Zhang Dani - IR Senior Manager Lei Chen - CEO Tom Wu - CFO.

Analysts:.

Good morning, and thank you for standing by for Xunlei's Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's presentation, 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 Senior Manager of Xunlei. Please go ahead..

Thank you, operator. Good morning, and good evening. Welcome to Xunlei's second quarter 2017 earnings call. I'm Zhang Dani, Investor Relations Senior Manager at Xunlei. With me today on the call are Mr. Lei Chen, our 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 IR website following the call. Our earnings release was distributed yesterday and it is now available on the IR website as well as Newswire service.

Before I 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 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 recent directly comparable to GAAP measures in the table 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 will now turn the call over to Lei.

Lei, please?.

Good morning, and good evening, everyone. Thanks for joining us today for our earnings call for the second quarter of 2017. We are pleased to deliver another solid quarter results. Our total revenues for this quarter were US$41.5 million, which represented 8.9% increase on a year-over-year basis.

Sustainable growth was led by our core business segments of cloud computing and mobile advertising. Cloud computing grew by 107.8% and mobile advertising grew by 38.2% on a year-over-year basis. Tom will provide more details on the financial results in his section.

Now I would like to start with our cloud computing business, which is powered by cloud-sourcing, utilizing existing idle capacity focusing primarily on streaming sector, live videos or video on demand.

Before I go through operational data, I would like to take this opportunity to emphasize our meaningful result of obtaining value-added telecommunication services license covering CDN services. We have been following the rules and regulations since we start up and working very closely with the licensing authority.

Receiving VATS license is a meaningful a milestone for the maturity of our innovative approach and a testimony of regulational supports. Now let me share with you our progress on cloud computing.

Continuing on the growth momentum from the previous quarter, revenues from our cloud computing business increased 107.8% on a year-over-year basis, 11.7% on a sequential basis. 60% of bandwidth usages were driven by live video customers and the other 40% were mainly from streaming customers.

It signifies customer acceptance, and it also testifies that our cloud services are very suitable for the streaming sector.

Our existing customer, Kuaishou, one of the largest social platforms in China, again expanded its consumption by 49% in the second quarter, and iQIYI, a leading player in the streaming sector, almost tripled its business with us. It is one of the most successful streaming companies in China with over 600 million active users.

So the fact a leading player, with not only massive user base, but highly complex demand scenarios, significantly expanded business with us is a further testament of our value proposition and increasing trust customers are placing with us. We obviously do not take their trust lightly.

In the next few months, we will also be very focused on our sales and marketing strategy to concentrate on key or marquee customers, industry leaders, whose adoption of our technology can help us better monetize our marketing effort. Let me now briefly comment on our mobility progress.

Xunlei Mobile, our own mobile app, not only allows users to search, download and consume content, but also increasingly focused on short video distribution. As we mentioned in the previous quarter, we're working on providing more short video shooting and editing tools, which encourage users to produce their own short video through our apps.

As of August, our daily user-generated content has increased almost 5 times compared to the beginning of 2017. On the other hand, we are also experimenting in live video segment on both mobile and PC end. Live video is a fast-growing business in China. With proper operation, we can further leverage our user traffic.

In the second quarter, revenue from live video rose by 14.3% compared to the first quarter. Driven by the development of short video and live video, mobile advertising revenues also increased by 41.6% and 28.9% on a year-over-year and sequential basis, respectively.

Lastly, let me briefly comment on our traditional business, subscription business, which represented about 49.6% of our total revenues in the second quarter of 2017.

We are delighted to see other revenues, except subscription, first, for the first time surpassed 50% of total revenue, which means our revenue structure is getting more and more diversified. But as we said, subscription is our legacy business and strategically important for Xunlei.

It generates strong cash flow at large scale and substantial user traffic, which fundamentally support our aggressive investment in cloud computing and other initiatives. The number of subscribers ended in June was 4.09 million, slightly increased from 4.08 million last quarter.

ARPU in the second quarter was RMB34.4, slightly decreased from RMB35.1 on a sequential basis but increased from RMB32.6 at the corresponding period last year. We remain very focused on operational efficiency and better customer care. With that, I will now turn it over to Tom for more detailed financial review.

We look forward to updating you on our progress soon.

Tom?.

Thank you, Lei. Good morning, and good evening, everyone. For the second quarter, total revenues were $41.5 million, which represented an 8.9% growth on a year-over-year basis. Growth in cloud computing and mobile advertising were the major drivers for the year-over-year growth -- base of growth. Subscription revenues were $20.6 million.

Number of subscribers were essentially flat from 4.08 million in the last quarter to 4.05 million. ARPU slightly declined to RMB34.4 compared to RMB35.1 in the last quarter. And as Lei mentioned in his section, we are very focused on customer care and execution.

For our cloud computing business, Project Crystal, revenues increased 107% on a year-over-year basis and 15.5% on a sequential basis. As Lei mentioned, the growth in the live video segment was strong, contributing to the rise in revenues. Overall cloud computing revenues grew by 11.7% on a sequential basis.

We're obviously very focused on executing this business. It is still in an investment phase, meaning it is still generating losses. Online advertising revenues, which included mobile advertising revenue, in the quarter were $5.2 million. Mobile advertising revenue grew 41.6% compared to the corresponding period of last year.

Traffic for this particular mobile app peaked at around about 10 million DAU last year. Cost of revenues was $24.2 million compared with $23.3 million in the first quarter of 2017. Gross profit margin was 41.1% compared to 40.8% in the previous quarter. Operating expenses were $28.3 million compared to $26.4 million in the previous quarter.

The increase on a sequential basis was mainly due to an increase in sales and marketing expense. Net loss from continuing operations for the quarter was $9.7 million compared with an operating loss of $6.7 million in the previous quarter. Non-GAAP net loss from continuing operations was $7.5 million. Turning to our balance sheet.

We continue to have a solid balance sheet. We ended the quarter with cash, cash equivalents and short-term investments balance of $364.8 million, which is down slightly from $370.9 million of the previous quarter end. The decline was mainly due to operating losses during the quarter.

Cash and short-term investments value per ADS at quarter end was $5.51 per ADS. Let me finish by going over our guidance for the next quarter. We expect our revenues to be between $41 million to $44 million for the third quarter of 2017.

The mid-point of the range represents a year-over-year increase of about 3.9%, and we obviously look forward to updating everybody soon. Operator, we're ready for questions..

[Operator Instructions] Currently, we don't have any questions from the line. Sir, please continue..

Let's just pause for another 30 seconds. And if not, we'll conclude this call. Let's wait for 30 seconds..

[Operator Instructions].

Okay, if there are no questions from the line....

One question just came in..

Please go ahead..

Yes, we have one question just came in from the line of [Jack Wu]..

My name is Jack Wu. Congratulations to Lei for your promotion to CEO and congratulations on the license for -- and I just have a -- yes, my question is my understanding is that your building is under construction.

Can you release more information on the budget and what's the process? When it's going to be done?.

I see. Lei, I will take that question. Jack, first of all, thank you for your kind words. Now for the benefit of the audience, what Jack's referring to is the current construction of our headquarter building in Shenzhen. Jack, we would rather not dive into too much details in that.

But what I would say this is a piece of land that was given us by the city government a few years ago, and we have commenced the project or construction of our headquarters building about 6 months ago. And assuming everything is smooth, we should have that ready probably the next 12 to 18 months or so.

But I'm afraid that that's probably all the details that we can provide at this point, but thanks again for your kind words on the license and the progress and Lei's promotion..

Okay, that's great. And I also noticed that there is significant increase in your marketing expenses.

Is there any reason behind this? Can you just give us some more information on that?.

Yes, you're right. As I pointed out in our prepared remarks, sales and marketing expense did go up. This is over a wide range of services, but in particular for Project Crystal, we had a more elevated level of activities. I do not expect that to be the case over an extended period of time.

So -- and let alone that we're obviously very focused on return on investment and cost control as well. But one of the reasons was Project Crystal for this previous quarter..

Okay. So that is related to cloud computing. That's my understanding.

Is that right?.

Like I said, it's a range of services. But certainly, given that most of the investments are going to cloud computing, that was one of the main reasons for the increase of our sales and marketing..

Sounds great. So my next question is related to the dollar amount. I noticed that your cloud computing and mobile advertising has seen significant growth.

But do you plan to release any dollar amount that are related to cloud computing and mobile advertising, or it's just that we really don't know your numbers behind those growth?.

Yes. I think that's a fair question, Jack. And I think what you're asking is whether the company is going to segment our results based on specific product and services. The short answer is no, we are not planning on segmenting our financial results for a lot of reasons.

And my last point is that we think the current disclosure whereby we quantify the growth rates is insightful and is sufficient, and we qualify that in the revenue segment of IVAS, most of that is from cloud computing.

So the short answer is that we are not planning on segmenting our results, and we think that the current disclosure, both the extent of that and the details are sufficient for investors to get an understanding of what's progressing with the company.

Operator?.

[Operator Instructions].

Operator, if there are no further questions, let's conclude our call, and thank you all for joining us on this call, and we look forward to updating the greater community with the results on a regular basis going forward. Thank you. Have a good day, and good evening..

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