Xunlei Limited (NASDAQ: XNET) is a leading cloud-based acceleration technology company in China. It operates a powerful internet platform in China based on cloud computing to provide users with quick and easy access to digital media content through its core products and services, Xunlei Accelerator, and the cloud acceleration subscription services.
Xunlei stock has seen significant volatility and appreciation in the recent past. More importantly, after the company reported second-quarter results in August, shares have increased by more than 25%.
The company’s total revenue in its most recent quarter was up 8.9%, Xunlei CEO Lei Chen said he was particularly pleased to deliver solid progress in the second quarter, particularly in cloud computing and mobile advertising business. Receipt of a value-added telecommunications services license additionally covering CDN services issued by the Ministry of Industry and Information Technology of the People’s Republic of China is a further testimony of the potential viability of its technology and regulatory support.
During the second quarter, Cloud computing and Mobile advertising were up about 108% and 42% year over year. Moving forward, Xunlei wants to continue emphasizing its cloud computing technologies as the “cornerstone strategy” for growing its business. For a small company like Xunlei, such a significant growth in some areas of its business is bound to trigger volatility.
Xunlei’ customer, Kuaishou, one of the largest social platforms in China, again expanded its consumption by 49% in the second quarter, and iQIYI, a leading player in the streaming sector, almost tripled its business with the company. So, the fact that leading players are significantly expanding their businesses with XNET is a further testament of its value proposition.
Over the next few months, XNET will be focusing on its sales and marketing strategy to concentrate on key or marquee customers, industry leaders, whose adoption of its technology can help the company better monetize its marketing effort. The management projects revenues to be between $41 million to $44 million for the third quarter of 2017. The mid-point of the range represents a year-over-year increase of about 3.9%
Also, the company has recently appointed Mr. Eric Zhou as its new CFO. Mr. Zhou had two decades of experience and was an interim chief financial officer at ChinaCache International Holdings Limited, a Nasdaq-listed company, before joining Xunlei. Previously, the company also announced the resignation of one of its board members, bringing the board to eight people.
With the significant movement in the senior management, it seems that something could be coming, and the company could also announce a M&A possibility. Driven by the above-mentioned factors, several analysts continue to maintain optimistic price targets for the company. The stock currently has an average rating of BUY and a consensus target price of $9.00
About the company: Xunlei Limited (“Xunlei”) is a leading cloud-based acceleration technology company in China. Xunlei operates a powerful internet platform in China based on cloud computing to provide users with quick and easy access to digital media content through its core products and services, Xunlei Accelerator, and the cloud acceleration subscription services.
Xunlei is increasingly extending into mobile devices, in part through potentially pre-installed acceleration products in mobile phones. Benefitting from the large user base accumulated by Xunlei Accelerator, Xunlei has further developed various value-added services to meet a fuller spectrum of its users’ digital media content access and consumption needs.
Second quarter financial results
Total Revenues: Total revenues were US$41.5 million, up 8.9% on a year-over-year basis and increase 4.9% sequentially. The increase in total revenues on a year-over-year basis was mainly attributable to the growth of cloud computing and mobile advertising.
- Subscription: Revenues from subscriptions were US$20.6 million, down 8.8% on a year-over-year basis and down 1.1% sequentially. The number of subscribers was 4.09 million as of June 30, 2017, mostly flat from 4.08 million as of March 31, 2017, but down from 4.55 million as of June 30, 2016. The average revenue per subscriber for the second quarter was RMB34.4, down from RMB35.1 as of March 31, 2017, but up from RMB32.6 as of June 30, 2016.
- Online advertising (including mobile advertising): Revenues from online advertising were US$5.2 million, up 38.2% both on a year-over-year basis and sequentially. Mobile advertising revenue increased 41.6% on a year-over-year basis.
- IVAS: Revenues from IVAS (including revenues from cloud computing) were US$15.7 million, up 33.8% on a year-over-year basis and up 4.7% sequentially. Cloud computing revenues grew by 107.8% and 11.7% on a year-over-year basis and sequentially, respectively.
- Gross Profit and Gross Margin: Gross profit for the second quarter was US$17.1 million, up 5.5% sequentially. Gross margin was 41.1%, compared with 40.8% in the previous quarter.
Operating Loss: Operating loss was US$11.3 million, compared with operating loss of US$10.2 million in the previous quarter. The company continues to invest in a range of new technologies and services, including cloud computing, which is still loss-making.
Net Loss: Net loss from continuing operations was US$9.7 million in the second quarter of 2017, compared with US$6.7 million in the previous quarter. Non-GAAP net loss from continuing operations was US$7.5 million in the second quarter of 2017, compared with a loss of US$4.4 million in the previous quarter.
Liquidity and financial flexibility: As of June 30, 2017, the Company had cash, cash equivalents and short-term investments of US$364.8 million, compared with US$381.5 million as of December 31, 2016. The decline in the aggregate balances of cash and cash equivalents and short-term investments was primarily due to operating loss during the period.
Guidance for Third Quarter 2017: For the third quarter 2017, Xunlei estimates total revenues to be between US$41 million to US$44 million, the midpoint of the range representing a year-over-year increase of 3.9%. This estimate represents management’s preliminary view as of the date of this release, which is subject to change and any change could be material.
Key risk factors and potential stock drivers:
- M&A activity: With the significant movement in the senior management, it seems that something could be coming, and the company could also announce a merger and or takeover.
- The announcement of another significant board movement could be an instant trigger for the company.
- The company is burning cash at the high rate and therefore its ongoing liquidity, and financial flexibility would continue to be a critical business sensitivity factor.
- The company is highly dependent on retaining and growing its customer base. Therefore, changes and diversification in customer base would be a key factor for XNET;
- Presently the company is significantly dependent on its cloud computing and mobile advertising business. Positive movement in the revenue mix could be a near to medium-term trigger for the company.
- The company’ business is subject to the risk related with potential viability of its technology and regulatory support. Any adversities with the same could have a direct negative impact on its operations.
On Tuesday, October 24th, 2017, XNET is trading at $6.39 on an above average volume of 453,122.00
shares exchanging hands. Market capitalization is $433.89 million. The current RSI is 73.63
In the past 52 weeks, shares of XNET have traded as low as $3.11 and as high as 7.39
At $6.39, shares of XNET are trading above its 50-day moving average (MA) at $4.58 and above its 200-day MA at $3.87 as well.
The present support and resistance levels for the stock are at $5.65 & $6.98 respectively.
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