarter to outside parties.

Cost of revenues increased by 15.2% to $15.8 million from $13.7 million in the second quarter of 2015. Bandwidth cost increased from $8 million to $9.5 million. The operating expenses were $19.6 million essentially flat on a sequential basis.

While we continue to invest in research and development the overall operating expenses stayed flat partly because of benefits from organizational synergy from the recent business restructurings we've undertaken since the beginning of 2015.

Net loss from continuing operations for the quarter was $3.3 million, we continue to invest in the range of new technologies and services including our initiatives in mobility as well as Project Crystal. These investments are still generating losses.

Excluding these investments operating profit was $6.5 million this quarter up from $4 million in the previous quarter. Non-GAAP net loss from continuing operations was $0.7 million currency translation loss from R&D depreciation was a significant contributor to the loss.

Turning to our balance sheet we continue to have a strong balance sheet, we ended the quarter with cash, cash-equivalents and short-term investments balance of $446.7 million $2.1 million increase compared to the end of the previous quarter. Cash value per AVS basis is $6.62.

Strong balance sheet should continue to allow us to execute our gross revenues that Sean has outlined in his sections. Guidance for the next quarter, we expect our revenues to be between $31 million to $34 million. With that Sean, Lei and myself will be happy to answer any questions that you may have. Operator..

Thank you, sir. Ladies and gentlemen we will now begin the question-and-answer session [Operator Instructions] We have a first question from the line of [Eric Xong] (Ph). Please ask your question..

Thank you. I would prefer to speak in Mandarin. [Foreign Language].

It's Tom here. I'm going to translate the question first. And Mr. Chen our Co-CEO will answer the question. First of all this was from an investor. There are two questions, the first question is how we think about the scale and the ramp of Project Crystal in terms of revenues going forward.

And the second question is more about the widening net loss this quarter and how we quantify losses generated by Project Crystal..

I'll translate Mr. Chen's comments.

You are absolutely correct that we accomplished revenues from Project Crystal this quarter, but the magnitude of which is still relatively small, but we are hopeful that the growth trajectories will be steep going forward, but it is fairly early in the ramping stage, but we certainly hope that the growth will continue..

So Sean made some additional comments.

Two points, first is that Project Crystal is a 2B services and as we mentioned in our opening remarks, the nature of the business is that the sales cycle tends to be longer because of architecture and testing involved, but once we are accepted, not only the stickiness is very good, but we consider revenues are almost recurring in nature.

And the second point is just the quick comment in terms of some color of our existing customer base. As we mentioned in our comments, it is a fairly broad range in terms of sectors for the Chinese internet.

Both in terms of streaming website like IGE to online games players as well as app stores and the actual companies represented in these sectors like IGE are leaders in these industries and they are only getting started in terms of adopting the technology. So, we think that as we go forward we can continue to gain their wallet share.

So the overall comment is that the business model, the revenue model is really driven by a couple of things. Number one is, the number of customers or new customers rather in terms of growth and the second growth factor is, how much wallet share in terms of percentage of business they can get out existing business - existing customers..

Let me move on to the second question just refresh everyone's memory, second question is about the widening loss of the net income perhaps, I will address that and how we quantify the losses by our Project Crystal. Now there are couple of reasons why losses increased that this quarter.

Actually that the main reason is a translation loss of our cash holding. So without getting into too much details, the cash that we hold offshore that's denominated not in U.S. dollar, because of the depreciation of RMB becomes a translation paper loss.

So, if you look at sort of apples-to-apples basis compared to the last quarter and this quarter, the increased widening loss in terms of net income was almost intact - one of the biggest reasons is that the FX currency depreciation.

And the second comment I wanted to make there is that as I pointed out in my section of the opening remarks, the existing businesses both the subscription business and so forth, actually are becoming more profitable.

So we added back the investments that we are making in all the new areas of mobility including Xunlei mobile that Sean mentioned and Project Crystal. If we exclude these investments the operating profit for our existing businesses quarter-over-quarter actually increase by 50%.

And the last part of your question is how we quantify Project Crystal? I will decline to provide the specifics there, because it’s still in a very sensitive stage, but the gross margin is solid for that business, on the other hand we are promoting the product in terms of sales and marketing expenses.

So the overall P&L for Project Crystal is causing a loss at the bottom line, but we think it's a wise decision, we think that we are making a good investment for the benefits of shareholders in the medium to longer term..

So Sean want to add an additional comment.

The key focus for Project Crystal right now is really too fold; number one is customer satisfaction, we wanted to make sure companies like IGE develop confidence in the product and are happy not just in terms of cost savings, but also in terms of the user experience of their subscriber base, let alone security feature that we mentioned.

So the first focus is customer satisfaction and the second focus is really as we've mentioned earlier to ramp and scale business. So profit we are going to sacrifice arguably short-term profits for the benefit of longer term leadership in this business and really drive benefits for the shareholders in longer term.

Operator, can we move to the next question please?.

Thank you, sir. We have our next question from the line of [Sherry Gou] (Ph). Please ask your question..

Hi thank you.

So I want to ask four questions; first, I see the subscription revenue has declined this quarter, I want to know what is the reason behind it, is it going to be a decline in trend or is it just a fluctuation? Second question, I see the gross margin has declined, so I want to the reason behind the - I don’t know why the cost of revenues have increased? And could you please comment are we going to keep the cost of revenue continue to growing? The third question is below the interest income and expenses, the other income, which has changed from positive to negative largely from last quarters, so I want to know the reason behind it? Fourth question is as you know there is a large form of discontinued operation, actually is there income from discontinuing operation this quarter, I want to know what is that discontinue operation and why it has changed from negative to positive? Thank you..

That’s a very good so questions, perhaps I can answer that in reverse order, easier for me to remember that way. Discontinued operation why it turned from a loss to a positive? That is the residual part of Kankan, which we divested and it was closed this quarter.

So the profit that you saw was actually quite small, but it relates to some of the residual accounting from closing of the KanKan transaction. And again in a reverse orders, the negative income below interest line, actually that’s partly when I was talking about in terms of foreign exchange loss.

We do hold our substantial balance in terms of cash in Chinese RMB and the RMB that we hold in offshore accounts because of the depreciation of the Chinese RMB that was the biggest loss coming from the FX loss. Your first question is about decline of subscription revenues.

Actually that also has something to do with FX, as I commented during my opening remarks, if you look at the revenues in the domestic currency RMB revenues for subscriptions are almost flat purely from the subscription basis.

And so when you convert that into our reporting currency in the dollar, because of the depreciation of the currency you see a 3% decline. Now as we commented earlier, we think that our subscriber base has essentially stabilized and the subscribers have had almost a year now to adjust to the current environment.

In terms of number of subscribers we trophed I think two quarters ago and it increased the previous quarter the second quarter and right now it's slightly down from the second quarter. So it's not our expectation that subscription revenues will fluctuate substantially.

And your question on gross margin, the gross margin decline is partly because of additional bandwidth we are applying to both the subscription businesses as well as the bandwidth that we crowd-source from our user base for Project Crystal.

And I'm not going to give the forecast in terms of a gross profit at this stage, but the absolute gross profit of that increase, if you look at the third quarter versus the second quarter and obviously we are going to be very mindful in terms of managing our profitability here.

But there is nothing meaningful in terms of that particular trends going out here. I hope I have answered your questions. Operator can we move on to next question..

Sure sir [Operator Instructions] pardon me sir, we don’t have any more questions from the audio line. Please continue. Thank you..

That's fine. If there are no more questions thank you for your participation and your interest in the company and I think Sean, Lei and myself will look forward to interfacing with you in the near future. Thanks again and have a good evening or good morning..

Thank you very much..

Thank you..

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