Business Context and Reporting Period
Xunlei Limited (Nasdaq: XNET), a leading provider of acceleration products and services in China, reported unaudited financial results for the second quarter ended June 30, 2015. The filing, submitted on August 13, 2015, excludes results from Xunlei Kankan, the company's online video streaming business, which was divested in July 2015 and classified as discontinued operations.
Key Financial Metrics
| Metric | Q2 2015 | Q1 2015 | Q2 2014 |
|---|---|---|---|
| Total Revenues | $31.2 million | $30.2 million | $33.3 million |
| Subscription Revenues | $21.0 million | $21.2 million | $25.2 million |
| Other Internet Value-Added Services | $9.2 million | $8.0 million | $6.6 million |
| Gross Profit | $16.8 million | $18.0 million | $18.1 million |
| Gross Margin | 53.8% | 59.7% | 55.6% |
| Operating Loss (GAAP) | ($3.2) million | ($1.4) million | $1.5 million |
| Operating Loss (Non-GAAP) | ($0.8) million | $0.8 million | $3.6 million |
| Net Income from Continuing Ops (GAAP) | $3.1 million | $2.4 million | $12.0 million |
| Net Income from Continuing Ops (Non-GAAP) | $5.5 million | $4.6 million | $6.2 million |
| Cash, Equivalents & Short-term Investments | $444.6 million | N/A | $433.7 million (Dec 31, 2014) |
Material Changes vs. Prior Period
- Revenue Trends: Total revenue increased 3.2% sequentially but declined 6.3% year-over-year. Subscription revenue, the core business, fell 16.9% year-over-year due to a decline in average revenue per subscriber (from $4.34 to $4.16), partially offset by a subscriber base increase to 5.06 million.
- Cost Pressures: Cost of revenues rose 18.5% sequentially, driven primarily by a 25.2% increase in bandwidth costs. This caused gross margin to compress from 59.7% to 53.8%.
- Profitability: The company reported a GAAP operating loss of $3.2 million, widening from a $1.4 million loss in Q1 and contrasting with a $1.5 million operating income in Q2 2014. Non-GAAP operating results also shifted from a profit to a loss.
- Discontinued Operations: Loss from discontinued operations (Xunlei Kankan) improved to $4.3 million from $7.0 million in the prior quarter.
Guidance, Outlook, and Risks
- Q3 2015 Guidance: Management estimates total revenues from continuing operations to be between $29 million and $33 million. The midpoint implies little sequential change and a 9.0% year-over-year decrease.
- Strategic Focus: The company is prioritizing a migration to mobile internet, citing deepened cooperation with Xiaomi as a key driver. Subscription business is showing signs of stabilization.
- Regulatory Risks: Ongoing government scrutiny of internet content in China poses a risk to PC-based download acceleration subscriptions. The company temporarily suspended services for approximately 426,000 subscribers as of June 30, 2015.
- Divestitures: Xunlei completed the sale of Xunlei Kankan for approximately $21.2 million. The company also intends to divest its client games business (4.2% of Q2 revenue) in August 2015, subject to a definitive agreement.
Investor Verification Checklist
- Verify the impact of the temporary suspension of 426,000 subscribers on future subscription revenue stabilization.
- Confirm the timeline and terms for the pending divestiture of the client games business.
- Monitor bandwidth cost trends relative to revenue growth to assess gross margin recovery potential.
- Review the progress of the mobile internet strategy and the depth of the partnership with Xiaomi.
- Assess the sustainability of Non-GAAP adjustments, specifically share-based compensation expenses.