Inside Xunlei (NASDAQ: XNET)

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Xunlei is China’s largest download client for software, video, and music downloads. It also operates an video website, Xunlei Kankan. Xunlei will list on NASDAQ on July 20 under the ticker XNET. By …

Xunlei is China’s largest download client for software, video, and music downloads. It also operates an video website, Xunlei Kankan. Xunlei will list on NASDAQ on July 20 under the ticker XNET. By iChinaStock.

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  • 1. INSIDE INSIDE XUNLEI NASDAQ: XNET   Chinese Download Client and Online Video       REPORT BY iChinaStock.com profiles Chinese firmsthat are publicly-listed or may list soon inoverseas markets
  • 2. INSIDE SUMMARY•  Xunlei is China’s largest download client for software, video, and music downloads. It also operates an video website, Xunlei Kankan. As of February 2011, Xunlei claimed 291 million active users. •  Xunlei’s revenue breakdown: 51% online advertising, 26% subscription fees, and 23% from games and other. Its 2011 Q1 revenues were $14.3 million, with gross profits of $8.8 million and net income of $1.7 million. •  Market Share: Xunlei held 78.7% market share among all download software in China as of February 2011. Among online video sites, Xunlei KanKan ranks fifth with 4.2% market share, according to iResearch. •  Xunlei will list on NASDAQ on July 20 under the ticker XNET. At the midpoint of its IPO price range ($15), Xunlei would raise $112.5 million at a valuation of $916 million.
  • 3. INSIDE BUSINESS MODEL Xunlei Online advertising Cloud-based Online games subscription service and others •  Over 1.3 million subscribers; Xunlei produces its own •  Subscription fee of RMB 9.8 games that are promoted Download (USD 1.51) or RMB 15 (USD through its download Xunlei Kankan client 2.31) per month client and its website.Aprx. 138 million 120.7 million monthlydownloads per day in 2010 unique visitors
  • 4. INSIDE REVENUE (unit:  $1,000) Games  and   other  16,000   1.2   23%   14,339  14,000   13,147   Online   1   adverEsing  12,000   98.13%   51%   SubscripEon   10,100   0.8   9,507   fees  10,000   76.38%   26%   7,973   8,000   7,444   7,454   7,237   0.6   6,000   35.68%   0.4   4,000   Revenue Breakdown in Q1. 2011 19.24%   0.2   2,000   As the graph above indicates, advertising displayed on Xunlei’s 0   0   download client and its video site 2009Q2   2009Q3   2009Q4   2010Q1   2010Q2   2010Q3   2010Q4   2011Q1   generates more than 50% of revenues. Net  Revenue   Growth  Rate  
  • 5. INSIDE PROFIT & HIGH MARGINS Unit:  $1,00010,000   80.00%   8,801   9,000   72%   70%   71%   70.00%   7,928   8,000   64%   63%   7,000   6,398   6,363   59%   56%   57%   60.00%   6,308   6,000   5,680   5,797   50.00%   4,993   5,000   40.00%   4,000   30.00%   2,698   2,677   3,000   2,187   1,980   2,070   1,770   20.00%   2,000   1,541   1,537   1,000   10.00%   0   0.00%   09Q2   09Q3   09Q4   10Q1   10Q2   10Q3   10Q4   11Q1   gross  profit   net  income/loss   gross  margin  
  • 6. Unit:  $1,000 COST OF REVENUES 16,000   40%   Total:  14,309     14,000   35%   33.50%   12,000   30%   10,000   25%   other  costs   24.20%   22.20%   DepreciaEon  of  servers   8,000   20%   Total:  6,578     Content  costs   6,000   15%   Bandwidth  costs   Total:  4,065   Cost/Revenues   4,000   10%   2,000   5%   0   0%   2008   2009   2010  
  • 7. COST OF REVENUES:  XUNLEI VS. YOUKU Xunlei  in  2010   Youku  in  2010  Bandwidth  costs   Content  costs   Other   Bandwidth  costs   Content  costs   Other   Total costs = 33.5% of revenue Total costs = 91% of revenue 3,493   11,750     5,746     24.5%     22%   40%   29,000     12,500   54%   5,070       24%   35.5%   Unit: $1,000 Unit: $1,000 As opposed to online video sites like Youku, Xunlei is already a profitable firm. Its cost of revenues are significantly lower, particularly in terms of bandwidth expenses.
  • 8. INSIDE SUBSCRIPTION SERVICEUnit: 1,000 paying users Unit: $1,0001,400,000   1,304   4500   4000  1,200,000   $4,060   1,031   3500  1,000,000   3000   800,000   $2,765   2500   619   600,000   2000   444   $2,168   1500   400,000   307   $1,413   1000   200,000   163   $887   79   500   18   $495   0   $31   $189   0   09Q2   09Q3   09Q4   10Q1   10Q2   10Q3   10Q4   11Q1   SubscripEon  fee   Paid  users   Cloud-based offline downloads and express downloads are the core of Xunlei’s VIP service, which now has 1.3 million paying users. They grant users the blazing fast download speeds that are Xunlei’s big appeal.
  • 9. INSIDE PRODUCTS STRUCTURE•  Xunlei launched its digital media download services in 2004, digital media streaming services in 2007, online games offerings in 2008 and cloud-based subscription services in 2009. •  Cloud-based offline downloads and express downloads are the core of Xunlei’s VIP service.
  • 10. INSIDE COMPETITORS I DOWNLOAD CLIENTS•  Xunlei held 78.7% market share among all download software in China in February 2011, according to iResearch. •  QQ Xuanfeng (QQ Cyclone or QQ ) by Tencent is Xunlei’s main competitor in the download client market. It also provides cloud-based offline downloading services. •  Users must subscribe to Xunlei’s offline download service at the price of 10 yuan/month. QQ Xuanfeng is free with a QQ VIP membership (paid). •  The maximum transfer volume per user for Xunlei is 1 PB, while QQ Xuanfeng is 50 GB. •  According to Chinese IT blog “Moonlight ( )”, Xunlei’s obvious advantage is its blazing download speeds.
  • 11. INSIDE COMPETITORS  Online Video•  Much of Xunlei’s download content is video, but the company also operate its own video website, where it faces fierce competition from other sites and services including Youku (NYSE: YOKU), Ku6 (NASDAQ: KUTV), Tudou, PPLive, PPTV, Qiyi, and others.•  The main cost of its video website is bandwidth and content licensing. Players in China’s online video market are all investing large sums to gain market share, though the economics are at present less appealing than download clients. (See “Cost of revenues” on slide 7) China’s Top 5 Online Video Sites Name Domain Visitor Time Percentage (unit:10,000 h) Youku youku.com 47,426.7 31.0% Tudou tudou.com 24,558.6 16.0% Sohu tv.sohu.com 22,419.5 14.6% Qiyi qiyi.com 18,579.5 12.1% Source: iResearch Q1 2011   Xunlei Kankan xunlei.com 6,474,6 4.2%
  • 12. INSIDE COPYRIGHT ISSUES•  Xunlei still faces 32 pending copyright infringement lawsuits. But it should be noted that Chinese law is not clear as to whether software or sites are responsible for policing pirated content that is downloaded via peer-to-peer (P2P) technology. •  Xunlei notes that 87% of lawsuits to-date against it have been resolved in their favor by Chinese courts. The monetary fines for copyright infringement are generally so small as to be immaterial to the company’s bottom-line (a total of about USD $200,000 to-date). •  Xunlei is likely more concerned about the reactions of foreign investors than the Chinese government when it comes to copyright issues. In preparation for its IPO, Xunlei removed the pirated content that used to be promoted front and center in its service. •  But users still use Xunlei to download pirated material by obtaining links from 3rd party sites that can then be entered into Xunlei’s client download software. If a user pays for the VIP ‘cloud download’ service, that pirated content can even first be downloaded directly onto Xunlei’s servers for that user to watch.
  • 13. INSIDE COPYRIGHT ISSUES II•  The majority of outstanding lawsuits are related to videos available on its Xunlei Kankan website and third-party content accessible through links provided by Gougou ( ), a film search site. •  In December 2010, the Xunlei Group sold the related domain name, trademark and software copyrights for Gougou, together with Gougous assets, to a third-party at a consideration of RMB10,000 (equivalent to USD1,471). •  The sale of Gougou to a third-party, still the featured search engine on Xunlei’s download manager, was likely to reduce Xunlei’s exposure to copyright issues.
  • 14. INSIDE INVESTMENT STATUS•  In 2007, Google invested $5 million in Xunlei and currently holds 2.8 percent of shares. •  In April 2011, the Murdochs made a $29.4 million third-round investment in the company through RW Investments LLC (“R” for Rupert, “W” for Wendi”). It is not a News Corp (NASDQ: NWS) investment. •  Sohu (NASDAQ: SOHU), a leading Chinese internet portal, has agreed to purchase USD $10 million in Class A common shares at a price equal to the IPO price. Assuming an initial offering price of USD $15 per ADS, Sohu will purchase a total of 2 million Class A common shares from Xunlei. (Note: 1 ADS = 3 common shares)
  • 15. INSIDE LISTING STATUS•  Xunlei will list on NASDAQ on July 20 under the ticker XNET. At the midpoint of its IPO price range ($15), Xunlei would raise $112.5 million at a valuation of $916 million. Use of proceeds: • USD $20 million to establish a customer service center and cloud computing data centers to better serve our subscribers;   • USD $20 million to acquire digital media content and exclusive online game licenses;   • USD $10 million to invest in technology, infrastructure and product development efforts; • The balance for other general corporate purposes, including working capital needs and potential acquisitions.
  • 16. INSIDE CORPORATION STRUCTUREXunlei Limited is a Cayman Islands company that controls various Chinese assets via contractual arrangementscommonly referred to as the Variable Interest Entity (VIE) structure or colloquially the “Sina Structure.”
  • 17. XUNLEI DOWNLOADER Xunlei’s client software for downloads of movies, tv shows, songs, etc. Gougou search Download statusDownload list Casual online games
  • 18. VIP SERVICE•  Xunlei’s VIP services includes offline download and express download, which offer faster downloads for a monthly fee of 10 RMB. Express download Offline download
  • 19. Xunlei Kankan is an online video site XUNLEI KANKAN that focuses on professionally produced content, similar to other competitors like Sohu TV and Baidu’s Qiyi XUNLEI.COMHome | Movies | TV | Reality shows | Comedy | News | Entertainment | Fashion | Auto | Travel Top moviesIncludes sponsored content from online brands like VANCL (online apparel), Okbuy (e-commerce, Moonbasa (fashion),and Yihaodian (online groceries)
  • 20. Xunlei used to rely upon revenue sharing with third-party developers, butXUNLEI GAMES now produces its own games that are promoted through its download client and its website, Xunlei Games. YOUXI.XUNLEI.COM Home | Charge up | Service | Forum
  • 21. INSIDE ABOUT ICHINASTOCK Snowball Finance is a financial media platform that includes two sites. One is iMeigu.com, a Chinese-language site that covers all US-listed stocks. The other is iChinaStock.com, an English-language site that covers Chinese stocks listed in the US. Each site provides stock quotes, business news, and analysis. Snowball Finance has also established my.iMeigu.com, a Web 2.0 platform for global investors to share news and insights on stocks they follow. Snowball Finance also publishes the iChinaStock 30 Index, a representative sample of Chinese stocks on the NYSE and NASDAQ. © March 2011 iChinaStock