Welcome, ladies and gentlemen, and thank you for your patience. You've joined Xunlei's 2022 Third Quarter 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 the host, Investor Relations Manager, Ms. Luhan Tang..

Thank you, and good morning, everyone, and thank you for joining Xunlei's 2022 third quarter earnings conference call. On the call with me today are Eric Zhou, Chief Financial Officer; and Lee Hu, Senior Vice President of Finance.

Now, you can find our earnings press release on our IR website, which is intended to supplement our prepared remarks today's. For today's agenda, I will first read our prepared opening remarks by our Chairman and CEO, Mr. Jinbo Li, on highlights of our third quarter operations. Then, Mr.

Eric Zhou, our CFO, will go through the details of financial results and wrap up with our revenue guidance for the fourth quarter of 2022. We'd like to welcome any questions from you after the management's remarks. Today's call is recorded, and you can replay the call from our Investor Relations website.

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 provisions of the US Private Securities Litigation Reform Act of 1995.

Such statements are based on management's current expectations on our current market conditions that 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 assume no obligations to update our forward-looking statements, except as required under applicable law. On this call, we will be using 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 US dollars unless otherwise stated. With that, the following is the prepared statement by Mr. Jinbo Li, Chairman and CEO of Xunlei Limited..

Good morning, everyone, and thanks for joining us today.

Despite the macro headwinds we've been facing for some time, we delivered solid third quarter results with revenue exceeding the top end of our revenue guidance and net income also grew sequentially, and this is the third profitable quarter this year, and we expect to end the year with full year profitability, assuming no extraordinary events or onetime write-offs, which we do not foresee as of this earnings release.

I believe, the third quarter results demonstrated our ability to focus on and execute our strategy and showing the resilience of our products and services in a challenging environment. I'd like to share with you some of the major highlights from the third quarter.

Generally speaking, the results of our major business lines, mainly member subscription, cloud computing and live streaming and other Internet value-added services can in either retain or exceeding our expectations. Although, the results, when reported in US dollars were partially offset by the impact of devaluation of R&D against the US dollar.

Specifically in third quarter of 2022, we realized $88.3 million in total revenue with a 12.8% quarter-over-quarter increase. And the revenue exceeded the high end of our revenue guidance range.

Meanwhile, our net income increased to $8.3 million in the third quarter from $6 million in the second quarter, which is the third consecutive profitable of this year.

Delivery profits three quarters in a row amidst a challenging macro environment, clearly demonstrated the successful execution of our business strategies and the resilience of our business model.

I feel very thankful to our employees and management for their dedication and efforts on keeping operations on track during a period of COVID-19 resurgence, and incurring on our products and services to serve our users and clients without interruption.

As one of our major business growth drivers, our cloud computing business in the third quarter of 2022, its revenue reached a record level of $29.1 million.

In addition, Shenzhen Onething, the operator of cloud computing business and a wholly-owned subsidiary of Xunlei was ranked number four with 12.2% of market share in public edge cloud service market in 2022 according to the study by International Data Corporation.

Our subscription business delivered essentially stable performance and generated approximately $25 million in revenue, down 1.7% compared to last quarter, mainly due to the impact on the currency devaluation and a slight decrease in the number of subscribers, partially offset by higher average revenue per user, is reported in renminbi.

The third quarter subscription business which has been up slightly versus the prior quarter. The average revenue per subscriber reached RMB 39.1 in the third quarter compared to RMB 37.8 in previous quarter, as the average proportion of premium membership rose to 35.3% of total subscribers from 34% in the previous quarter.

We will continue to improve product features to enhance user experience and at the same time, explore additional marketing channels to reach a broader user base.

Our live streaming and other Internet value-added services was the fastest-growing business line in the third quarter of 2022, accounted for approximately 38.8% of our total revenues in third quarter, surpassing cloud computing and membership subscription, which accounted for approximately 33% and 28.3%, respectively, of our total revenues.

In the third quarter, our live streaming and other Internet value-added services reached a record level of $34.2 million in revenue with a 39.4% quarter-over-quarter increase. We expanded the presence of our products and services in more countries, hired additional local teams and deepened our brand recognition in this new market.

However, we expect a continued appreciation of the US dollar against other currencies, if it happens will dampen our financial performance in overseas market. We will closely monitor the dynamics of global economies, geopolitical tensions and regulatory policies and importantly execute our international growth strategy.

We have high hope that in a foreseeable future, Xunlei growth will be driven by the products and services that have broader user recognition and larger market potential and rely less on our traditional products and services. And this is an ongoing transition, and we look forward to sharing with you our development in the coming quarters.

To conclude, we anticipate future growth for the fourth quarter of 2022 sequentially and year-over-year and that expected to be on course to achieve full year profitability. However, we will stay vigilant about the current macro dynamics, which could significantly impact our operations.

To ensure sustainable development, we are steadily entering selected international markets, to strengthen our product portfolio and address geographic market risk. We have seen diseases, but encouraging progress in this regard.

With a healthy balance sheet, clear strategic focus and effective execution as well as improved product portfolio, we believe, we are well positioned to navigate this volatile macroeconomic and geopolitical environment and capture long-term opportunities. Now, I'd like to turn the call to Eric to review some of the financial numbers..

Thank you, Luhan. Good morning, and good evening, everyone. We are pleased to have you join us today to discuss our first quarter results. I will now go through the details of our financial results and wrap-up with our revenue guidance for the fourth quarter of 2022.

Total revenues were $88.3 million, resenting an increase of 12.8% from the previous quarter. The increase in total revenues was mainly attributable to increased revenue, generated from our large streaming business. Revenues from cloud computing were $29.1 million resenting an increase of 2.7%, from the previous quarter.

The increase of cost computing revenues was mainly due to the increased demand from our major customers for our cloud computing service, partially offset by the devaluation of the exchange rate of RMB against U.S. dollars. Revenues from subscriptions were $25 million, representing a decrease of 1.7% from the previous quarter.

If reported in R&D, the subscription revenue would have been up slightly. The example of subscribers was 4.37 million as of September 30, 2022, compared with $4.46 million as of June 30, 2022. The average revenue per subscriber for the third quarter was RMB39.1, compared with RMB37.8 in the previous quarter.

The higher average revenue per subscriber was due to a larger percentage of users, opted for our premium membership. Revenues from live streaming and other IVAS were $34.2 million, representing an increase of 39.4% from the previous quarter.

The increase of live streaming and other IVAS revenues was mainly driven by the rise of in the number of paying subscribers of our live streaming products, which were launched in 2021 as well as our enhanced monetization capability.

Cost of revenues were $52.8 million, representing 59.9% of our total revenues, compared with $44.3 million or 56.6% of the total revenues in the previous quarter.

Bandwidth cost is included in the cost of revenues were $25.3 million, representing 28.6% of our total revenues, compared with $25.5 million or 32.6% of the total revenues in the previous quarter.

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 $35.2 million, representing an increase of 4.4% from the previous quarter.

Gross profit margin was 39.9% in the third quarter compared with 43.1% in the previous quarter. The increase in gross profit was mainly driven by the increase in gross profit from our live streaming business.

The decrease in gross profit margin was mainly due to the increased portion of live streaming revenue to total revenues, which has a lower gross profit margin.

Research and development expenses for the third quarter were $16.4 million, representing 18.3% of our total revenues compared with $60 million or 20.4% of our total revenues in the previous quarter.

Sales and marketing expenses for the third quarter were $5,8 million, representing 6.6% of our total revenues compared with $5 million or 6.4% of our total revenues in the previous quarter. The increase was primarily due to higher market expenses during the third quarter, driven by our continued user acquisition efforts.

G&A expenses for the third quarter were $8.2 million, representing 9.6% of our total revenues compared with $12 million or 15.4% of our total revenues in the previous quarter. The decrease was primarily due to the decrease share-based compensation expenses since share units were vesting during the quarter.

Operating income was $5.1 million compared with $0.7 million in the previous quarter. The increase in operating income was primarily attributable to the increase in gross profit of live streaming business and less share-based competition expenses accrued during the third quarter.

Other income was $4.7 million compared with other income of $7 million in the previous quarter. The decrease was primarily due to reverse of certain payables due over 3 years with loan payment probability recognized in the second quarter, but no significant item in the third quarter.

Net income was $8.3 million compared with $6 million in the previous quarter. Non-GAAP net income was $9 million in the third quarter of 2021 compared with $9.8 million in the previous quarter. The increase in net income was primarily driven by the increase in operating income as discussed above.

Diluted earnings per ADS in the third quarter of 2022 was approximately $0.12 as compared to $0.09 in the second quarter of 2021. Moving to liquidity. As of September 30, 2022, the company has cash, cash equivalents and short-term investments of $261.7 million compared with $259.9 million as of June 30, 2022.

The decrease in cash and cash equivalents was mainly due to the impact of foreign exchange rates, spending on Xunlei headquarters building under construction and share repurchases. Turning to ongoing stock repurchase program.

In March, Xunlei announced that its Board of Directors authorized the repurchase of up to $20 million of its outstanding common stocks over the next 12 months. As of September 30, 2022, we have spent approximately $4.3 million on buying back Xunlei stocks.

Regarding Xunlei research and headquarters building under construction, now, it is in the final stage for interior decoration and preparation, and we expect the new building to commence operations by the end of this year. And finally, moving to our guidance for the fourth quarter of 2022.

The company estimates total revenues to be between $90 million and $95 million, and at the midpoint of the range represents a quarter-over-quarter increase of approximately 4.8%. These estimates represent management's preliminary view as of the date of this press, which is subject to change and any change could be material.

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

Thank you. [Operator instructions] Our first question comes from Sangmi Lee [ph], private investor. You may proceed..

[Foreign Language] Thank you. This question is on the recently status on China [indiscernible] Euro company and Proxima TV and edge computing and this one if the joint ventures business has overlap with Xunlei’s business.

And if so, will there be any impact on Xunlei?.

We think to some extent the joint venture demonstrated China's comprehensive layoff of the cloud computing inventory, and may have great -- and maybe bring great confidence to the entire industry under the current economic environment.

And so that is, we haven't seen any details of the joint venture, and we really compare whether there will be any overlapping in business or FYDA [ph] direct competitors. But from our perspective, within edge computing has great opportunities. We will adopt measures to increase the changing competitive landscape.

And so far, we haven't seen any impact on this yet. As one of the Tier 1 countries in edge public cloud, we intend to collaborate closely with all the players in the industry, including [indiscernible] tariffs, edge cloud computing firms as well as old upstream and downstream variant firms.

And together, we can build a better ecosystem system for edge computing. And in the long-term, we will do our best to achieve winning results for all six of the -- in the edge singles as we believe the market is huge and has also further potential. Thanks for the question.

[Foreign Language] And he asked based on our performance for the last quarter and the growth of each business line, and we want to have an outstanding outlook of the company's business and particularly of computing, and he wants to know whether the gross margin will continue to decline in the future? And we believe the gross margin will continue to decline as our live streaming business is expected to continue to grow and account for a larger percentage of the total revenues.

Our live streaming product has a lower gross margin than our traditional subscription business. What do we expect that in the longer term, the overall gross margin will gradually stabilize to a certain level? [Foreign Language].

Thank you. Our next question comes from Janine [ph] Song with Accenture. You may proceed..

[Foreign Language].

And asked is this that all subscriptions has been rate stable for the last several quarters. And he would like to know if we will have a breakthrough in this business. And this is a good question. And we hope our products and services as well as the number of subscribers will remain stable at a slightly higher level and continues to improve.

We are exploring new potential opportunities and strive to add more convenient, efficient and reliable functions on top of our existing subscription service. In addition, we are also exploring efficient marketing channels to try to reach a broader user base. Thank you. .

Thanks for asking. And his question is, since our last, product has become the fastest-growing business and the largest growth driver of [indiscernible]. And he would like to know the [indiscernible] of this business, and he wants -- also wants to know if we transition for Xunlei's business model. This is questions.

Since we launched our last streaming business in 2021, we have seen significant growth and our recent fast-growing operating results met our current expectations. We are expanding our presence in more countries, trying more local tenants and deepen our brand recognition in these new markets.

As for whether we will make a transition, we are open to all possibilities in the future, and we will closely monitor the industry development and back our overseas growth strategies accordingly.

We are optimistic that in the future our business growth will be driven by our product and services that have broader user recognition and large market potential and rely less on our traditional products and services. And this is an ongoing endeavor, and we look forward to sharing with you our progress in the coming quarters. Thank you.

[Foreign Language].

Thank you. One moment for questions. Our next question comes from [indiscernible]..

Hi. Thank you for taking my call. The share repurchase program, you have about 4 million shares repurchased. I mean not shares and value.

But that doesn't seem to be reflected in the -- unless I'm reading something wrong and the total number of shares issued and outstanding, can you share some light on exactly how that's calculated, or why the total share outstanding are not going much lower?..

Firstly, I don’t know exactly why the number is not what you saw. First, this number is the accumulated number versus the dollar amount since we started program. And secondly, so far, it's been done according to a 10b5-1 program and because it's growing on based on a predetermining the formula by our brokerage [indiscernible].

And we really don't have control yet. But that said, when the window opens, the trading window opens, we may look at all options. But if you need to know the specific discrepancy if you see it, we may discuss it off the line, because I need to look at the numbers and know exactly what you meant. Thank you..

Okay. I have a second question, if you may. Most of your income is in other income. Is this like account receivables that you had written off years ago and you're putting them back on the books.

Is that what it is, if I understand correctly? And second, do you anticipate this other income to continue as in the last two quarters?.

The other income, basically the two major items in other income section, we have some income from our bank deposits. We also have some income, or sometimes lost due to the exchanges gain or losses. And for the last quarter, we also had some, as you mentioned, the receivable of some of the accounts payable, which later we deem it's not needed.

And the second, we really don't extend or provide any guidance on the net income for the coming quarters. But based on our progress so far, and particularly the performance of the last three quarters, and based on also our revenue guidance, we're still optimistic that for the full year, we are going to have net profit. Thank you..

Thank you..

Thank you. [Operator Instructions] Our next question comes from Sarah Jung [ph] who is a Private Investor. You may proceed..

[Foreign Language].

Thank you. And she has a question regarding the blockchain, and particularly our digital collectible assets business, and she wants to know our plan for the future and for this business? We think this is still a new and emerging industry. And in rare cases, the development of a new industry will be underlying.

Regarding the -- our products, our blockchain business, we basically experienced the same -- experience, some of the other companies have experienced. And we are still operating with our enterprise digital search platform and also actively cooperate with creative and cultural organizations, new business and IP owners.

At the same time, we are exploring more opportunities for cooperation. And so far, our investment in blockchain business is very limited. And it accounts for an insignificant part of our portfolio, and we treat it as a real option and may adjust our strategy in the future based on the development of the industry.

And as for the outlook of the broad industry, I believe that different people or different companies may have different opinions, and even for an industry giants like Facebook, [Indiscernible] needs trials and make adjustments to its strategies. But again, we think it's a nascent industry and follow opportunities and challenges as well. Thank you.

[Foreign Language] Then he asked basically, we discussed before that we want to control our cost and see the production now recovers so far in this regard. And this is a good question. Basically, the -- overall, our costs remained relatively stable and is up slightly, because we also grow our business.

You see we have been exploring additional products and also enter into a diverse geographic market, which all require capital investments and expenses. So we want to start the balance between growth and preserving capital. And so far, we -- our strategy is try to grow our business with a reasonable CapEx or expenses.

We want to maintain a strong balance sheet at the same time, try to grow our business. Thanks for your question. [Foreign Language] That's a good question. They are different ways of using cash. Basically, she asks whether we -- how we are going to use the cash we have and whether we are going to distribute any dividend.

And there are different ways of using the cash. And for instance, we can distributed dividends, we can buy and buy back stock, and we can also use cash to expand our market. And so far, we have chosen to reinvest the cash into companies. And for a couple of reasons, first, we still feel we have very good growth opportunities.

And if we go beyond our existing business, we see there are quite other opportunities, a lot of opportunities out there. And so far, our initial exploration has been successful. And so we feel we can get high returns for investment than distribution cash. Second reason we do it is there are some practical restrictions if we’re distributing cash.

For instance, we might have to pay taxes when we distribute the public, they try to the image -- spend the money overseas and on the company level and also some investors may pay taxes on the money we receive. So it may not see a better decision for the time being, particularly when we have growth opportunities..

That’s the same dividend could be an option in the future, but for the time being, we feel we can use the cash for more productive purposes. Thank you..

[Foreign Language].

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Eric Zhou for any further remarks..

Thank you, Lin, for your time and participation. If you have any questions, please visit us at our website at ir.xunlei.com or send e-mails to our Investor Relations. Have a good day. We conclude today's conference call. Thank you very much.

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