Xunlei(US:XNET)2020-04-28 20:03Part I Key Information This section presents selected historical financial data for the five years ended December 31, 2019, highlighting revenue decline and widening net loss, alongside significant business and regulatory risks Selected Financial Data Selected Consolidated Statements of Comprehensive Income/(Loss) Data (in thousands of US$) | (in thousands of US$) | 2015 | 2016 | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues, net | 104,837 | 140,985 | 201,911 | 232,132 | 181,267 | | Gross profit | 45,271 | 60,278 | 82,707 | 114,937 | 80,752 | | Operating loss | (31,521) | (41,502) | (54,201) | (44,329) | (56,422) | | Loss from continuing operations | (18,567) | (30,806) | (44,216) | (40,793) | (53,415) | | Net loss | (14,466) | (24,183) | (37,809) | (39,490) | (53,415) | | Net loss attributable to Xunlei Limited's common shareholders | (13,167) | (24,111) | (37,822) | (39,278) | (53,169) | | Net loss per ADS (Basic & Diluted) | (0.20) | (0.36) | (0.57) | (0.59) | (0.79) | Selected Consolidated Balance Sheets Data (in thousands of US$) | (in thousands of US$) | 2015 | 2016 | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total assets | 538,361 | 509,795 | 533,437 | 455,431 | 424,687 | | Total liabilities | 93,680 | 103,545 | 150,600 | 111,251 | 129,144 | | Total shareholders' equity | 446,749 | 408,238 | 384,997 | 345,296 | 296,878 | Selected Consolidated Statements of Cash Flows Data (in thousands of US$) | (in thousands of US$) | 2015 | 2016 | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | :--- | :--- |\n| Net cash from/(used in) operating activities | 13,764 | 16,970 | (14,216) | (35,608) | (45,649) | | Net cash (used in)/generated from investing activities | (54,982) | (158,335) | 35,208 | (69,357) | 79,260 | | Net cash generated from/(used in) financing activities | 5,030 | (11,041) | 2,561 | 929 | 12,177 | Risk Factors - The company's business model is undergoing significant innovation and transition towards mobile internet, cloud computing, and blockchain technology. Historical growth may not be indicative of future performance, and new business initiatives face substantial uncertainties and risks3233 - The emerging blockchain industry in China is subject to developing and evolving laws. Failure to comply with current or future regulations, such as the Blockchain Provisions, could materially and adversely affect the business3435 - The company faces risks of copyright infringement claims. As of the report date, it was involved in 20 copyright lawsuits in China with total claimed damages of approximately RMB54.2 million (US$7.8 million)4951 - The company's ability to retain its large user base (88.3 million monthly unique visitors in Dec 2019) and convert them to subscribers is a key risk. The subscriber base decreased from 4.4 million in 2014 to 4.0 million as of Dec 31, 2019, partly due to intensified government scrutiny of internet content344647 - The company's corporate structure relies on contractual arrangements with its Variable Interest Entity (VIE), Shenzhen Xunlei, due to PRC restrictions on foreign investment in internet businesses. This structure carries risks related to enforceability and potential conflicts of interest172174 - The company believes it was a Passive Foreign Investment Company (PFIC) for the 2019 tax year and will likely be a PFIC for 2020, which could result in significant adverse U.S. federal income tax consequences for U.S. investors303304 Information on the Company Xunlei, a Chinese innovator in shared cloud computing and blockchain, operates an internet platform through a VIE structure, focusing on mobile and ThunderChain development History and Development of the Company - Commenced operations in January 2003 through Shenzhen Xunlei. Established Xunlei Limited as a Cayman Islands holding company in February 2005306307 - Completed its Initial Public Offering (IPO) on the NASDAQ Global Select Market under the symbol "XNET" in June 2014316 - As part of a strategy to streamline its business and focus on mobile internet, the company completed the sale of its entire stake in Xunlei Kankan in July 2015 for RMB 130.0 million317 - Expanded overseas by establishing a subsidiary in Thailand in July 2018 to engage in cloud computing and blockchain business315 Business Overview - Xunlei is a leading innovator in shared cloud computing and blockchain technology in China, providing services like cloud acceleration, blockchain platforms (ThunderChain), live streaming, and online games320 - The core product, Xunlei Accelerator, had approximately 88.3 million monthly unique visitors in December 2019. The subscriber base for premium services was 4.0 million as of December 31, 2019321340 - The company is transitioning to mobile, with its Mobile Xunlei app having an average of 6.6 million daily active users in 2019. A key partnership with Xiaomi involves pre-installing the mobile acceleration plug-in on Xiaomi phones324325 - A key strategy involves crowdsourcing idle bandwidth and storage from users via hardware like OneThing Cloud to power its Content Delivery Network (CDN) services and reduce bandwidth costs326 - Launched ThunderChain in 2018, a high-performance blockchain open platform enabling enterprise users to develop and manage blockchain applications, capable of processing over a million transactions per second328349350 Revenue Breakdown (2017-2019) | Revenue Source | 2017 (US$M) | 2018 (US$M) | 2019 (US$M) | | :--- | :--- | :--- | :--- | | Subscriptions | 85.0 | 81.9 | 81.5 | | Online advertising | 22.5 | 27.8 | 15.6 | | Product revenue | 32.9 | 54.6 | 8.3 | | Cloud computing & other IVAS | 61.6 | 67.9 | 75.8 | | Total | 201.9 | 232.1 | 181.3 | Organizational Structure - Xunlei Limited is a Cayman Islands holding company that operates its PRC business primarily through a Variable Interest Entity (VIE) structure to comply with Chinese regulations restricting foreign investment in internet and telecommunications services498762 - The VIE is Shenzhen Xunlei Networking Technologies Co., Ltd. The structure is maintained through a series of contractual arrangements between the wholly-owned subsidiary Giganology (Shenzhen) Ltd. and Shenzhen Xunlei and its shareholders499500 - Key contractual agreements that provide effective control and transfer economic benefits include: Business Operation Agreement, Equity Pledge Agreement, Powers of Attorney, Exclusive Technology Support and Services Agreements, and Equity Interests Disposal Agreement500501502503508 - As of the report date, Mr. Sean Shenglong Zou, a co-founder and director, owned 76.0% of Shenzhen Xunlei's equity interests499 Property, Plant and Equipment - The company's principal executive offices are leased in Shenzhen, comprising approximately 7,575 square meters. It also leases office space in Beijing, Xian, and Hong Kong514 - Servers are primarily hosted at internet data centers owned by major domestic providers, with hosting agreements typically having one-year terms514 Operating and Financial Review and Prospects Fiscal year 2019 saw total revenues decrease by 21.9% to $181.3 million, leading to a wider operating loss and persistent negative operating cash flow Operating Results Revenue by Segment (2017-2019, in thousands of US$) | Revenue Segment | 2017 (in thousands of US$) | 2018 (in thousands of US$) | 2019 (in thousands of US$) | | :--- | :--- | :--- | :--- | | Subscriptions | 84,956 | 81,877 | 81,532 | | Online advertising | 22,484 | 27,781 | 15,643 | | Product revenue | 32,894 | 54,604 | 8,269 | | Cloud computing and other IVAS | 61,577 | 67,870 | 75,823 | | Total | 201,911 | 232,132 | 181,267 | - 2019 vs. 2018: - Total Revenues decreased by 21.9% from $232.1M to $181.3M, mainly due to a sharp decline in OneThing cloud hardware sales and reduced demand for online advertising services564573574583 - Gross Profit decreased by 29.7% from $114.9M to $80.8M. Gross margin fell from 49.5% to 44.5%564573574583 - Operating Expenses decreased by 13.9% to $137.2M, driven by lower R&D and sales & marketing costs564573574583 - Operating Loss widened from $44.3M to $56.4M564573574583 - Net Loss Attributable to Xunlei Limited increased from $39.3M to $53.2M564573574583 - 2018 vs. 2017: - Total Revenues increased by 15.0% from $201.9M to $232.1M, driven by product sales, live streaming, and mobile advertising584593594601 - Gross Profit increased by 39.0% from $82.7M to $114.9M. Gross margin improved from 41.0% to 49.5% due to high-margin product sales and lower bandwidth costs584593594601 - Operating Expenses increased by 16.3% to $159.3M, due to investment in cloud computing and blockchain, and higher staff costs584593594601 - Operating Loss narrowed from $54.2M to $44.3M584593594601 - Net Loss Attributable to Xunlei Limited increased slightly from $37.8M to $39.3M584593594601 Liquidity and Capital Resources - As of December 31, 2019, the company had $265.3 million in cash, cash equivalents, and short-term investments663 Summary of Cash Flows (in thousands of US$) | (in thousands of US$) | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | (14,216) | (35,608) | (45,649) | | Net cash from/(used in) investing activities | 35,208 | (69,357) | 79,260 | | Net cash from financing activities | 2,561 | 929 | 12,177 | - The company has experienced persistent negative cash flow from operating activities, worsening from -$14.2 million in 2017 to -$45.6 million in 2019669670 - The ability to transfer funds from PRC subsidiaries is restricted. As of December 31, 2019, the amount of restricted net assets (registered capital and statutory reserves) was US$245.9 million665 Contractual Obligations Contractual Obligations as of December 31, 2019 (in thousands of US$) | Obligation Type | Total (in thousands of US$) | Less than 1 year (in thousands of US$) | 1-3 years (in thousands of US$) | 3-5 years (in thousands of US$) | More than 5 years (in thousands of US$) | | :--- | :--- | :--- | :--- | :--- | :--- | | Bandwidth lease obligations | 12,033 | 7,918 | 4,115 | — | — | | Capital obligations | 22,510 | 21,453 | 1,057 | — | — | | Total | 34,543 | 29,371 | 5,172 | — | — | Directors, Senior Management and Employees This section details the company's leadership, compensation, and board practices, including executive compensation and share incentive plans - As of the report date, Jinbo Li was Chairman and CEO, Sean Shenglong Zou and Hao Cheng were Co-Founders and Directors, and Naijiang (Eric) Zhou was CFO687 - For fiscal year 2019, aggregate cash compensation paid to executive officers was approximately US$0.6 million, and US$0.1 million was paid to two non-executive directors698 - The company has three active share incentive plans: the 2010 Plan, 2013 Plan, and 2014 Plan, used to grant options and restricted shares to employees, directors, and consultants699 - As of December 31, 2019, the company had 1,070 employees, with the majority (839) in research and development747 Major Shareholders and Related Party Transactions This section outlines major shareholders, with Itui International Inc. as the largest, and details significant related party transactions, particularly through the VIE structure and Xiaomi affiliations Principal Shareholders as of April 15, 2020 | Shareholder | Number of Shares | Percentage Ownership | | :--- | :--- | :--- | | Directors and executive officers (as a group) | 161,997,127 | 47.7% | | Jinbo Li (beneficial owner) | 135,320,239 | 39.8% | | Sean Shenglong Zou | 22,931,611 | 6.8% | | Principal Shareholders (>5%) | | | | Itui International Inc. | 135,320,239 | 39.8% | | Yong Rong (HK) Asset Management Limited | 49,398,310 | 14.5% | - The company's operations are conducted through contractual arrangements with its VIE, Shenzhen Xunlei, which constitutes a significant related party relationship762 - Significant related party transactions exist with Xiaomi-affiliated companies. In 2019, Xunlei recognized US$2.5 million in revenue from Guangzhou Millet for technology solution services and US$2.7 million in cloud computing revenue from Beijing Xiaomi and Xiaomi Technology776777 Financial Information This section covers legal proceedings, including copyright infringement and a dismissed U.S. shareholder class action, and states the company's policy of not paying cash dividends - The company is frequently involved in legal proceedings, primarily related to alleged copyright infringement in China779 - A putative shareholder class action lawsuit filed in the U.S. alleging that its OneCoin (LinkToken) was a disguised "initial coin offering" was dismissed with prejudice in September 2019779 - The company has not declared or paid cash dividends and does not plan to in the foreseeable future, intending to retain earnings for business operations and expansion781 Additional Information This section outlines the company's tax obligations in the Cayman Islands and PRC, including preferential rates for HNTEs, and notes its likely PFIC status for U.S. investors - Cayman Islands Taxation: The company is not subject to taxes on profits, income, or capital gains in the Cayman Islands790 - PRC Taxation: The standard Enterprise Income Tax (EIT) rate is 25%. However, qualified "High and New Technology Enterprises" (HNTEs) can enjoy a reduced rate of 15%. Several of the company's PRC entities, including Shenzhen Xunlei and Xunlei Computer, qualified for this preferential rate109410961097 - U.S. Federal Income Tax: The company believes it was a Passive Foreign Investment Company (PFIC) for its 2019 taxable year and likely will be for 2020. This status can have significant adverse tax consequences for U.S. Holders of its ADSs or common shares801807 Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are foreign exchange risk due to RMB-USD fluctuations and interest rate risk from cash deposits, with significant cash balances held in both currencies - The primary market risk is foreign exchange risk due to the fluctuation of the RMB against the U.S. dollar, as revenues are denominated in RMB while ADSs are traded in USD819 - As of December 31, 2019, the company held RMB-denominated cash, cash equivalents, and short-term investments of RMB 345.8 million (approx. US$49.6 million) and U.S. dollar-denominated balances of US$218.4 million821 - Interest rate risk is mainly related to interest income from bank deposits and is not considered a material risk824 Part II Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - Management concluded that as of December 31, 2019, the company's disclosure controls and procedures were effective830 - Based on an assessment using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2019834 - The independent registered public accounting firm, PricewaterhouseCoopers Zhong Tian LLP, audited and confirmed the effectiveness of the company's internal control over financial reporting as of December 31, 2019835 Corporate Governance As a foreign private issuer, Xunlei follows Cayman Islands corporate governance practices, deviating from NASDAQ rules regarding annual meetings, board independence, and committee composition - Xunlei follows its home country (Cayman Islands) practices in lieu of certain NASDAQ corporate governance requirements849 - Key deviations from NASDAQ rules include: - Not required to hold an annual shareholder meeting849850851852 - Board of directors is not required to have a majority of independent directors849850851852 - Audit committee has two members instead of the required three849850851852 - Nominating and compensation committees are not composed solely of independent directors849850851852 Part III Financial Statements This section presents the audited consolidated financial statements for 2017-2019, prepared under U.S. GAAP, including the independent auditor's unqualified opinion and key financial statements - The report includes the audited consolidated financial statements for the years ended December 31, 2017, 2018, and 2019858 - The independent registered public accounting firm, PricewaterhouseCoopers Zhong Tian LLP, issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting866867 Consolidated Balance Sheet Summary (in thousands of US$) | (in thousands of US$) | Dec 31, 2018 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | 362,899 | 316,583 | | Total Assets | 455,431 | 424,687 | | Total Current Liabilities | 108,035 | 111,286 | | Total Liabilities | 111,251 | 129,144 | | Total Shareholders' Equity | 344,180 | 295,543 | Consolidated Statements of Comprehensive Loss Summary (in thousands of US$) | (in thousands of US$) | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | Net Revenues | 200,583 | 230,604 | 180,665 | | Gross Profit | 82,707 | 114,937 | 80,752 | | Operating Loss | (54,201) | (44,329) | (56,422) | | Net Loss Attributable to Xunlei Limited | (37,822) | (39,278) | (53,169) |