Lei Chen - CEO Eric Zhou - CFO.

Analysts:.

Good morning and thank you for standing by for Xunlei's First Quarter 2018 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 turn the call over to your host for today, Dr.

Eric Zhou, Chief Financial Officer of Xunlei. Please go ahead, sir..

Thank you, Ageia. Hello everyone. Welcome to Xunlei's first quarter of 2018 conference call. I'm Eric Zhou, CFO of Xunlei. I am joined by the company’s CEO, Mr. Lei Chen. 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 press release was distributed earlier today and is also now available on our website. Before we begin, I like to mention of the company’s safe harbor statement in connection with today's conference call. Please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S.

Private Securities Litigation Reform Act of 1995. And these 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, including our recent annual report on Form 20-F, 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 laws.

During this call, we will refer 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 US dollars unless otherwise stated.

Before starting the question and answer session, I will now turn the call over to our CEO, Mr. Lei Chen, for prepared remarks..

Thank you, Eric. Thank you all for joining us today for our first quarter of 2018 earnings conference call. We had an excellent start in 2018. We grew our revenue by 118% on a year-over-year basis, and achieved profits for two consecutive quarters. I'm very proud of the fact that we enjoyed revenue growth for nine consecutive quarters.

I'm grateful that we have an exceptional team and I want to thank them for their tremendous efforts and achievements. During the quarter, total revenues were US$78.8 million, which represented an increase of about 118% on a year-over-year basis.

On a sequential basis, revenues declined 4.4% due to the seasonality impact of the Chinese New Year holidays and the contract revenue in the previous quarter. Our total revenues would have increased about 2.8% if we excluded the contract revenue in the previous quarter.

The growth was mainly driven by our cloud computing and internet value-added services, which grew by approximately 316% as compared with a same period last year. In as early as 2015, we started to develop shared cloud computing products as we saw significant growth opportunities with the emergence of Internet of Things, AR, AI, and big data.

We transformed the users' idle bandwidth and storage to offer cloud computing services to our enterprise customers. By our shared computing model, we help our customers to reduce cost and improve performance.

Lately, we've seen a trend 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 starts 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 grows rapidly while the cost of CPU flash and other computing units reduces 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. It is also why we keep operating our technology and have recently expanded our cloud service to IaaS domain with our new cloud platform StellarCloud.

To strengthen our leadership in distributed cloud computing, in September 2017, we launched a new product OneThing Cloud, which is a blockchain-based smart hardware device and serves as a personal private cloud. The online personal cloud market is very big. For example, China has more than 400 million personal cloud users according to market research.

By offering a hardware at your home, and satisfying the same need, OneThing Cloud provides better privacy, security and user experience than traditional personal cloud service. In addition, OneThing Cloud users can voluntarily share their idle computing resources that can be transformed into enterprise level computing resources.

We believe cloud computing will be an important industry trend and a key driver for our long-term growth. That is why we invest heavily in this technology. In addition to our shared cloud computing technology, blockchain technology and its applications are another key area of our focus.

I'm pleased to report that during the first quarter of 2018 we made significant strides in upgrading our blockchain infrastructure. We recently launched our ThunderChain, a high-performance blockchain platform that can concurrently conduct over a million transactions per second.

The application of ThunderChain has already helped to solve a few critical issues facing our shared computing model. We also aim to have blockchain technology benefit more companies, industries and individuals.

ThunderChain will help companies and developers create decentralized applications that empower corporations and end-users across various industries, including copyright, logistics, healthcare and public sector. With ThunderChain we have taken the first step in building a Xunlei blockchain ecosystem that involves companies, developers and end-users.

We are very excited about its prospects and its potential influence on the broader industry. I would also like to touch on our subscription business. Over the years, our membership subscription business has provided us with stable cash flows to pursue growth and innovation opportunities.

It is especially important while our company has been transitioning from a traditional Internet company into an innovative technology provider driven by the power of sharing economy and the potential of blockchain technology. So it is encouraging to see that the subscription business remained steady over the past quarters.

Although the number of subscribers were down to 3.81 million from 4.25 million as of last quarter, revenues from subscriptions were 23.4 million, representing an increase of 12.3% on a year-over-year basis, an increase of 3% sequentially.

Finally, let me 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 that our mobile application continued to generate strong revenue for us.

Mobile advertising revenue grew 95.4% on a year-over-year basis, down slightly 4.1% from last quarter due to the seasonality reasons of Chinese New Year. With that, I will now turn the call over to Eric to review the first quarter financial performance. Eric, please..

Thank you, Lei. Hello everyone, and once again thank you for joining Xunlei’s first quarter of 2018 conference call. We started 2018 with solid financial performance. Our total revenues increased about 118% on a year-over-year basis, and decreased 4.4% sequentially despite the seasonality impact of the Chinese New Year holidays.

Overall we are very pleased with the results. Going forward, we will continue to expand our distributed cloud computing and industry-leading blockchain-based products and services and at the same time strengthening the portfolio of our traditional products.

Our goal is to pursue sustainable growth while striking a balance between revenue growth and profit. And now I would like to go through the details of our financial results. Our total revenues were $78.8 million, representing an increase of approximately 118% as compared with the same period last year.

The increase in total revenues was mainly attributable to the growth of cloud computing, live streaming and the mobile advertising businesses.

Total revenues in the previous quarter included technology solution service income from Xiaomi of US$5.8 million, which covered the services from 2016 to mid-June 2017, and it was recorded in Internet value-added services revenues.

The service agreement was still in the renewal process during the first quarter of 2018, and therefore no such service income was recognized during the quarter. If we had excluded the above service income, the total revenues would have increased 2.8% sequentially.

Revenues from cloud computing and internet value-added services were US$48.1 million, representing an increase of 316.4% on a year-over-year basis and a decrease of 7.3% sequentially. Cloud computing revenues grew by 395.3% and 9.4% on a year-over-year basis and sequentially, respectively.

Revenues from subscriptions were US$23.4 million, representing an increase of 12.3% on a year-over-year basis and an increase of 3.0% sequentially. The year-over-year increase in subscription revenue was primarily attributable to increase in average revenue per subscriber.

The average revenue per subscriber for the first quarter of 2018 was RMB 38.8, an increase from RMB 34.4 as of December 31, 2017 and RMB 35.1 as of March 31, 2017, respectively. The number of subscribers was 3.81 million as of March 31, 2018, decreased from 4.25 million as of December 31, 2017 and 4.08 million as of March 31, 2017, respectively.

The company continued to transition from a traditional Internet company to one with growth drivers coming from innovation and investments in industry-leading technologies and products. Revenues from online advertising were US$7.3 million, representing an increase of 92.2% on a year-over-year basis and a reduction of 6.8% sequentially.

Mobile advertising revenues increased 95.4% on a year-over-year basis. Costs of revenues were US$40.5 million, representing 51.5% of our total revenues. Bandwidth costs were US$16.5 million, representing 20.9% of our total revenues, compared with US$14.7 million or 17.9% of our total revenues in the previous quarter.

The remaining costs of revenues were largely the manufacturing costs of our OneThing Cloud product and the revenue-sharing costs for our live streaming business. Gross profit for the first quarter of 2018 was US$37.7 million, representing a decrease of 5.2% sequentially. Gross margin was 47.8% and decreased from 48.2% in the previous quarter.

Research and development expenses for the first quarter of 2018 were US$16.5 million, representing 20.9% of our total revenues, compared with US$20.6 million or 24.9% of our total revenues in the previous quarter. The decrease on a sequential basis was mainly due to the annual bonus for the year 2017 accrued in the previous quarter.

Sales and marketing expenses for the first quarter of 2018 were US$6.8 million, representing 8.6% of our total revenues, compared with US$7.5 million or 9.1% of our total revenues in the previous quarter.

General and administrative expenses for the first quarter of 2018 were US$7.0 million, representing 8.9% of our total revenues, compared with US$7.7 million or 9.4% of our total revenues in the previous quarter. Operating income was US$7.4 million in the first quarter of 2018, compared with operating income of US$3.9 million in the previous quarter.

Net income from continuing operations was US$6.7 million in the first quarter of 2018, compared with US$3.0 million in the previous quarter. Non-GAAP net income from continuing operations was US$7.9 million in the first quarter of 2018, compared with US$4.8 million in the previous quarter.

Diluted earnings per ADS from continuing operations in the first quarter of 2018 was US$0.10 as compared with a loss of US$0.14 in the same period last year and an income of US$0.05 in the fourth quarter of 2017.

As of March 31, 2018, the company had cash, cash equivalents and short-term investments of US$355.6 million, compared with US$372.4 million as of December 31, 2017. CapEx for the first quarter of 2018 was approximately US$0.8 million.

And finally, I would like to turn to our guidance for the second quarter of 2018; we expect total revenues to be between US$56 million and US$62 million for the second quarter of 2018. The midpoint of the range represents a year-over-year increase of about 53.2%.

With that, we conclude our prepared remarks today, and I will now turn the call over to the operator for your questions. Ageia, we are now open to questions..

[Operator Instructions] The first question comes from the line of [Jack Wu]. Please go ahead..

Hi, good evening. This is [Jack Wu] again. Congratulations on the good performance on quarter one. And I have a couple of questions.

First off, the guidance for the second quarter has been reduced compared to first quarter, what is the reason for this guidance? Hello, did you hear me?.

Yes. Hi, Jack. You said you have two questions.

So that was the first question, right?.

I have several questions. Yes, this is the first question.

The guidance has been reduced compared to first quarter, is there any particular reason behind this?.

Yes. [Foreign Language] Hi, Jack. So I want to address the question in Chinese. Have [indiscernible] to translate into English. So first of all, our cloud computing business is transitioning. And so the enterprise users will exchange for cloud services with LinkToken.

[Foreign Language] Because we allow enterprise users to exchange cloud services with LinkToken, cash revenue will therefore decline. [Foreign Language] Here, I want to explain our business model. [Foreign Language] OneThing Cloud user can [indiscernible] join the reward program to share their idle computing resources in order to get LinkToken.

[Foreign Language] LinkToken can then be exchanged for the services that the company use through ThunderChain or StellarCloud. [Foreign Language] On the perspective enterprise, so these users will exchange the idle computing resources shared by the personal users and then they can provide the services or products to this personal user.

[Foreign Language] So there will be a closed loop system with the use of LinkToken. [Foreign Language] So accordingly compared with our previous model, Xunlei will then see the decline in our cash revenue. [Foreign Language] In the meantime, we also expect to sale of OneThing Cloud in Q2 will somewhat decline.

[Foreign Language] At this stage the distribution of the OneThing Cloud – the number is actually enough to support the cloud business of Xunlei. [Foreign Language] So we stopped the promotion campaigns when we first released OneThing Cloud.

[Foreign Language] The list price of OneThing Cloud now covers – will cover the two revision price, which is RMB 599. [Foreign Language] Compared with that at the beginning we will launch the products, the promotion price was RMB 339. [Foreign Language] In the near-term we will not launch OneThing Cloud Pro or any other new products.

[Foreign Language] At this stage, our goal is to take full use of the computing by OneThing Cloud. [Foreign Language] However, we will also adjust our sales strategy based on our business development of StellarCloud.

[Foreign Language] And here, I also want to emphasize that the revenue from the CDN business compared with quarter-over-quarter basis was increased by 29.5%. [Foreign Language] This is our response to the Q2 guidance..

Thank you, and my second question has to do with ecosystem, I know that Xunlei has released ThunderChain and it is encouraging people or company or business to join this application, and that is a well established Xunlei ecosystem. Now, how will that benefit Xunlei in the future with this ecosystem? This is my second question. Thank you..

[Foreign Language] So recently we launched the ThunderChain, which is based on our blockchain technology, and the trend we are seeing at this moment is more [public chain] is actually in the US. [Foreign Language] Let me answer this in English. So, ThunderChain is world’s first public chain that is offered in China.

And we have seen many developers to contact us and started to develop that blockchain application on top of our ThunderChain. So, we are seeing some applications that are developed on our blockchain has potential to have a strong impact on the world economy.

Many of such applications are aimed for consumers instead of enterprise users because they need the throughput – high-performance that ThunderChain provides. So, they select ThunderChain and it is pretty much their only choice when developing blockchain applications on top of a public chain in China.

So, we believe such an ecosystem may give us advantageous position in the future..

Thank you. My third question has to do with tomorrow's event.

Is there – I mean, is a big event planned in Beijing tomorrow? Is there any information – as we know, many of us will not be able to attend the event or listen live, is there any further information or any preliminary information you can share with us today?.

Thank you, Jack. So, yes, it's true. We are planning to have a launch event tomorrow in Beijing. The launch event will launch three new products, and they are business facing. So, with that we expanded our service area from CDN to a more general cloud computing domain.

So, tomorrow we will launch three new products that expand our horizon in the cloud computing business.

On top of that we will launch our ThunderChain ecosystem, and we will showcase a few application development teams to develop very interesting applications on top of our blockchain, and we will also talk about policies around how to develop applications on our ThunderChain and what Xunlei can provide to the developers who intend to develop applications on ThunderChain..

Thank you.

My last question has to do with class actions in the United States, as you know, many of us are concerned about the outcome of the class action, although we are confident with the result, well, is there anything you can share at this moment regarding the class actions that is going on in the United States?.

So, the proceedings are still at an early stage. So far pursuant to the latest court’s order, a brief schedule for filing – [indiscernible] lead plaintiffs consolidated amended complaint will be due in the next couple of months. So it is still very early stage and I think it is going to – [indiscernible] the market when it is appropriate..

Thank you so much Mr. Chen, and again congratulations on your great performance on Q1, and I wish great success in the future. Thank you..

Thank you very much, Jack..

[Operator Instructions] There are no further questions. I would now like to hand the conference back to our presenters for today..

Thank you, Lei Chen. And thank you all again for your kind attention and please feel free to contact us if you have any questions, and have a great day..

Thank you. Bye-bye..

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