Dani Zhang - Manager, IR Sean Zou - Chairman and CEO Lei Chen - Co CEO Tom Wu - CFO.

Stephen Chen - JPMorgan.

Good morning and thank you for standing by for Xunlei's First Quarter 2016 Earnings Conference Call. At this time, all participants are in listen-only-mode. After Management's prepared remarks, there will be a question-and-answer-session. Today's conference call is being recorded. I would now like to turn the call over to your host today, Ms.

Zhang Dani, IR Manager of Xunlei. Please go ahead ma'am..

Thank you, operator. Good morning and good evening. Welcome to Xunlei's first quarter 2016 earnings call. I'm Dani Zhang, Investor Relations Manager at Xunlei. With me today on the call are Mr. Sean Zou, our Chairman and CEO; Mr. Lei Chen, our Co-CEO and Mr. Tom Wu, our CFO.

Today's conference call is being broadcasted and a replay of the call will be available on our website following the call. Our earnings release was distributed yesterday and it is now available on our IR website as well as Newswire service.

Before we get started, please note that the discussion today will contain certain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Please refer to our SEC filings for a more detailed description of the risk factors that may affect our results.

We do not assume any obligations to update any forward-looking statement except as required under applicable law. During this call, we will be referring to both GAAP and non-GAAP financial measures.

The non-GAAP measures are reconciled to the most recent directly comparable to GAAP measures in the tables attached to our earnings release, which can be found again on our IR website. Please note that all numbers are in U.S. dollars unless otherwise stated. I would now turn the call over to our Co-CEO, Lei Chen. Lei, please..

Good morning and good evening, everyone. Thanks for joining us today for our earnings call for the first quarter of 2016. Let me start by commenting on our topline. Our total revenues for this quarter was US$38.5 million, which represented 27.4% growth on a year-over-year basis and 1.6% growth on a sequential basis.

This again exceeded the high end of our guidance range. The revenue growth was amongst the fastest growth rate in recent years. Almost all major revenue segments grew at a strong rate. Revenue from cloud computing increased 40.4% on a sequential basis, besides that mobile internet also maintained the growth momentum, contributing significant revenue.

It accounted for 23% of our total revenues, increased from 17% the previous quarter. Tom will provide more details on the financial results in his section. Let me first comment on cloud computing business, one of the most important innovative strategies for Xunlei.

Our cloud computing is powered by Cloud Sourcing, utilizing existing idle capacity, focusing primarily on streaming, live and on-demand. As we mentioned on previous calls, our cloud computing business started to generate revenue since the third quarter last year, really a milestone attesting markets initial questions of its value propositions.

In the first quarter of 2016, revenue of cloud computing grew 40.4% sequentially. Number of customers also more than doubled this past quarter. Sequentially we see a trend of increasing number of live streaming sites as our customers. As you know, live streaming is one of the fastest growing sectors in the internet market in China.

Furthermore, our existing customer, Xiaomi extended its bandwidth usage further to live streaming, specifically for its Spring Festival and the Lantern Festival Live TV programs. Live streaming this quarter represented about 30% of revenues from bandwidth selling.

Although there is some seasonality because of Chinese New Year, it is a very encouraging trend. Other live streaming sites were serving include Panda TV and the Mungo TV. Last but not least, our pipeline of new customers, which are in various stages of product testing customization negotiations also look solid.

Let me reiterate value propositions of our cloud products. First enhanced user experience in terms of smoothness, especially for the streaming sector given its cloud sourced architecture.

Second, added security for content owners, also due to the cloud sourced architecture, spreading our components of content, which enhances security and last, but not least, comparative cost structure.

As I mentioned in the last quarter, our strategies for cloud computing in the coming few months are, first to continue to advance on the product and technology front. It is still a fast evolving technology. There is further optimization and the potential to be harnessed.

Second, to secure up, its revenue and customer size for building up its customer pipeline. We’re also improving our user experience and customization in order to get more wallet share of existing customers and third, to ramp our investments in the business. Our initial success further anchors our confidence in the future of our cloud business.

Let me now briefly comment on our mobility progress. Our mobility effort is anchored around two broad fronts. First, our own mobile application, Mobile Xunlei. This mobile application allows users to search, download and consume content on their mobile devices in a user friendly way. This product continues to be very well received by users.

Daily active user is approaching 10 million, as of the end of March up from 8.8 million the previous quarter. As you may know, we started to monetize the mobile traffic through advertising sales in the fourth quarter last year and advertising revenue from mobile app nearly doubled this quarter.

Moreover this application is also synergistic with our existing subscription business as a important channel for subscribers acquisition. About 30% of all our subscribers for our subscription business join or extend their memberships through this Mobile Xunlei application.

Combining revenues from mobile advertising and subscriptions revenues through this mobile app, mobile revenues now accounted for 23% of Xunlei’s total revenues during the fourth quarter up from 17% the previous quarter, contributing to revenue growth.

The second part of our mobility strategy is through our partnership with Xiaomi, one of our largest shareholders. The benefit from pre installation agreement with Xiaomi whereby all of Xiaomi phones come free installed from Xunlei’s mobile acceleration products.

The install base of Xunlei’s mobile acceleration products in Xiaomi mobile phones continues to increase as a function of Xiaomi’s own sales growth. The DAU of that mobile acceleration product continued to very meaningful and we continue to look at possibly monetizing the mobile traffic.

I think the key to our mobile business is how we capture the secular shift of user behavior on the mobile phones, given the changes in devices and we think that we are involved in a number of interesting applications to benefit from the secular shift, both on our own and through our partnership with Xiaomi.

Lastly, I would like to update you on our subscription business. The number of paid subscribers surpassed 5.13 million, which is approaching all-time high up from 5.02 million at the end of the previous quarter. As we mentioned previously, a number of factors contribute to the growth trajectory of our subscriber base.

First, the user demand remains strong for content access. Second, Mobile Xunlei has been increasingly important channel for new subscribers as mentioned previously.

And third we have been making various progresses in offering better customer care, including improvement of user interface, new product launch and new services offerings such as Quai Niao and Super VIP service. Both help subscribers enjoy faster overall Internet speed or enjoy more privileges and services.

Number of Super VIP more than doubled this quarter, grew from 66,000 to 143,000 by the end of third quarter. Growth of Super VIP who pays the higher membership fee contributed to the growth of ARPU, which grew in the first quarter to RMB28.1 up from RMB25.3 the previous quarter.

Subscription continues to represent the most significant revenue source for Xunlei and provide us with an opportunity to invest in our growth initiatives. Going forward, we will continue to execute our core strategies, first to further scale up our Cloud computing products in terms of revenue size, customer size and new product lines.

Second, to continue to fully explore potentials for mobile products; third, to focus on the monetization of mobile traffic and subscription revenue. We look forward to updating you on our progress in the near future. I will now turn it over to Tom for more detailed financial review.

Tom?.

Thank you, Lei. Good morning and good evening, everyone. For the first quarter, total revenues were US$38.5 million, which exceeded the high end of our own guidance range. Revenues grew by 9.6% compared to the previous quarter and grew by 27.4% on a year-over-year basis.

Almost all of our major revenue segments grew growth in subscription revenues, cloud computing business, and mobile advertising revenues were the major contributors for the sequential growth. Subscription revenues were US$22.2 million, which is 11.6% higher on a quarter-over-quarter basis and 4.6% higher on a year-over-year basis.

Number of subscribers at the end of the quarter was 5.13 million, an increase of 110,000 during the quarter, which almost approached an all-time high in Xunlei’s history and it was the third consecutive quarter for subscriber growth.

As Lei mentioned, the key reasons for the growth in his prepared remarks are strong user demand, better customer care and the importance of our mobility product as a source of new subscribers. ARPU also grew strongly to US$28.1 million to RMB21.81, an increase of US$25.3 from the previous quarter.

For our cloud computing business, Project Crystal, revenue growth was robust 40.4% on a sequential basis. As Lei mentioned, there were some very encouraging signs in terms of our number of customers, live videos as well as pipeline for new customers. We are obviously very focused on execution for this business.

Online advertising revenues were US$3.9 million for the quarter. This represented 125% growth from the previous quarter and 286% growth on a year-over-year basis. Strong user traffic on Mobility application allowed us to continue with our monetization effort.

Cost of revenues increased by 14.3% to US$20.4 million from US$17.8 million in the fourth quarter of 2015. Bandwidth cost increased from US$11 million to US$12.91 million, partly reflecting the continued investments in our cloud computing business. Operating expenses were US$25.8 million, an increase from US$23 million in the fourth quarter of 2015.

The increase was partly attributable to employee compensation and research and development expenses related to cloud computing. Net loss from continuing operation for the quarter was US$5.4 million. Our continued investments in cloud computing was a major drive. Non-GAAP net loss from continuing operations was US$2.9 million.

Turning to our balance sheet, we continue to have a strong balance sheet. We ended the quarter with cash, cash equivalent and short-term investment balance of US$422.8 million. Cash value per ADS was US$6.25 at the end of the quarter. During the first quarter, we also spend US$2.6 million in share repurchase as part of our authorized buyback program.

We'll obviously continue to use our balance sheet to support our growth strategies in cloud computing and mobility initiatives. Let me finish by going over our guidance range for the next quarter. We expect our revenues to be between US$37 million to US$41 million for the second quarter of 2016.

The midpoint of the range represents a year-over-year growth of 25% and we look forward to updating everyone soon.

With that operator, are there any questions on the line?.

[Operator Instructions] The first question comes from the line of Stephen Chen. Please ask your question..

Hi. Good morning. This is Stephen. I actually have three questions. So first number one, so we saw in your press release that the growth of this was question based, led to an increase in bandwidth cost and you also just mentioned that the company had just taken more high subscribers.

So how much of this increase in bandwidth cost is attributable to the higher take up of these more premium subscribers? And then question two for cloud computing, so who are your biggest competitors in this space? And question three also related to cloud computing, what percentage of your total revenue was attributable to cloud computing, thanks?.

Stephen, you were breaking up. You were talking about a third question..

So the third question is what percentage of your revenue comes from cloud computing?.

Yes, why don't I address the first question and the third question and I ask our Co CEOs to address your second question, which is competition. So the first question is on bandwidth increase. How much of that is attributable to the growth of our subscription business vis-à-vis cloud computing? You're absolutely correct.

We pointed out that bandwidth consumption increased, but we're not going to break out the actual bandwidth consumption between cloud and subscription, but what I will emphasize is that part of the synergy for cloud computing is to actually help bandwidth consumption synergy or usage on a subscription side.

So without that breaking down numbers, let me just say or stop at the qualitative level to confirm, number one, overall bandwidth cost did go up and second, there is synergy between cloud computing in terms of bandwidth and the bandwidth used by the subscription business. And I’m sorry the third question was on….

The third question is I’m just asking for a percentage. So the percentage of cloud computing revenue as of total revenue..

Yeah, so let me say this. The cloud revenue is presented as part of IVAS, Internet Value Added Services. So, if you look at the total breakdown of IVAS it was -- I’m sorry, I am looking at, hang on a second, it was a US$12.4 million as a percentage of US$38.5 million. So out of that US$12.4 million, there are really two aspects of revenue sources.

Number one is our games business and second is cloud computing revenues. So, if you look at the trend of that business, it actually grew by 50.5% on a year-over-year basis and most of that growth, is coming from cloud computing.

But unfortunately we’re not going to break it down for various reasons for you, but let me ask Lei to address your second question, which is on competition for cloud computing..

[Foreign Language].

Right. That’s Mr. [Chen] speaking and I'll just translate for him. So that the segment that we focus on for now for Cloud computing is the CDN market and there are really two types of competitors. First is more traditional CDN providers ChinaCache being one of them and WangSu, which is a company listed on Asia here in China.

And the second type increasingly will be larger Cloud players, people like Ali Cloud and Tencent Cloud..

All right, thanks a lot..

Thank you for your questions.

Operator?.

There are no questions at this moment. Please continue sir..

Why don’t we clear the floor one more time before we wrap it up?.

Sure sir. [Operator Instructions].

Okay. Thank you for joining us tonight or this morning and we look forward to updating you on our progress in the near future. Thank you. Good evening and good morning..

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