Lei Chen - CEO Eric Zhou - CFO.

Leon Dean - Morgan Stanley Eric Sun - AING.

Good morning and thank you for standing by and welcome to the Xunlei's Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in 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 hand the call over to your first host today, Ms. Charlene Lu, [ph] IR Manager of Xunlei. Thank you, please proceed..

Thank you, Kevin. Good morning and good evening. Welcome to Xunlei's fourth quarter 2017 earnings call. I'm Charlene Lu [ph], Investor Relations Manager at Xunlei. With me today on the call are Mr. Lei Chen, our CEO; and Mr. Eric Zhou, our CFO.

Today's conference call is being recorded and a replay of the call will be available on our IR website following the call. Our earnings release was distributed earlier today and is now also available on our IR website.

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 comparable GAAP measures in the table attached to our earnings press release, which can also be found on our website. Please note that all numbers are in U.S. dollars unless otherwise stated.

Okay, now, I will now turn the call over to our CEO, welcome Mr. Lei..

Good morning, and good evening, everyone. Thanks for joining us today on our fourth quarter 2017 earnings conference call. I’m pleased to report that we ended 2017 with growth in revenues and net profits.

This was eighth quarter in which we achieved year-over-year quarterly revenue growth, and we met our upwardly revised revenue guidance of between $80 million and $88 million for the fourth quarter of 2017.

During the quarter, total revenues were 82.4 million which represented approximately 128.5% and 83.9% increase on a year-over-year and the sequential basis, respectively. The growth was driven by our cloud computing business. Cloud computing grew by approximately 517.2% on the year-over-year basis and 225.8% over the previous quarter.

In addition, we have also achieved good performance for our membership subscription business and enjoy growth in online advertising and live video businesses as well. Historically, our membership subscription business provided us with significant cash flows to pursue growth opportunities.

Now, I’d like to add some color to performance of our major products including cloud computing, membership subscriptions and Xunlei mobility. Early as 2015, we started to develop distributed cloud computing product as we saw significant growth opportunities with the emergence of IoT, AR, AI, and big data et cetera.

We leverage users' idle bandwidth and storage to offer cloud computing services to business. By this approach, we can help business to reduce cost and improve performance. Lately, we've seen the trends of similar and relevant technologies such as Edge Computing and Serverless PaaS sprouting out from different technology thinkers and evangelists.

We believe this trend will continue for a couple of reasons. First, IoT becomes more important and start to fundamentally change how we live and how we conduct business. This leads to a variety of applications where such technologies provide better solutions. And secondly, the demand for bandwidth, storage and computing power grow rapidly.

While the cost of CPU flash and other computing units reduced at a much slower pace. We even saw a reverse price trend in some of these units. A solution that can fundamentally reduce cost will become more and more desirable in this market.

To strengthen our lead in distributed cloud computing, in September 2017, we launched a new product OneThing Cloud which has a smart hardware device. And so, as our personal private cloud that can be considered as the Google Drive at home.

We believe unlined personal cloud market, which is often used to calculate the market for product similar to Google Drive in China is very big. According to incomplete statistics, China has more than 400 million personal cloud users.

By offering a hardware that placed at your home, but satisfy the same needs, OneThing Cloud provides an added benefit of privacy, security and better user experience.

We introduced a voluntary incentive program based on OneThing Cloud by enrolling into this program user give permissions to use their idol bandwidth, storage and CPU through OneThing Cloud.

We believe OneThing Cloud not only helps to meet the rapidly growing demand for computing resources but reduced the need computing new IDC and hence saves energy and protect the environment. We believe the introduction of OneThing Cloud and blockchain technology will improve our distributed cloud computing business.

The device offers better hardware configuration, that Xunlei manifested which allows us to go beyond the CDN domain, and offer new types of services to our customers. Blockchain allows us to construct an automated, efficient and trustworthy reward mechanism.

We also expect to develop and expand an open echo system Xunlei and our partners will build more applications on our blockchain infrastructure. Our effort around blockchain has received recognition at home and abroad.

To mention a few, in December 2017, we were selected as an outstanding entity of the Chinese blockchain industry during an award ceremony in Beijing.

The sponsoring organization China High-tech Industrialization Research Association and Blockchain Industry aligns together with China Association of Science and Technology, the National Development and Reform Commission and Ministry of Science and Technology, the Ministry of Industry and Information Technology of Peoples Republic China, China High-tech Industrialization Association, China Electronic Standardization Institution -- Institutes and other related institutions presented awards to OneThing and other honorable firms.

In general 2018 our OneThing Cloud was recognized as a global top innovator product in blockchain technology by TMTPost for its annual CES innovation awards program in Las Vegas.

Now, I'd like to move on to our subscriptions business, revenues from our subscription business accounted for about 27.6% of our total revenues in the fourth quarter of 2017. The revenue were relatively stable but the percentage to total revenue declined as our cloud computing business contributed more to the total revenues.

As compared with the third quarter of 2017, we have an increase in the number of membership subscribers we also had higher ARPU value, as we offered a super VIP membership program and achieved better profit margins as we reduced IBC embedded costs, by utilizing resources collected from our cloud computing.

Let me now turn to our mobile products, Xunlei Mobile, our mobile app allows users to search and download contents, distribute short videos and participate in live video programs, we're delighted to see revenue from our live video product rose by 34.4% in the fourth quarter as compared to the previous quarter, expanding the rapid growth that we have achieved in the third quarter.

We believe live video has a large and competitive market and have significant growth potential. We expect to release a new product in the near future to maintain our growth momentum. Finally our efforts to build a short video and live video content ecosystem began to payoff for our advertising business.

We had higher TAUs and better advertising pricing. As a result our online advertising revenue grew 70.6% and 30 -- 36% on a year-over-year and sequential basis respectively. With that, I will now turn the call over to Eric to review the fourth quarter financial performance.

Eric?.

Thank you, Lei. Good morning and good evening everyone and once again welcome to Xunlei’s fourth quarter earnings conference call. For the fourth quarter, total revenues were $82.4 million, which represented a 128.5% growth on a year-over-year basis and met our revised revenue guidance.

Increases in cloud computing and live video business where the major contributors to the year-over-year growth. For our cloud computing business, revenues from cloud computing increased 225.8% on a sequential basis primarily due to the sales of our new intelligent hardware device OneThing Cloud.

Other IVAS revenues excluding cloud computing revenues also increased in the fourth quarter of 2017 primarily due to the increase in live video revenue and in onetime technology solutions first revenue of 5.8 million. Subscription revenues were $22.7 million.

The number of subscribers increased from 4.18 million as to the end of the third quarter to 4.45 million at the end of the fourth quarter. The ARPU value increased to RMB34.4 in the fourth quarter from RMB33.2 in the third quarter. We offered a super VIP membership program and it was well received.

We have seen increases in this enrollment lately and expect the trend to continue in a coming quarters. Online advertising revenues, which included mobile advertising revenue in the fourth quarter was $7.8 million. Mobile advertising revenue grew 79.2% in the fourth quarter of 2017 compared to the corresponding period of last year.

The gross margin in the fourth quarter was 39.7 million grew 153% compared to the corresponding period of last year. The gross margin was 48.4% compared with 43.5% of the corresponding period of last year.

We realized operating profit and a net profit from continuing operations of $3.9 million and $3 million respectively in the fourth quarter compared with operating loss and the net loss from continuing operations of $31.8 million and $26.8 million respectively in the previous quarter.

We improved the performance was mainly due to increased cloud computing revenues as well as performance of other major product lines. 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 of $372.4 million, which is up from $357.7 million at the end of third quarter of 2017. Cash, cash equivalents and other short-term investments per ADS was approximately $5.60 at the end of fourth quarter of 2017.

Let me finish by going over our guidance for the first quarter of 2018. We expect total revenues to be between $81 million and $85 million for the first quarter of 2018. The mid-point of the range represents a year-over-year increase of about 129.3%.

With that, I conclude our prepared remarks today, and I will now turn the call over to the operator for your questions. Operator, please..

[Operator Instructions] And our first question comes from Leon Dean from Morgan Stanley. Please ask your question Leon..

I just have two questions, one is over the medium to long term how should we think about hardware revenue, from cloud computing, i.e.

OneThing Cloud? And second question is, how should we think about revenue associated with cloud beyond just hardware revenue?.

So, hardware revenue in terms of hardware revenue it is very -- the hardware business has a -- has its own -- has a -- sorry let me -- let me. Yes. Let me first answer it in Chinese. Okay? And then we’ll continue with English answers. So, let me try to rephrase that in English.

Hardware business has its own growth pattern, in the beginning when the markets has very few defined units, the growth rate is usually very high but the growth rate will slow down when the market has become -- more and more hardware has delivered to the market, so we don’t expect the hardware revenue to continue to grow as such a rapid pace.

But we do expect our 2B business the cloud service start to rapidly grow based on our deployment units across the nation.

So -- but also for the 2B business, what we are doing is we are expanding our -- the scope of our business and product lines, so, and I think when we address the market we are more and more focused on the bottom line which is better profitability from our 2B business, the pricing because we have such a advantage our strategy is to stress on our cost advantage which will bring down the pricing of the overall market.

So our focus is more on the bottom line is that at the top line..

Understood, if I may have a follow-up just on the 2B business given that it's based on the number of units deployed and I think as of the latest I think there is by 1.2 million units deployed is that about 3 historic correct me if I'm wrong and what type of capacity should we like expect from the current unit deployed and what type of unit deployed should we how should we think about the number of units deployed let's say by the end of the 2018 and by the end of 2019 and what type of sort of size of capacity can we offer to our 2B business customers? Thank you..

We currently do not disclose the exact number of units that has been deployed. We are currently in the fast expanding phase of the capacity that we are collecting from the users at home and let me say there is the current deployment comment in China has allowed us to rapidly expand our cloud offering of top customers for a while.

However with more and more units deployed both the service capacity and service quality will improve but we are not disclosing the exact capacity at this time..

And when should we expect servicing revenue to come through.

Would it be like a six months to a year and does it like a rough time line that we could have expect or hope to see?.

Yes, so we currently generate significant service revenue already for the past two years that has been growing at a pretty high rate as well. We are expecting the revenue on profitability to grow but our focus is on the bottom line more on the bottom line then the top line as I said our stress is that in significantly reduce to cost of the industry.

So we are going to elaborate that cost advantage and to view that profitable cloud computing business..

And our next telephone question comes from Ran Zhou [ph], he is a private investor. Please ask your question..

I guess firstly I do want to make a quick comment, again no offense and no harsh reading, but this rescheduling conference call I hope I kind of personally I hope it won't happen again.

Again that's a quick comment, the first question, I have a couple of questions, I will ask one by one, the first one is very quick one, just on the -- I thought, so you basically you have sells down your online games business, so intentionally that's not in the revenue anymore and I do have -- I just want to clarify and make sure that's the right understanding because you restate your revenue numbers in the prior quarter of $40 million so that's because of it, right, so the online game it's not in the revenue anymore, and you restate that?.

Well, first of all let me apologize which we should probably have done in the beginning of the conference for rescheduling the conference call. At the last minute, we were doing our due diligence to make sure that we report our -- so we needed a little bit time to work on our reports.

I am sure our financial team we’ll be more diligent and this won't happen next time. So, let me apologize on behalf of the financial team for the preparation that is -- for the release and the conference call. The question about online game business, Eric do you have comments on that..

You’re correct, most of the business work is continued and we still have a very-very small portion of the game revenue. But that amount is not significant right now..

So, I should better understand the difference between the revenue that you put out today, with it before, it's basically the online game business, is that correct?.

That’s correct. Yes..

And then the next question is on -- so I look at -- I noticed that your bandwidth cost has declined nicely this quarter, just want to understand that's due to your nice work, your online cloud being deployed so you intentionally either need to use sub party bandwidth, is that correct?.

Yes, so as we said earlier we are -- our subscription business has leveraged the -- has reduced IDC and bandwidth costs by utilizing the sources collected from our cloud computing business, so that's not only achieved better profit margin for our membership business, but also from a financial statement perspective we did reduce our raw bandwidth cost..

And I assume it’s because you have your own online video. So I assume your own OneCloud network to do the online video so essentially that's why you sometimes probably you don't need to push the revenue or the cost for your own online video, is that the right way to think about..

So across our business line we are adopting rapidly and our own cloud computing business, our own cloud computing technology and as a result it reduces cost across the board but more significantly our cost or let me say this so live video product, the cost serves live video products in terms of barriers compared to the subscription business is still small, is still relatively small so even though there is the adoption of our own cloud computing technology helps, but not as significantly as the subscription business in the march right..

And final question kind of a little bit bigger topic. So I guess I appreciate your efforts in some of rolling out the equipment. The new blockchain based LINK token, but I also, I guess I also appreciate the reasons that you have to shut down or limit the sub party trading of LINK token.

I guess my question here was given, we can still check the price of LINK tokens from several store base and the prices have come down for the last kind of over one month or so and it has come down significantly.

I wonder do you kind of, is that a concern that one given the prices have fell significantly the incentive for consumers to buy the equipment has can of reduced, so that will actually impact the deployment of your equipment.

If that's a concern how would you address that?.

Thank you very much for the question, you understand that there's potential litigation in the U.S., so we're advised not to answer questions in this nature at this time..

Our next question comes from Eric Sun from AING. Please ask your question Eric. Hello Eric your line is open you might have yourself on mute please ask your question..

I have a few questions regarding the financials of the quarterly report and the first one is really regarding whether we record like we're going to or we're planning to put the liability for LINK token, because as part of the rolling program, our LINK token will be distributed to our users who contributed their bandwidth and also the storage, so the question would be by the end of the quarter or by the end of this year, there will be significant portion of the LINK token distributed to the users, and would that be part of the liability of Xunlei or it won't be?.

First question is yes, we are recording -- we're doing accounting treatment for LINK token, right now we are diverting the bandwidth costs and at the same time we created deferred revenues..

If we are recording as a liability like at what price are we are booking for the financial reporting purposes?.

Basically, we assess these sale market value of the bandwidth we collect and in doing so we take into account a number of factors, such as the market price of various bandwidths and also the bandwidths usability and OneThing Cloud device availability and also advocacy of the storage between the users and Xunlei, so we are basically considering a number of factors when we come to a value or the cost for the LINK token, we rewarded..

And the second question is really regarding the attributes of the total revenue, and then we know like prior your financial report, upgrading and net value added to it was contributed like how probably 50% of your revenue and that component really contains pretty much everything related to hardware sales of OneThing Cloud and also sales of cloud computing services, so at what time or to what extent that the components of these sales that will be prepared in the future, because from the current financial earnings like we couldn't tell like how much was attributed to for example cloud computing business and the quarter-over-quarter how much increase we're looking at?.

You are correct, the IVS consider the number of revenue items and -- but the largest items are fit in and also the sales of the OneThing Cloud, and for competitive reasons as you may understand and for time being we are not operating timely components of this revenue items but we are studying this issue and we may have more detailed segment reporting in the future..

And the last question is really for CEO, Lei Chen, I think first thank you so much for bringing this business up and hanging the business around.

And my questions will be general and I wanted to like one or two sentence as a comment on you to describe, your vision of the Company with the next three to five years?.

Xunlei is in my view -- Xunlei's future is tied to its ability of technology innovation. Xunlei's trend from the beginning is decentralized computing. And the way that we are doing the distributed computing, distributed cloud computing is the extension to is build on top of the core strength of Xunlei as well as blockchain technology..

Next question comes from Jack Wu, he is the independent investor. Please ask your question Jack. Hello Jack your line is open. You might have yourself on mute. Please ask your question. Jack Wu is not replying. Gilbert Sung, your line is open. Please ask your question. Gilbert your line is open. Please ask your question. Hello Gilbert your line is open.

As is there is no response from Gilbert, we'll go to Kan Wu who is private investor. Please ask your question Kan..

Yes, this is Kan. Congratulations on the great revenue growth and apparently your guys have been working very hard for the last couple of years and the result is outstanding.

My first question is what is the top of time cost in CDN business?.

But I'm sorry I lost you on the cost trend..

What is your top time cost to the most in the CDN business?.

So, our top customers, in the CDN business?.

Yes, top five. Yes..

So the exact top five customers Panda TV is online stream video streaming company, a live video streaming company, Xiaomi, ITE, Billy-Billy [ph] and which one is our [indiscernible]. So, yes, quite so I think is among the top five. So I'm now looking at my far right now, but to the crop on my memory these are the top five revenue generators..

Yes, how way should think about your CDN business growth? Apparently, you've guided your revenue pretty much flat what is Q4 for the Q1 2018? And you'll see the revenue continue grow in the CDN business or the revenue you are beginning to be flat because of your focusing on the profitability?.

So the CDN business in China is very competitive at this point. I think there were more than 80 licenses issued last year to CDN providers, which is a lot more than what we would expect couple of years ago. So the pricing of CDN business has been driven down because of the competition.

The key to competition, our sense in this business is our cost structure so we are certain extent benefiting from the downward pressure of the CDN pricing however it does drive down the revenue numbers as well. Because the same amount of services probably same amount of services delivered the prices downward charging less.

So we are coming out with even better solutions with significantly lower pricing in the future, such as deploying product will give us even better profitability and bottom lines. So as I said our emphasis is going to be to strengthen our bottom-line down the road, rather than looking too much on the top-line.

So our focus is to expand our market share and to build a better bottom line..

Understood but your CDN business the top line will continue to grow or it’s going to face lack or it's going to go down, but I understand your cost structure will be better with the new product..

Yes, what I'm saying probably is this. Let me think how best to phrase it. Our strategy will be more aggressive down the road because we have build up our deployment units which is, which is our main, where our strength lies, right.

So we're going to leverage that strength to use more aggressive marketing strategy to perhaps even drive down the current pricing more. I expect our service will have better market share but because the pricing will be driven down it probably will, it's hard to say how the -- so I wouldn't expect as fast as a revenue growth.

So the pricing will be down, the revenue growth will apparently be affected by the pricing, but our focus is more and more on the market share and the bottom line..

That's great. I think in my view is that this deal happened, a lot of potential to get more market share and get inside of profitability and you are extremely on the value add at this point.

And my final question is, is about your allotment today on the Xiaomi revenue, you said this is the one time of event, and is that with the Xiaomi -- can you clarify the nature of that revenue recognition with the Xiaomi and going forward you are still doing business with Xiaomi? You just mentioned Xiaomi was actually in top five of your CDN customer? Does the Xiaomi continues to be a CDN customer or they're not going to be next quarter?.

So, Xunlei, since Xiaomi to develop acceleration and file management technology that is embedded into MIUI, Xiaomi's cell phone operating system, Xiaomi and Xunlei entered into an agreement in 2017 Q4, that Xunlei is entitled to receive a technical support income for services provided. And what we received is the -- first time for that payment.

We are -- what is that continued in discussion?.

Basically, the revenue we represent in the first quarter in earnings report, was the revenue from the services we provide to Xiaomi before, I think it is some of it, most of the revenues were in 2017 and more possible covered in 2016, but we didn't recognize this revenue before.

Because even though our services was provided but the final contract was not -- we didn't come to the final agreement to the -- in terms of certain priority issues, so the contract was actually was eventually just closed this way and once the contract was closed then we in terms of our country rules we booked the revenue.

So the revenue for the servicing we provided before and right now we are still talking to Xiaomi and trying to dispatch a new contract for the services for future.

So we are continuing to provide this service apparently of course to Xiaomi, so we are negotiating the contract for the future revenue recognition and hopefully a long term contract this time.

And -- but as you can see that collaboration between Xiaomi and Xunlei is strengthening and Xiaomi first of all Xiaomi is a leader in hardware development and that will certainly help our costs and then somebody assuming exceptionally well in some of the foreign markets that we are interested in so we expect that when we expand into foreign market our relationship with Xiaomi will certainly help..

If you have taken away that the Xiaomi's revenue I mean I look at your Q1 guidance actually you will be flat or even grow a little bit or layers have gone Q4 last year?.

That's correct even without Xiaomi's revenue our revenue still grew a lot..

And then I just want to make sure that you mentioned that Xiaomi is actually one of your top customers in the CDN business. That business is continuing and….

Yes, and so our relationship with Xiaomi is multi-factored they are our investor, they are also our top customers as well one of our top customers as well..

And our next question is from Jack Wu, who is independent investor..

Congratulations on the profitability, so speaking about profitability as you have a question regarding the sales of OneCloud hardware? Was there any liability included in the sales of the hardware because you planned to survive large times downloading service or those owners of the hardware?.

And yes we did book some cost associated with setting of the OneThing Cloud. So, yes, the liability you are mentioning you are reporting to basically it is the kind of the liability in the future how we are going to achieve these being token and right now we ask booking some of the cost associated with the tokens.

So a couple of minutes a few minutes ago the same question was asked and there was the more extensive answer backend and it's there maybe if you are so kind maybe review that the scripts or the transcripts of the call. You will see a more extensive answer to your question..

Yes, so there might be a misunderstanding about or my questions. The previous answer was related to LINK token liabilities. My question is actually related to the liability about OneThing Cloud hardware because you would provide the downloading service to the hardware.

Is that correct? So sometimes we record those kind of liability and earned a lot of revenue and until those services that are provided, so was the I see a market already of those services or you just it in the order those kind of future service? It’s downloading yes..

And we have -- right now what we are doing is based on the U.S. GAAPs. I think it's my guess you know if you need to want more maybe we can have a future discussion, but right now basically what we are doing is based on US GAAPs..

And speaking about the class action cases, just Lei just mentioned. So I know you're not supposed to discuss in details policies stuff like that.

But my question is you know is there any Chinese official government alleged or you know Xunlei has ICO, a legal ICO operation, I mean I'm asking the government agencies?.

Well, so given that there is potential class action litigation we're advised not to answer questions of this nature at this time..

Okay, and [indiscernible] still in charge of the legal department, is she handling those cases?.

No..

Okay, the next question has to do with international marketing and international sales.

Is there any you update you want help us to foresee the future like what kind of market are you looking into and what are the potential sales in different markets?.

Yes, so the final question is about core markets, right. We are starting to start -- we have started our sales of OneThing Cloud in foreign markets and so. So let me give a fairly high level answer to this question.

Our oversea strategy is based on our existing technology and product, this including downloading and acceleration as well as our cloud computing technology.

For our cloud computing business we are doing pursuing partnership, especially with local carriers in the foreign markets and I think that is one of the most important strategies for us is to establish in partnership with local carriers. The countries participating in the Belt One Road initiative, of course the highest priority for us..

Okay, I live in United States, and I'm thinking when will I be able to get OneThing Cloud at my home?.

We do have customers who bought OneThing Cloud and using them in the United States even though we haven't sell this product, I think, from China, we concurrently the usability of this product, they brought this product on their own to U.S., perhaps it's worth try..

I just have one quick comment about OneThing Cloud, as you were talking about it might be slowing down the sales of the OneThing Cloud, I have to have an idea when do those implement to the users or to the players and they pay back with LINK token, whatever they get from using this equipment, I don’t know whether you probably have extraordinary ideas but that is something that have in my mind and I just want to make a comment on this..

Thank you very much Jack. This is a new idea to us and we value your input and we will certainly consider it with high regard..

There are no more questions at this time. I'll like to hand the call back to speakers' for any concluding remarks. Please continue..

Thanks again for your kind attention and please feel free to contact us, if you have any questions and have a good day, bye..

Bye-bye..

Ladies and gentlemen, that does conclude the call. You may disconnect. Good bye..