Xunlei Limited — FY2020 Form 20-F
Reporting period: Fiscal year ended December 31, 2020. This filing reports annual results, not standalone fourth-quarter results; Q4-specific financial values are not provided in the supplied text. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.
Business context
Xunlei operates a China-focused internet platform spanning download acceleration subscriptions, shared cloud computing and CDN services, advertising, live streaming, online games, and blockchain services. Its traditional PC acceleration business is transitioning toward mobile and enterprise cloud services. The company reports one operating segment, with more than 99% of revenue from mainland China. It had approximately 52 million monthly unique visitors in December 2020 and 3.8 million subscribers at year-end.
Key financial metrics
| Metric (US$ millions, except percentages and per-share data) | 2020 | 2019 |
|---|---|---|
| Revenue, net of rebates and discounts | 186.7 | 181.3 |
| Net revenue after business taxes and surcharges | 186.4 | 180.7 |
| Gross profit / gross margin | 93.7 / 50.2% | 80.8 / 44.6% |
| Operating loss | (18.8) | (56.4) |
| Net loss attributable to Xunlei shareholders | (13.8) | (53.2) |
| Basic and diluted loss per common share | (US$0.04) | (US$0.16) |
| Net cash used in operating activities | (13.9) | (45.6) |
| Cash and cash equivalents | 137.2 | 162.5 |
| Short-term investments | 117.8 | 102.8 |
| Total current assets / current liabilities | 302.3 / 103.3 | 316.6 / 111.3 |
| Total liabilities | 125.2 | 129.1 |
| Bank borrowings | 19.9 | 11.3 |
Revenue mix in 2020: subscriptions US$84.3 million (45.1%); online advertising US$13.2 million (7.1%); cloud computing and other internet value-added services US$87.8 million (47.0%); and hardware products US$1.4 million (0.8%). Live-streaming revenue was US$20.9 million.
Changes versus 2019
- Revenue rose 3.0%, mainly on higher cloud computing and subscription revenue. Cloud computing and other internet value-added services increased 15.8%; subscriptions increased 3.4%, reflecting higher average revenue per user.
- Advertising revenue fell 15.6% amid weaker demand, while hardware product revenue fell 82.9% as OneThing Cloud sales declined.
- Gross profit rose 16.1% and gross margin improved from 44.6% to 50.2%, supported by a more favorable revenue mix and lower costs of hardware and live-streaming revenue sharing.
- Operating expenses fell 18.0%, with lower research and development, sales and marketing, and general and administrative spending following organizational and cost reductions. The operating loss narrowed substantially.
- Net operating cash outflow improved to US$13.9 million from US$45.6 million, but remained negative. Cash and cash equivalents declined by US$25.2 million; cash, cash equivalents and restricted cash totaled US$138.8 million at year-end, versus US$165.4 million a year earlier.
- Bandwidth costs rose 9.3% to US$62.4 million as cloud services expanded. The company recorded a US$5.1 million asset impairment loss in 2020; the filing’s narrative description of this item is inconsistent, so the amount and nature merit verification.
Outlook, risks and unusual items
- Management says existing cash, cash equivalents and anticipated operating cash flows should cover expected needs for the next 12 months, while cautioning that liquidity could be pressured by continued operating outflows, construction costs, or difficulty renewing or accessing loans. The company expected its headquarters construction to finish by late 2021 or early 2022; completion timing and costs were not guaranteed.
- No numerical revenue or earnings guidance is provided. Management expects investment in capital expenditures and continued development of mobile, cloud computing and blockchain offerings; profitability of newer initiatives remains unproven.
- At year-end, cash and short-term investments totaled US$255.1 million. Bank borrowings were US$19.9 million, associated with headquarters construction; the facility is secured by the land-use rights and building under construction. The company also disclosed US$11.7 million of bandwidth lease and capital obligations, principally due within one year.
- Related-party exposure increased after advertising operations were outsourced to Itui, a company associated with the principal shareholder. Xunlei recognized US$7.3 million of 2020 advertising revenue from Itui and reported US$7.7 million due from it at year-end. The top 10 customers represented 38% of annual revenue and 65% of accounts receivable.
- Material risks include China’s internet-content, privacy and licensing rules; the VIE contractual structure and uncertainty over its enforceability; intellectual-property claims; customer collection risk; competition and technology shifts; and restrictions on moving cash out of China. Management believes it was a passive foreign investment company (PFIC) for U.S. tax purposes in 2020 and says it was likely to remain one in 2021.
- The filing reports 16 pending lawsuits with claimed damages of approximately US$1.9 million and an accrual of US$1.6 million. Most relate to alleged copyright infringement. The filing’s risk-factor discussion gives a different case count and claimed amount, which investors should reconcile. The 2018 U.S. securities class action related to LinkToken was dismissed with prejudice in 2019.
- In 2020, a product suffered an approximately three-hour outage, and users exploited a technical flaw to make fraudulent purchases; the company says it fixed the issues. It also says it responded to a regulator’s notice about inappropriate platform information. The former CEO was under investigation following a public-security case filing concerning alleged embezzlement, which the company said had not materially affected financial reporting.
- The auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. The filing nevertheless highlights risk that U.S. trading could be affected if PCAOB inspection restrictions lead to action under the Holding Foreign Companies Accountable Act.
Important facts for investors to verify
- Obtain quarterly disclosures for Q4 2020: this annual filing does not provide a clear standalone Q4 income statement, cash flow, or segment breakdown.
- Reconcile the 2020 asset impairment description and the differing lawsuit counts and claim amounts within the filing.
- Assess collectability and concentration of receivables, particularly the US$7.7 million due from Itui and the US$10.3 million allowance for credit losses on receivables and other current assets.
- Review construction spending, the secured bank facility, and the ability to generate positive operating cash flow after 2020.
- Evaluate VIE enforceability, required operating licenses, cash-transfer restrictions, and potential PFIC and U.S. listing risks.