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.
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
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.
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
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
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.
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.
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.
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.
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%
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.
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.
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)
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.
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.”
XUNLEI DOWNLOADER Xunlei’s client software for downloads of movies, tv shows, songs, etc. Gougou search Download statusDownload list Casual online games
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
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)
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