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Xunlei Limited (NASDAQ:XNET)
Q3 2020 Earnings Call
Nov 12, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, thank you for your patience. You have joined Xunlei's Third Quarter of 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will have a Q&A session after a few management remarks.

I would now like to turn the call over to your host, Investor Relations Manager, Ms. Mengnan Gao. Please, go ahead.

Mengnan Gao -- Investor Relations Manager

Thank you, operator. Good morning, and good evening. Thank you all for joining us today. We welcome you to this conference call to discuss Xunlei's third quarter of 2020 earnings.

Joining us today is our CFO, Mr. Eric Zhou. Eric will first deliver a prepared speech on behalf of our Chairman and CEO, Mr. Jinbo Li. And then, he will go over some financial highlights for this quarter, wrapping up with our revenue guidance for the fourth quarter of 2020. We will be happy to take your questions after our management remarks. Please be limited to two questions at a time, so others can get their questions in as well. Today's conference call is being recorded, and a replay of the call will be available on our IR website afterwards. Our earnings press release was distributed earlier today, and is now also available on our IR website.

Before we get started, please note the discussion today will contain certain forward-looking statements made under the safe harbor provisions of the US Private Securities Litigations Reform Act of 1995. Such statements are based on management's current expectations and 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. We do not take -- undertake any duty 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 US dollars, unless otherwise stated.

And with that, I'd like to pass the call to our CFO, Eric, for prepared remarks.

Naijiang (Eric) Zhou -- Chief Financial Officer

Thank you, Mengnan. Good morning, and good evening, everyone. Thank you for joining us today for third quarter of 2020 conference call. I'm pleased to deliver today's opening remarks on behalf of a Chairman and CEO, Mr. Jinbo Li.

We are delighted to report that the third quarter was a quarter of progress and achievement, as we further optimized operating efficiency, launched new products and explored new partnerships. In the third quarter, we made progresses in several financial and operating metrics. In particular, we improved gross profit and significantly reduced net loss. And we are optimistic that we could carry the positive momentum into the fourth quarter of 2020.

Now I'd like to give you a recap of the financial highlights of the third quarter of 2020, and share with you some of the recent developments of the Company. For the third quarter, total revenues were $43.7 million, a 1.4% decrease sequentially. Our cloud computing and other internet value-added services grew 1.1% sequentially, and our online advertising business began to rebound with a sequential improvement of 10.8%.

The overall gross margin expanded to 51.9%, the highest one since the third quarter of 2018. Our total net loss was $1.5 million as compared with a net loss of $11.8 million in the second quarter of 2020. At the end of the third quarter, our cash, cash equivalent and short-term investments was approximately $246 million, as compared with $257.1 million at the end of the second quarter of 2020. And the reduction included about $4.5 million we spent on buying back our stocks.

Overall, I believe our business is strong and the financial position is solid. As we begin to execute strategies to uncover Xunlei's value after the management transition in the second quarter, we made significant progress in the third quarter in our operations.

Now I'd like to review some of our recent developments in certain particular areas, optimizing business operations, rolling out new products, and exploring strategic partnerships. First, about optimizing business operations. Organizationally, we restructured corporate starting in the second quarter to make our business nimble and agile. As a result, in the third quarter, we were able to control costs and improve operating efficiency, while keeping the top line relatively stable. We reported improved gross profits and significantly reduced net loss for the third quarter. I believe this could be an important step to prepare the Company to turn around and for future growth.

Turning to our subscription business. Our subscription revenues decreased 5.5% quarter-over-quarter, and increased 1.8% year-over-year to $19.6 million, and accounted for approximately 44.8% of our total revenues this quarter. Our subscriber base decreased from approximately 3.9 million in the second quarter to about 3.8 million in the third quarter. In the third quarter, we enhanced user experience by adding new features and providing more value-added functions like, cloud storage to our subscribers. Although, there was a decrease of our user base, our user base structure was shifting toward a larger portion of the user subscribing for premium services. Further, we are exploring new ways to expand our user base and capture more monetization opportunities.

For our cloud computing business, we anticipate our service capabilities will continue to expand with improved profitability. While we have a robust pace of a video, music and gaming clients, including some of the top internet companies in China, we are also exploring opportunities to serve customers in other sectors like, e-commerce. For example, one of the top Chinese social e-commerce platforms has lately completed testing of our products, and we are in the process of negotiating a contract with them. As a distributed cloud computing service product provider, we expect more opportunities for us in the future as more cloud computing capabilities move from centralized internet data centers to the edge near end users. Although, we believe edge computing is still at its early stage of industry development cycle, its importance and the potential role in our economy cannot be ignored.

For advertising business, we cooperated with our partners and took advantage of their advanced precision targeting algorithm to achieve better placement of advertisement. As a result, we realized improved average advertising pricing per user and increased revenues.

Now moving to another key area, developing new products. During the third quarter, we launched a Blockchain as a Service or BaaS platform for our blockchain business. The platform is designed to empower enterprises and developers, and free them from dealing with complex blockchain infrastructure issues when developing blockchain applications. Our blockchain experts are holding weekly training classes to facilitate blockchain applications.

In addition, recently we entered a cooperation agreement with e-Surfing Cloud Storage, the cloud storage product run by Shijilong Information Network Company Limited, a wholly owned subsidiary of China Telecom. Under this cooperation, we will leverage our technological expertise by offering Xunlei Space, a public cloud product, based on download SDP [Phonetic] functionality to enable our partner to cover their service capabilities in both private cloud and public cloud. As part of the cooperation, we will launch a joint membership program, so that users will have simultaneous access to both of their cloud storage services. This cooperation represents the first step for us to explore collaboration in our product portfolios, which will help boost more premium product offerings and enhance users experience.

Before discussing the details of the third quarter financial performance, let me briefly revisit the initiatives we took during the third quarter. First, we optimized operations in major product lines and delivered improved operating efficiency. Second, we continue to invest in product developments and rolled out new products. And third, we established new partnerships and deepened cooperation with our current partners. We have strong confidence in our business and look forward to building long-term value for our users, partners, and shareholders. That was a prepared speech by our Chairman and CEO.

I will now go through some of the details of our financial results and wrap up with our revenue guidance for the fourth quarter of 2020. Total revenues for the third quarter of 2020 were $43.7 million, representing a decrease of 1.4% from the previous quarter. The decrease was primarily due to reduced revenues from our subscription business.

Revenues from subscriptions were $19.6 million, a decrease of 5.5% from the previous quarter. The number of subscribers was approximately 3.8 million as of September 30, 2020, a slight decrease from about 3.9 million as of June 30, 2020. The average revenue per subscriber for the first quarter of 2020 was RMB35.9, falling from RMB37.5 for the previous quarter. The decrease in subscription revenues was mainly attributable to decline in pricing and subscriber base compared with that in the second quarter.

Revenues from online advertising was $3 million, representing an increase of 10.8% from the previous quarter. The increase was mainly due to the application of precision targeting algorithm to achieve better advertising and improve monetization efficiency.

Revenues from cloud computing and other internet value-added services combined were $21.2 million, representing an increase of 1.1% from the previous quarter. Cost of revenues were $21 million, representing 48.1% of our total revenues, compared with $23.9 million or 54% of total revenues in the previous quarter. The decrease was mainly due to decreased cost associated with a writedown of our inventory for OneThing Cloud hardware products of $2.5 million in the second quarter.

Bandwidth costs in the third quarter of 2020 were $15.4 million, representing 35.1% of our total revenues, compared with $13.9 million or 31.4% of the total revenues in the previous quarter. The increase was primarily due to increased demand for our cloud computing service, which was consistent with the increase of cloud computing revenues. The remaining cost of revenues mainly made up of the revenue-sharing costs for our live streaming business.

Gross profit for the third quarter of 2020 were $22.7 million, an increase of 11.3% from the previous quarter. Gross margin was 51.9% in the third quarter, compared with 46% in the previous quarter. The increased gross profit was mainly due to the combined impact of an increase in revenue from online advertising services, which have a high gross margin as compared with other business, and the decrease in cost associated with a writedown of our inventory accrued in the previous quarter.

Research and development expenses for the third quarter of 2020 were $12.1 million, representing 27.6% of our total revenues, compared with $14.5 million or 32.8% of our total revenues in the previous quarter. The decrease was mainly due to decreased expenses associated with the optimization of organizational structure during the previous quarters.

Sales and marketing expenses for the third quarter of 2020 were $4.2 million, representing 9.6% of our total revenues, compared with $4.4 million or 9.9% of our total revenues in the previous quarter.

General and administrative expenses for the third quarter of 2020 were $7.5 million, representing 17.1% of our total revenues, compared with $10.1 million or 22.8% of our total revenues in the previous quarter. The decrease was mainly due to decreased employee and rental expenses as there were more employee severance compensation as a result of organizational optimization in the previous quarter, and incurrence of a one-time expenses associated with terminating several office leases in the second quarter.

Operating loss for the third quarter was $1 million, compared with an operating loss of $13.7 million in the previous quarter. The decrease was primarily due to higher gross profit and less operating expenses incurred in the third quarter, as discussed above.

Net loss was approximately $1.5 million in the third quarter of 2020, compared with a net loss of $11.8 million in the previous quarter. Non-GAAP net loss was $0.9 million in the third quarter of 2020, compared with a non-GAAP net loss of $11.2 million in the previous quarter.

Diluted loss per ADS in the third quarter of 2020 was $0.02, compared with a diluted loss per ADS of $0.17 in the previous quarter.

As of September 30 2020, the Company had cash, cash equivalents and short-term investments of $246 million, compared with $257.1 million as of June 30, 2020.

And finally, I'd like to turn to our guidance for the fourth quarter of 2020. We expect total revenues to be between $45 million and $49 million for the quarter. The midpoint of the range represents a quarter-over-quarter increase of about 8%. This estimates represents the management's preliminary view as of today, and is subject to change and any change could be material.

With that, we conclude our prepared remarks today, and I'll now turn the call over to the operator for your questions. Operator, we are ready to take questions.

Questions and Answers:

Operator

Certainly. [Operator Instructions] We have a questions from the line of Trista Yang [Phonetics] of Venture Smart. Please go ahead.

Trista Yang -- Venture Smart -- Analyst

Hi, this is Trista Yang from Venture Smart, Hong Kong. I would like to ask that you will complete development plans for blockchain business. Will you continue to expand blockchain business? And what is the expected impact on the Company's future earnings looks like? Thank you.

Naijiang (Eric) Zhou -- Chief Financial Officer

Thank you for the question. We think blockchain is still at its nascent stage of an industry development cycle, and we view our investment in blockchain as part of our technological innovation, and we are participating in the development of the blockchain industry. In the coming days, we will continue to carry out our current projects and explore additional ones.

As an emerging technology and one of our incubation business, so far, it has not yet generated significant amount of revenues. That being said, we view our investments in blockchain is a real option and hope to realize its returns in the future. Thank you for your question.

Operator

Thank you. [Operator Instructions] We have no more questions from the phone line. May I hand the call back to management, please continue.

Naijiang (Eric) Zhou -- Chief Financial Officer

Okay. Let's just conclude our today's call. Now, if you have any questions in future, please contact us. Thank you. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 21 minutes

Call participants:

Mengnan Gao -- Investor Relations Manager

Naijiang (Eric) Zhou -- Chief Financial Officer

Trista Yang -- Venture Smart -- Analyst

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