Welcome ladies and gentlemen and thank you for your patience. You've joined Xunlei's Third Quarter of 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. I would now like to turn the call over to your host, Investor Relations Assistant, Ms. Charlene Lu.

Please go ahead..

Thank you. Good day, everyone and thank you for joining Xunlei's third quarter earnings conference call. By now, you should have received a copy of our earnings release and is also available on our IR website. For our agenda today, I will first read the prepared remarks by our Chairman and CEO, Mr.

Jinbo Li, and the highlights of our third quarter operations. After that, Mr. Eric Zhou, our CFO, will provide additional details on the financial results and wrap up with our revenue guidance for the fourth quarter of 2021. After the management's remarks, we will open the call to questions from the audience.

Before we get started, I would like to take this opportunity to remind you that the discussion today will contain certain forward-looking statements made under the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995.

Such statements are based on management's current expectations under current market conditions and are subject to risks and uncertainties that are difficult to predict, which may cause actual results to differ materially from those made in the forward-looking statements.

Please refer to our SEC filings for a more detailed description of the risk factors that may affect our results. Xunlei assumes no obligation to update any forward-looking statements, except as required under applicable law. During this call, we will refer to both GAAP and non-GAAP financial measures.

A reconciliation of non-GAAP to comparable GAAP measures can be found in our earnings press release. Please note that all numbers are in U.S. dollars unless otherwise stated. Now, the following is the prepared statement by Mr. Jinbo Li, Chairman and CEO of Xunlei Limited..

Thank you all for joining us today. For the third quarter, we delivered higher-than-expected revenue growth and significantly exceeded our revenue guidance for the third quarter of 2021. Previously, we had issued a revenue guidance of 1.4% sequential growth.

The total revenues for the third quarter reached $60 million, representing an increase of 8.8% from the second quarter. It was mainly driven by strong sales of our cloud computing products and other Internet value-added services but their impact on the bottom line was offset by lower advertising revenues and higher operating expenses.

Xunlei is investing in human resources talent acquisition to support for innovative business development. As a result, we incurred a net loss of approximately $5.1 million for the third quarter. Now, I'd like to provide some details of the operating results.

Revenues from our subscription business in the third quarter accounted for approximately 37.8% of our total revenues. It edged down 0.2% sequentially and climbed by 16% year-on-year.

At the end of the third quarter of 2021, the number of subscribers reached $4.15 million and was up approximately 4.8% as compared with that at the end of the second quarter. Subscription revenues were down slightly due to our customer rewarding programs that reduced the average price per user.

Subscription has been an important source of capital to support our endeavor, our research and development of new and innovative products. It's delighting that for the last several quarters, membership count was steady and premium services gained continuing popularity.

Not only that, we have been devoting efforts to polishing customer experience, providing users with better products and services. For our cloud computing and other Internet value-added business, we are pleased that it grew 21.8% in the third quarter, with the growth driven mainly by our cloud computing business.

Our live streaming products also contributed to the segment growth but to a lesser extent. Especially encouraging is that we achieved growth in both cloud computing revenues and bandwidth capacity under challenging circumstances, demonstrating our strong competitive edge in meeting our customers' demand.

During the third quarter, this business segment accounted for approximately 58.7% of our total revenues. As the passion for short-form and long-form video and other streaming products continues, we expect future demand for our products to remain strong. Our online advertising business is going through difficult times.

As previously, we had cautioned against the near-term outlook of this business. Advertising revenues declined 40.5% sequentially and accounted for approximately 3.5% of our total revenues in the third quarter. The reduction was primarily attributable to reduced advertising placements on our platform in an effort to improve user experience.

Since local regulatory entities have heightened supervision of Internet advertising, the pressure on advertising business persists, but there are signs of some easing in the fourth quarter. We will try to mitigate the impact by actively expanding the scope of products to diverse our customer base and increase customer loyalty.

Moving forward, we will continue to explore growth opportunities at home and abroad, including in conventional 2C businesses, capital operations as well as innovative products and services like selected digital networking technologies and applications.

We will take a prudent approach to exploring potential business opportunities with monetization capabilities. To conclude, I'd like to say that we have confidence that Xunlei's strong balance sheet, long history of entrepreneurialship and hard-working employees will help us cope with uncertain market conditions to achieve resilient and vitality.

In the days to come, we will continue to invest in business innovation and seize growth opportunities through expansion of our product lines. Now, I will turn the call over to Eric to review financial results of the third quarter of 2021 and provide revenue guidance for the fourth quarter of 2021. Thank you..

Thank you, Charlene. Hello, everyone, and thank you again for joining Xunlei's Third Quarter 2021 Earnings Conference. I will now go through the details of our financial results and wrap up with our revenue guidance for the fourth quarter of 2021. Total revenues were $16 million, representing an increase of 8.8% from the previous quarter.

The increase in total revenues was mainly attributable to increased revenue from cloud computing and other IVAS business. Revenues from cloud computing and other IVAS were $35.2 million, representing an increase of 21.8% from the previous quarter.

The increase was mainly driven by increased CDN sales due to increased demand for our cloud computing products. Revenues from subscriptions were $22.7 million, a decrease of 0.2% from the previous quarter. The number of subscribers was 4.15 million as of September 30, 2021, compared with 3.96 million as of June 30, 2021.

The average revenue per subscriber for the third quarter of 2021 was RMB 35.4 compared with RMB 36.9 for the previous quarter. Revenues from online advertising were $2.1 million, representing a decrease of 40.5% from the previous quarter primarily because we limited the number of advertisements placed on our platform to improve user experience.

Cost of revenues was $30.4 million, representing 50.7% of our total revenues, compared with $26.2 million or 47.5% of the total revenues in the previous quarter. The increased cost of revenues was mainly attributable to increased bandwidth cost and revenue sharing costs of our live streaming business.

Bandwidth costs included in cost of revenues were $21.7 million, representing 36.2% of our total revenues, compared with $18.5 million or 33.6% of the total revenues in the previous quarter. The increase was mainly due to increased CDN sales.

The remaining cost of revenues mainly consisted of costs related to the revenue-sharing costs for our live streaming business and depreciation of servers and other equipment. Gross profit for the third quarter was $29.3 million, representing an increase of 1.3% from the previous quarter.

Gross margin was 48.9% in the third quarter, compared with 52.5% in the previous quarter. The decrease in gross margin was mainly attributable to decreased revenue portion of subscription and online advertising business, which had high gross margins than other business.

Research and development expenses for the third quarter were $16.8 million, representing 28% of our total revenues, compared with $15.2 million or 27.5% of our total revenues in the previous quarter. The increase was primarily due to increased employee-related cost.

Sales and marketing expenses for the third quarter were $6.8 million, representing 11.3% of our total revenues compared with $6.7 million or 12.1% of our total revenues in the previous quarter.

General and administrative expenses for the third quarter were $11.4 million, representing 19% of our total revenues, compared with $7.7 million or 14% of our total revenues in the previous quarter.

The increase in general and administrative expenses were primarily due to increased legal and consulting expenses and increased amortization costs for the newly awarded restricted stocks under the company's share incentive plan. Operating loss was $5.7 million, compared with an operating loss of $1.1 million in the previous quarter.

Other income was $0.5 million compared with other income of $0.9 million in the previous quarter. The decrease was primarily due to donation of approximately $0.8 million to aid flood victims in central China in July 2021, which was partially offset by other incomes in the third quarter.

Net loss was $5.1 million, compared with a net income of $5,800 in the previous quarter. Non-GAAP net loss was $3.1 million in the third quarter of 2021, compared with a non-GAAP net income of $1.3 million in the previous quarter. The decrease was primarily due to increased operating expenses as discussed above.

Diluted loss per ADS in the third quarter of 2021 was approximately $0.08 as compared with a diluted earnings per ADS of $0.00005 in the previous quarter. As of December 30, 2021, the company had cash, cash equivalents and short-term investments of $228.3 million, compared with $245 million as of June 30, 2021.

The reduction of cash balance was mainly due to a term loan in the amount of $20 million provided to Chizz (HK) Limited, a company controlled by Itui International Inc., our largest shareholder in September of 2021.

For the fourth quarter of 2021, Xunlei estimates total revenues to be between $67 million and $71 million, and the midpoint of the range represents a quarter-on-quarter increase of approximately 15%. These estimates represent management's preliminary view as of the date of this release, which is subject to change and any change could be material.

Now, we conclude prepared remarks for the conference call. Rachel, we are ready to take questions..

[Operator Instructions] Your first question comes from the line of Steve Chen of Stella Capital [ph]. Please ask your question..

Hello, thanks for taking my question. I got two questions. First, Xunlei is one of the first movers in the blockchain space in China.

So will you continue to invest into this domain? And do you expect it to generate significant revenues in the near future?.

[Foreign Language] So we think blockchain is still at nascent stage of an industry development cycle. We view our investment in underlying technology of blockchain as part of our technological innovation. We are participating in the development of the blockchain industry.

And in the coming days, we will continue to carry out our current projects and explore additional ones. And currently, we are working on several blockchain-related projects. One of the projects is to improve the privacy aspects of the technology with several partners and we expect to receive several million renminbi from this project.

As an emergency technology and one of our incubation businesses, as far, it has not yet generated significant amount of revenue for us. We view our investment in blockchain is a real option and hope to realize returns on investments in the future. Thank you for your question..

And actually, my second question is about can the management provide their views regarding the China's public cloud service market and what's your advantage? And do you really expect it to grab more market share going forward?.

[Foreign Language] We believe that the CDN market will continue to grow as a result of continued popularity of short-form and long-form video products. Although competition is fierce and prices will continue to decline, there are plenty of opportunities for us.

We believe our sharing economy based business model is highly competitive because of its proprietary technology and competitive pricing. We expect to continue to expand our CDM business while improving operating profitability.

In addition, we have been investing in other edging computing technologies and cloud computing products and are looking forward to sharing with our progress in the coming days. Thank you..

Thank you..

Your next question comes from the line of Yu Jay Zhang [ph], a retail investor. Please ask your question..

[Foreign Language].

So, we believe this cooperation with Itui is a moving cooperation, and this decision also passed AC community and [indiscernible] community and due to business reasoning, we are not able to announce any more details, but we believe that this cooperation is a decent cooperation. Thank you..

[Foreign Language].

[Foreign Language] So some of the fees such as legal fees is a one-time fee, and it doesn't mean that it will persist along the way. It only depends on the needs at the time. But some of the fees such as human resources and talent acquisition, these kind of fee will persist along the way. Thank you..

[Foreign Language].

[Foreign Language] Currently, we are exploring for a broad opportunity and seeking for chances to take our CDN market abroad. But, however, it only depends on the possibility of taking this to actually happening, and we're still exploring this. Thank you..

[Foreign Language].

[Foreign Language] So the construction of the Xunlei building is actually almost finished and also depends on the government's regulatory entities time of working to know the actual time of us moving in. But our plan is moving into the building at the second quarter of next year.

And our plans for the building is a part for self-use and some for rent, which will probably generate profits. But however, we don't have the numbers yet because we haven't done that yet. Thank you..

[Foreign Language].

[Operator Instructions] Your next question comes from the line of [indiscernible]. Please ask your question..

Good evening. I have two questions. The first one is could the management add some color on the strategic prospects in the near future? Thank you..

Basically, our short-term goal is to uncover Xunlei's value and achieve profitability as soon as possible. We increased significant quarter-on-quarter revenue growth in the third quarter, but its impact on the bottom line was offset by rising operating expenses.

To achieve profitability, we need to concentrate on our core 2C and 2B businesses and put optimizing business operations as our priority to improve operating efficiency. And once we achieve our near-term goal, I believe we will be in a better position to pursue growth opportunities and achieve sustainable development.

We intend to explore growth opportunities that have relatively good visibility and are close to our competitive strengths. We will be looking forward to share with you our stories in the near future. Thank you. [Foreign Language].

Thank you. My second question is what is the management's expectation for earnings in the quarters ahead? Thank you..

Thank you for your question, but we don't provide guidance on net income or losses for the coming quarters. However, as reflected by the financial results of the third quarter and the revenue guidance for the next quarter, we are hopeful that we will improve both top lines and bottom lines in the coming quarters.

Achieving net profitability is one of our priorities. We are working towards this goal through solid execution in multiple areas. For example, we will optimize business operations across our major product lines and explore growth opportunities in our traditional business by developing premium functions in our product portfolio.

In addition, for our cloud computing business, we will stay focused on achieving the economy of scale and high-quality growth. Furthermore, we formed project incubators within our country to develop potential new products and services.

I believe that above measures we are taking, we are positioning us well to turn around and later foundation for future development. Thank you. [Foreign Language].

This question comes from the line of [indiscernible]. Please ask your question..

[Foreign Language].

[Foreign Language] As we mentioned, our subscription business revenue slightly decreased sequentially. The number of subscribers increased about 5% as compared with that at the end of the second quarter, showing users' demand for high-quality file transmission services remain steady.

Currently, we have about 4 million subscribers as our valuable assets. And over the years, the subscription business has demonstrated strong profitability.

By further improving the quality of the product and user experience, we will continue to uncover its potential, expand user base and increase the percentage of subscribers who use our VIP service, which we believe we are moving along accordingly.

We hope our subscription business will continue to generate cash flows to support our development of new products and services and exploration of emerging technologies. [Foreign Language].

[Operator Instructions] As there are no more questions, I'll hand the call back to the management. Please continue..

Thank you, again, for your time and participation. If you have any questions, please visit our website at www.Xunlei.com or send e-mails to our Investors Relations. Have a good day. Rachel, we conclude today's conference call. Thank you very much..

This concludes today's conference call. Thank you for participating. You may now disconnect..