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

Analysts:.

Good morning and thank you for standing by for Xunlei's Second 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..

Thank you, operator. Good morning and good evening. Welcome to Xunlei's second 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’s 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 US 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, 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 US 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 second quarter of 2016. Let me start by briefly summarizing our top line, our total revenues for this quarter were $38.1 million, which represented 22.3% growth on year-over-year basis.

Within our guidance range, revenue from subscription business is continuing to regain growth trajectory increasing 7.5% on a year-over-year basis. In addition, mobile internet also maintains a growth momentum, contributing significant revenues. It now accounts for 27% of our total revenues, up from 23% in the previous quarter.

Tom will provide more details on the financial results in his section. Now let me first comment on our cloud computing business, one of the important and innovative product strategies for Xunlei. Our cloud computing is powered by a cloud sourcing, utilizing existing idle capacity, focusing primarily on streaming live or on demand.

In the second quarter of 2016, revenue of cloud sourced bandwidth selling increased 19% sequentially. As I mentioned previously, we continued to focus our effort on the live video industry, which is one of the fastest growing internet usage in China.

The technical aspect for this application is particularly demanding, and our conquest here is an early testament of our technology and value propositions in providing smooth live video feeds real time. The usage of Panda TV, a leading customer in the live video segment almost tripled on a sequential basis.

Our overall revenues from live video customers also grew by 14% sequentially, despite difficult comparison given the quarter prior benefited from strong seasonality due to Chinese New Year.

Total number of customers increased 84.2% sequentially, and our pipeline of new customers, which are in various stages of product testing, customizations and negotiations also look solid. Let me reiterate value propositions of our cloud products.

First, enhance the user experience in terms of smoothness, especially for the streaming sector, given its cloud source architecture. Second, added security of content owners also due to the cloud source architecture, spreading out components of content, which enhances security. And last, but not least, competitive cost structure.

Our strategies for cloud computing will remain focused on, first, to continue to advance on the product and technology front. As you may know this is still a fast evolving technology. There is certainly further optimization and customization.

Second to get more wallet share of existing customers by refined, management and services, and third to ramp and set and scale our business. Our initial success further anchors our confidence in future of our cloud business. Let me now briefly comment on our mobility progress; first on Xunlei mobile, our old mobile app.

The DAU of this app has exceeded 10 million at the end of June, which continues to rank as one of the top three mobile apps in China. This app allows users to search, download and consumer content under the mobile devices, and we’re increasingly focusing on user generating content.

As you may know, we’re starting to monetize the mobile through advertising and sales in the fourth quarter last year. Mobile advertising revenues from mobile apps continue to grow a strong 27.3% on a sequential basis. As importantly, about 30% of our subscribers for our subscription business join or extend their memberships through this Mobile Xunlei.

Combining revenues from mobile advertising and subscriptions revenues through these mobile apps, mobile revenues now accounted for 27% of Xunlei’s total revenues during the second quarter, up from 23% in the previous quarter, contributing revenue growth. The other parts of our mobility strategy is through our partnership with Xiaomi.

The installed base of Xunlei’s mobile acceleration product in Xiaomi mobile phone continues to increase as a function of Xiaomi’s own sales growth. The DAU of that mobile acceleration product continues to be very meaningful and we still expect to monetize this considerable user traffic in the near future.

I want you to reiterate that user behavior has fundamentally changed as phones with bigger screens and bigger storage space has led to a secular shift in user’s consumption of video content under our mobile devices, and with that demand for acceleration of content on their phones.

Xunlei intends to take advantage of that, and our recent progress on our mobility products is a demonstration that our value propositions of acceleration remains compelling in today’s mobile internet world. Lastly, let me provide more detailed comments on our subscription business.

The number of paying subscribers surpassed 5.26 million, which approaching historical high in the company’s history, up from 5.13 million at the end of the previous quarter. As we mentioned previously, demand for acceleration is especially on the mobile end remained strong due to structural bottlenecks in the networks in China.

And we’re also more focused on providing more relevant and differentiated services. Our Super VIP membership, for example, combines all privileges of our subscription services and it continues to be well received. The number of Super VIP grew 51.7% on a sequential basis.

Our [password] services, which provides network acceleration almost tripled this quarter. Our final example is our recent launch of a new version of PC Xunlei accelerator. The latest version provides better searching filtering, enhanced interface, and more interactive features. It’s launch also helped increase user participation and memberships.

ARPU in the second quarter was RMB28.2 comparable to that of the previous quarter, but up by 11% on a year-over-year basis. In all, we want to point out; the demand for acceleration services remains compelling.

With more product and service offerings, subscription business continues to generate the most significant revenue for Xunlei and it is increasingly profitable.

In conclusion, 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 revenues.

We look forward to updating you on our progress in the near future. I’ll now turn over to Tom. .

Thank you Lei. Good morning and good evening everyone. For the second quarter, total revenue were 38.9 million, which represented a 22.3% growth on a year-over-year basis. Increases in subscription, cloud computing business and mobile advertising revenues were the major contributors for the year-over-year basis growth.

The total revenues on a sequential basis remained flat. Subscription revenues were 22.6 million, number of subscribers increased by about130,000 during the quarter and reached 5.26 million, which is approaching an historical high for Xunlei. ARPU also grew strongly to RMB28.2 compared to RMB25.4 in the corresponding period of last year.

As Lei mentioned in a section, the key reasons for the growth were user demand, our improving customer care and continued importance of our mobility products. For our cloud computing business, Project Crystal, revenues for cloud sourced bandwidth increased 19% on a sequential basis.

As Lei mentioned, the growth in the live video segment was particularly strong, contributing to the rise in revenues. Overall cloud computing revenues; however, were down slightly due to slower sale of our hardware devices Zhuanqianbao, as planned. We’re obviously very focused on executing this business, which is still generating losses.

Online advertising revenues which included mobile advertising revenue this quarter were 3.8 million. Mobile advertising revenues grew 27.3% compared to the previous quarter, which we stated, we saw the demand price of mobile traffic in terms of advertising and sales in the fourth quarter of 2015. Traffic for our mobile apps continued to be strong.

Cost of revenues was 18.6 million compared with 20.4 million in the first quarter of 2016. Gross profit increased 7.9% compared to that of the previous quarter. Gross margin was 50.6% up from 46.5% in the previous quarter. Total operating expenses were 24.1 million compared to 25.8 million in the previous quarter.

Net loss from continuing operations for the quarter was 4 million compared with operating loss 5.4 million in the previous quarter. Non-GAAP net loss from continuing operations was $2 million. Turning to our balance sheet, we continue to have a very strong balance sheet.

We ended the quarter with cash, cash equivalent and short term investment balance of 391 million. This is down from that of the previous quarter end. The decline was probably due to several strategic investments we made during the quarter, as well as our ongoing share repurchase program. Cash value per ADS at the end of the quarter was $5.86.

Now let me finish by going over our guidance for the next quarter. We expect our revenues to be between $38 million to $42 million for the third quarter of 2016. The mid-point of this range represents a year-over-year increase of about 20% and we look forward to updating you soon.

Operator?.

[Operator Instructions]. Your first question comes from the line of [Kanan Gul] of [Asisi] Capital. Please ask your question. .

The first question is, can you give us the outlook of your CDN service revenue, where its reached growth like 30% in the following quarters. And the second question is that, I noticed the degrees target of sales of volume of Zhuanqianbao, does it mean that currently the server - the Zhuanqianbao peer load is not enough.

Can you give us some color over the ARPU generated per user?.

I can take a stab at it and Sean and Lei may want to join after that. Now your first question on the outlook for CDN services, unfortunately we don’t provide specific guidance in terms of segments. But as we pointed out, we expect our revenue to grow by roughly about 20% on a year-over-year basis.

However, we do expect revenue from our CDN cloud computing service to grow, given the momentum that we mentioned both in terms of the progress that we’re making on live videos as well as the number of customers that we have signed as paying customers, as well as the pipeline.

But unfortunately we’re not going to provide a specific guidance in terms of that particular revenue segment. Your second question I believe was on our hardware device sale, which as we mentioned in our prepared remarks slowed in the second quarter. So first of all, yes, it was slower and that contributed to the overall cloud revenue decline a bit.

But it was absolutely planned. We did not want to ramp out as much as the previous quarter, primarily because we wanted to make sure that we could better utilize what we have in terms of existing capacity. No, we don’t think it’s an indication of the demand side.

As I pointed out we do expect growth in terms of our cloud computing revenues, particularly in the live videos section. And I wanted to make it very clear that the sale of hardware devices is on schedule, it was an unplanned, slow down and we expect to maintain similar momentum for the second half of this year.

Let me pause and see if my colleagues would want to make any further comments. If not, we’ll go to next question.

Operator?.

[Operator Instructions].

I’m sorry, there was a part of the question I did not address earlier. ARPU, I suppose you were talking about how much our suppliers in terms of owner of our hardware devices were getting paid. It’s a wide partly it depends on how much they contribute in terms of bandwidth, but roughly about RMB60 per month. Sorry, I should have included that earlier. .

Operator any other question?.

No questions at this time. [Operator Instructions] Currently we don’t have any questions from the line. Please continue. .

Thank you for your participation and you continued interest in our company. We look forward to updating you on our progress in the near future. Thank you, and good evening, and good morning. .

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