inside xunlei (nasdaq: xnet)

INSIDE XUNLEI �

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iChinaStock.com profiles Chinese firms that are publicly-listed or may list soon in overseas markets

REPORT BY

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NASDAQ: XNET

Chinese Download Client and Online Video

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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.

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•  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.

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Xunlei �

Online advertising�

Download client� Xunlei Kankan �

Cloud-based subscription service�

Online games and others �

120.7 million monthly unique visitors �

BUSINESS MODEL �

Aprx. 138 million downloads per day in 2010

•  Over 1.3 million subscribers; •  Subscription fee of RMB 9.8 (USD 1.51) or RMB 15 (USD 2.31) per month �

Xunlei produces its own games that are promoted through its download client and its website.�

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REVENUE �

7,973 7,444 7,454 7,237

9,507 10,100

13,147

14,339

19.24%

35.68%

76.38%

98.13%

0

0.2

0.4

0.6

0.8

1

1.2

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1

(unit: $1,000) �

Net Revenue Growth Rate

Online adverEsing

51% SubscripEon

fees 26%

Games and other 23%

Revenue Breakdown in Q1. 2011 As the graph above indicates, advertising displayed on Xunlei’s download client and its video site generates more than 50% of revenues.

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PROFIT & HIGH MARGINS �

6,308 5,680 5,797

4,993

6,398 6,363

7,928

8,801

2,698 1,980

1,541 1,537 2,187

2,677 2,070 1,770

72% 70% 71% 64% 63%

59% 56% 57%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

10,000

09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1

gross profit net income/loss gross margin

Unit: $1,000�

COST OF REVENUES �

Total: 4,065

Total: 6,578

Total: 14,309

24.20% 22.20%

33.50%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2008 2009 2010

other costs

DepreciaEon of servers

Content costs

Bandwidth costs

Cost/Revenues

Unit: $1,000�

COST OF REVENUES: ��XUNLEI VS. YOUKU�

5,746

40%

5,070

35.5%

3,493

24.5%

Xunlei in 2010 Bandwidth costs Content costs Other

29,000

54% 12,500

24%

11,750

22%

Youku in 2010 Bandwidth costs Content costs Other

Total costs = 33.5% of revenue �

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.

Total costs = 91% of revenue �

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$31 $189 $495

$887 $1,413

$2,168

$2,765

$4,060

18 79 163

307

444

619

1,031

1,304

0

500

1000

1500

2000

2500

3000

3500

4000

4500

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1

SubscripEon fee Paid users

Unit: $1,000�

SUBSCRIPTION SERVICE �Unit: 1,000 paying 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.

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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 旋风) 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 (月光博客)”, Xunlei’s obvious advantage is its blazing download speeds. �

INSIDE COMPETITORS Ⅱ��

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 (unit:10,000 h) �

Percentage�

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% �

Xunlei Kankan � xunlei.com� 6,474,6� 4.2% �Source: iResearch Q1 2011

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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.

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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 (狗狗), a film search site.

•  In December 2010, the Xunlei Group sold the related domain name, trademark and software copyrights for Gougou, together with Gougou's 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.

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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)

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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.�

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CORPORATION STRUCTURE �

Xunlei Limited is a Cayman Islands company that controls various Chinese assets via contractual arrangements commonly referred to as the Variable Interest Entity (VIE) structure or colloquially the “Sina Structure.”

XUNLEI DOWNLOADER �

Download list�

Casual online games�

Xunlei’s client software for downloads of movies, tv shows, songs, etc.�

Gougou search �

Download status�

VIP SERVICE �

•  Xunlei’s VIP services includes offline download and express download, which offer faster downloads for a monthly fee of 10 RMB.

Offline download �

Express download�

XUNLEI GAMES ��YOUXI.XUNLEI.COM �

Xunlei used to rely upon revenue sharing with third-party developers, but now produces its own games that are promoted through its download client and its website, Xunlei Games.�

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© March 2011 iChinaStock

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