Xunlei Ltd. Q3 2015 Financial Summary
Business Context and Reporting Period
This Form 6-K filing, dated November 23, 2015, reports unaudited financial results for Xunlei Limited for the third quarter ended September 30, 2015. Xunlei is China's leading provider of acceleration products and services. The results presented exclude the discontinued operations of Xunlei Kankan (online video streaming), which was divested in July 2015. The filing also announces the appointment of Mr. Lei Chen as Co-Chief Executive Officer.
Key Financial Metrics
| Metric | Q3 2015 | Q2 2015 | Q3 2014 |
|---|---|---|---|
| Total Revenues | $33.5 million | $31.2 million | $34.1 million |
| Internet Value-Added Services (IVAS) | $12.1 million | $9.2 million | $7.6 million |
| Subscription Revenues | $20.4 million | $21.1 million | $26.5 million |
| Gross Profit | $17.7 million | $16.8 million | $20.3 million |
| Gross Margin | 52.7% | 53.8% | 59.8% |
| Operating Loss (GAAP) | ($2.0) million | ($3.2) million | $1.9 million |
| Operating Income (Non-GAAP) | $0.7 million | ($0.8) million | $3.9 million |
| Net Loss from Continuing Ops (GAAP) | ($3.3) million | $3.1 million | $4.4 million |
| Net Loss from Continuing Ops (Non-GAAP) | ($0.7) million | $5.5 million | $6.4 million |
| Cash, Equivalents & Short-term Investments | $446.7 million | N/A | $433.7 million (Dec 31, 2014) |
Subscribers: 4.94 million as of September 30, 2015.
Cost of Revenues: $15.8 million (47% of revenue). Bandwidth costs were $9.5 million (28.4% of revenue).
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 7.5% sequentially, exceeding the high end of the company's prior guidance. This was driven by a 32.1% sequential increase in IVAS revenues, primarily due to first-time revenue from "Project Crystal" (crowd-sourced bandwidth sales).
- Subscription Decline: Subscription revenues decreased 3.2% sequentially, attributed primarily to RMB depreciation.
- Profitability Improvement: GAAP operating loss narrowed to $2.0 million from $3.2 million in the prior quarter. Non-GAAP operating income turned positive at $0.7 million, compared to a loss of $0.8 million previously.
- Expense Management: Total operating expenses remained stable sequentially at $19.6 million. R&D expenses decreased as a percentage of revenue (27.6% vs 30.9%), while Sales and Marketing expenses increased (11.5% vs 7.9%) due to Project Crystal marketing.
- Discontinued Operations: The quarter included a $1.5 million disposal gain from the divestiture of Xunlei Kankan, resulting in $0.7 million of income from discontinued operations.
Guidance, Outlook, and Risks
Guidance: For the fourth quarter of 2015, Xunlei estimates total revenues from continuing operations to be between $31 million and $34 million.
Management Commentary: Management remains confident in the core strategy of innovation through Project Crystal. The appointment of Mr. Lei Chen as Co-CEO is intended to leverage his expertise in cloud computing and P2P infrastructure to drive the sharing economy.
Risks and Contingencies:
- Regulatory Scrutiny: PC-based download acceleration subscriptions face ongoing negative impact from Chinese government scrutiny of internet content.
- Service Suspension: The company temporarily suspended services for approximately 311,000 subscribers as of the end of Q3 2015.
- Currency Risk: Currency translation losses on offshore non-US cash values negatively impacted net income.
- Mobile Investment: The company continues to invest in mobile initiatives which are currently generating losses.
Investor Verification Checklist
- Verify the sustainability of Project Crystal revenue growth and its ability to offset declines in traditional subscription revenue.
- Monitor the impact of Chinese government content regulations on the 4.94 million subscriber base and the 311,000 suspended accounts.
- Assess the trajectory of Non-GAAP profitability, noting the significant impact of share-based compensation ($2.6 million in Q3) on GAAP results.
- Review the company's cash burn rate relative to its $446.7 million cash position as it invests in mobile and cloud infrastructure.
- Confirm the integration progress of the new Co-CEO leadership team and its effect on strategic execution.