Agora Q3 2023 Earnings Call Transcript

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November 21, 2023

There are 5 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to Agora's Inc. Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded.

Operator

The company's earnings results, press release, earnings presentation, SEC filings and a replay of today's call can be found on its IR website at investor. Agora. Io. Joining me today are Tony Zhao, Founder, Chairman and CEO Jimbo Wang, the company's CFO. Reconciliations between the company's GAAP and non GAAP results can be found in its Earnings Press Release.

Operator

During this call, the company will make forward looking statements about its future financial performance and other future events and trends. These statements are only predictions that are based on the company's belief today and actual results may differ materially. These forward looking statements are subject to risks, uncertainties, assumptions and other factors that could affect the company's financial results and its performance of its business and which companies discuss in details in its filings and the SEC, including today's earnings press release and the Risk factors of other information is contained in the final prospectus relating to its initial public offering. Agora Inc. Remains no obligation to update any forward looking statements the companies may take on today's call.

Operator

With that, let me turn it over to Tony. Hi, Tony.

Speaker 1

Thanks, operator, and welcome, everyone, to our earnings call. In the Q3, our revenue was $15,300,000 for Agora, flat compared to last quarter and RMB141 1,000,000 for Shingwan, an increase of 7.4% quarter over quarter. As of the end of this quarter, we have more than 1600 active customers for Agora and more than 4,000 for Xinyuan, an increase of 26% and 6%, respectively, compared to 1 year ago. Now moving on to our business, product and technology updates for the quarter. Let's start with Agora.

Speaker 1

We recently announced the general availability of video based solution to power live shopping experiences. In recent years, live shopping has disrupted and transformed the entire e commerce market in China. We believe that U. S. And other developed market will soon catch up and embrace live shopping as the next big trend.

Speaker 1

According to Mackenzie, live shopping could account for 20% of all e commerce sales by 2026 And the U. S. Live shopping market is estimated to be worth $35,000,000,000 by 2024. We're also proud to mention that Agora was highlighted as a leading vendor in Gartner's recent market guide for live commerce in retail. With Agora, brands, marketplace and platforms The leading fashion live shopping platform for retailers to introduce a new functionality that allows seller to invite Sellers can easily and professionally host, celebrates can easily add Professional hosts, celebrities, influencers or VIP customers to join their live shopping session via video to provide more engaging content and boost conversion.

Speaker 1

This quarter, we also partnered with The Sandbox, A leading decentralized gaming virtual world to promote real time engagement and social interactions within the metaverse Through voice, video and chat, The SandBox chose Agora because of our comprehensive product stack, which can seamlessly integrate 3 d spatial audio, persistent text chat and interactive live streaming functionalities at scale. As a result, players' ability to connect, collaborate and form meaningful communities in the metaverse is significantly enhanced. Moving on to Sheng Wang. We recently launched Our AITC RTE SDK, a real time engagement solution connecting human users with large language models. So far, people have largely interact with AI models in text format.

Speaker 1

Only recently, companies such as OpenAI have beta launched their direct voice conversation between human users and AI models. However, there is usually a significant delay of 6 to 7 seconds or more to receive a simple voice response. Our solution has been designed to tackle the latency issue so that the users can hear the response within 2 seconds. This near real time response is close to the natural pause expected in human to human conversations and therefore provide much more engaging and near real experience for users. Our AIGC RT SDK also comes with great flexibility.

Speaker 1

Developers can easily create their application with the freedom to fit their unique use case. A video demo of our AIGC RT solution can be found in our earnings presentation with more details on its features and capabilities. Please also feel free Real world factories to see how we assist BMW in their digital transformation journey. Historically, we when local engineers needed technical support from the specialist at BMW headquarters in Germany. They had to wait at least 24 hours before the specialist could arrive on-site, which could impact manufacturing time line and even cost delays in delivery.

Speaker 1

Our solution enables the remote specialist at BMW Headquarter to remotely inspect Even the smallest detail with HD video and low latency. In addition, when the specialist Makes inquiries or provide instructions, local engineers can see exactly where the specialist is marking with the help of AR Devices. This solution demonstrates our commitment to becoming a trusted partner of Large Enterprise for their digital transformation initiatives. Last month, we held our RTE conference For the 9th consecutive year, where we discuss the role We have been leveraging AI To enhance the quality of experience in real time engagement for a long time, we developed the AI powered real time on device On the video front, our AI based real time on device algorithms, such as super resolution, Perceptual video coding, off chip segmentation, adaptive coding and video quality assessments enable us to deliver optimal video quality and viewing experience up to 4 ks resolution. Many of our customers worldwide have integrated our latest SDKs with these AI technologies and more are in the process to upgrade.

Speaker 1

With our constant pursuit of more efficient AI powered SDK to overcome the limits of device and network infrastructures. We have substantially reduced the barrier to high quality RTE. This means that people around the world, Even those without the latest smartphones or access to high speed Internet can now enjoy a wide range of RT use cases, Just like how they have access to basic utilities such as clean water and electricity. With billions of smartphones and devices powered by our SDK with AI driven capabilities, We are making solid progress to realize our mission of making real time engagement new business and allowing everyone to interact with anyone, anytime and anywhere. We have also closely followed the development of large language model and generating AI around the world.

Speaker 1

As mentioned earlier, Our AIPC RT solution enables developers to put AI powered characters into voice conversation with users. We have been working closely with some customers and expect to see them launch their innovative use cases soon, such as AI companions or personal assistance, social deduction games with AI players and AI tutors to help users learn from foreign language As large language models continue to advance in their ability to process and generate multimodal information, Substantial amount of data in video and audio format will need to be transmitted between human users and AI models. The volume of such data will one day surpass today's human to human traffic, and we are uniquely positioned to become the critical infrastructure that enables human users and AI models to interact with each other through video and audio. Before concluding my prepared remarks, I would also like to announce a change in our Board of Directors. Mr.

Speaker 1

Tak Lai Koh has tendered his voluntary resignation due to personal reasons. Tak has been working with us since our inception a decade ago, first as an investor, then as a Director since 2018. I would like to sincerely thank Tak for his dedicated service and invaluable advice to our Board. Ms. Shawn Zhong, currently our Chief Technology Officer and Chief Scientist, has been appointed as the Director.

Speaker 1

I would like to warmly welcome Sean to join our Board, And I'm confident that Sean's insights and expertise will help the Board and the company stay on the forefront of real time engagement technology and create long term value to our shareholders. With that, let me turn things over to Qingbo,

Speaker 2

Thank you, Tony. Hello, everyone. Let me start by first reviewing financial results for the Q3, and then I will discuss outlook for the Q4 of 2023. Total revenues were $35,000,000 in the Q3 of 2023, an increase of 2.9% quarter over quarter and a decrease of 14.6 percent year over year. Agora revenues were $15,300,000 in the 3rd quarter, flat compared to last quarter and decreased 8.9% year over year.

Speaker 2

The year over year decrease was primarily due to reduced usage and increased pricing sensitivity from customers in emerging markets Due to challenging macroeconomic environment and tightening financing conditions starting from the second half of last year, Shunmang revenues were RMB 141,200,000 in the 3rd quarter, an increase of 7.4% quarter over quarter and a decrease of 9.2% year over year, Excluding revenues from the disposed CEC business, the quarter over quarter increase was primarily due to an increase In revenues from digital transformation customers or large enterprises, this is an area where we have seen strong revenue growth in the past 2 years. Going forward, we believe digital transformation market will become an increasingly important revenue and product contributor for the Xunhua business. The year over year decrease was primarily due to Dollar based net retention rate is 98% for the quarter and 89% for Xunghu, excluding revenues from discontinued business. Moving on to costs and expenses. For my following comments, I will focus on non GAAP adjusted financial measures, which exclude share based compensation expenses, acquisition related expenses, Financing related expenses, amortization expenses of acquired intangible assets, income tax related to acquired intangible assets, impairment of goodwill, depreciation of property and equipment and amortization of land use rights.

Speaker 2

Adjusted gross margin for the 3rd quarter was 66.9%, 3.3% higher than Q3 2022, mainly due to the change in product mix and the implementation of technical and infrastructure optimizations. As mentioned in previous earnings calls, we restructured and reduced our global workforce in Q4 last year, And we have continued to implement effective expense controls. As a result, adjusted R and D expenses were $15,700,000 in Q3, decreased 36.4% year over year. Adjusted R and D expenses represented 44.8% of total revenues in the quarter compared to 60.2% in Q3 last year. Adjusted sales and marketing expenses were $6,600,000 in Q3, decreased 48.8% year over year.

Speaker 2

So the marketing expenses represented 18.9 percent of total revenues in the quarter compared to 31.5% in Q3 last year. Adjusted G and A expenses were $6,200,000 in Q3, decreased 15.1% year over year. G and A expenses represented 17.6% of total revenues in the quarter compared to 17.7% in Q3 last year. Adjusted EBITDA was negative $4,400,000 translating to a 12.7 percent Adjusted EBITDA loss margin in 4th quarter, significantly lower than the loss margin of 40% in Q3 last year. Investment loss was $13,400,000 in Q3, mainly due to the fair value change and equity investment of $7,000,000 and loss on investments in certain private companies of 6,300,000 Non GAAP net loss, excluding the investment loss, was $2,200,000 in Q3, translating to a 6.3% net loss margin for the quarter compared to a non GAAP net loss margin of 42.9% in Q3 last year and 19.4% in Q2 this year.

Speaker 2

Now turning to cash flow. Operating cash flow was negative $3,000,000 in Q3 compared to negative $8,800,000 last year. Free cash flow was negative $3,200,000 compared to negative $9,900,000 last year. Moving on to balance sheet. We ended Q3 with $373,400,000 in cash, cash equivalents, bank deposits and financial products issued by banks.

Speaker 2

Net cash outflow End quarter was mainly due to free cash flow of negative $3,200,000 and share repurchase of 12,500,000. Thanks to the Board approved our share repurchase program in February 2022 And as of September 30, 2023, we have returned approximately 94,300,000 Dollars to shareholders through share repurchase, demonstrating the Board's commitment to safeguarding shareholder value and its confidence in the long term prospect of the company. As of September 30, 2023, The company had approximately 94,300,000 ADS outstanding, reflecting a 16% Reduction in total shares outstanding compared to January 31, 2022, before the share repurchase program started. So far, we have completed 47% of a $200,000,000 share repurchase program, which will expire as in February 2024. And we intend to continue to undertake this meaningful capital return to our shareholders.

Speaker 2

Now turning to guidance. For the Q4 of 2023, we currently expect total revenues to be between 35,500,000 at 37.5 minutes. This forecast reflects our current and preliminary view on the market and operational conditions, which are subject to change. In closing, We are very proud of our execution in this quarter, especially the significant improvement in profitability. We'll stick to our strategy and be laser focused on driving revenues and improving efficiency.

Speaker 2

For the long run, as Tony just mentioned, we're excited to see emerging IGC use cases, and we are well prepared to help developers Thank you to both the Core and Shuang teams for your hard work and to our investors for your trust. Thank you, everyone, for attending the call today. Operator, Let's open it up for questions.

Operator

Thank you. We will now conduct the Q and A session. First, we have Tom Tang from Morgan Stanley. Please go ahead.

Speaker 3

Thanks, management for the chance to ask questions. This is Tom from Mona Stanley. So I have two questions. The first one is regarding the 2024 outlook for Do you have a breakdown between Agora and Shingwa with this? And the second question is regarding the competition landscape in both China and other cities?

Speaker 3

Thank you.

Speaker 1

Sure. The status for both Shuang and Agora for Agora side, I think The growth global market overall, I'm optimistic about demand in mid term to long term. I think one big factor is the pandemic actually really changed consumer behaviors. Before the pandemic, the only scenario where people use real time audio video is basically web conferencing. The U.

Speaker 1

S. Market, people are not that get used or Familiar with all other use cases like co watching experience, etcetera. Now, after pandemic, although in some of the use cases, The volume decreased, but consumers are more adapt to all type of real time engagement Activities online such as shopping with live conversations and releasing With live sessions online or cold watching or watch party, I think the overall, those consumer behavior change can help us to see a lot of growth in both use cases and volume. Meanwhile, the macro environment is still challenging, but it is for all companies operating in this market. As a matter of fact, we actually see some small competitors start to run into financial difficulties.

Speaker 1

For 2024, our goal is to stabilize our existing Business and grow into new regions and new use cases. In China market, a lot of macro and Regulatory headwinds, as you probably already know, but usage on our platform continue to grow. Our market share in new app adoptions also increased nearly 20% this year. And our digital transformation business serving large enterprise also grew more than 50% this year. For 2024, we expect our digital transformation business to continue to grow and our goal for the Internet business is to further end market share.

Speaker 1

And on the question about the demand and the pricing, For a growth market, our number of customers continue to grow at about 25%, as I mentioned earlier. Also, we see some more use cases start to emerge into growth mode, such as live shopping. And also mentioned the consumer behavior change actually give us Hope that there will be more growth potential in both use cases and the volume. Overall, the Challenging environment is still there and those in near term still impact the operation. But a lot of potentials in the medium to long term timeframe.

Speaker 1

Pricing wise, more pressure in emerging markets, but price has been healthy and stable in developed market. In China, overall, demand is stable from Internet customers With some bright spot, such as online karaoke and premium broadcasting streaming products, We see strong demand from digital transformation side, as I mentioned. Pricing in Internet sector Generally, it's dropped about 10% each year, but our gross margin remains healthy. Pricing in digital transformation is also more attractive in this market.

Operator

Thank you. Next, we have Daley Li from BofA Securities.

Speaker 4

Hi management, thanks for taking my question. One question about the AI. You mentioned there's more application scenarios for the AI Like AI assistant, AI tutoring, etcetera. And when do you think the AI can really Have more meaningful revenue contribution from our business or in which allocation do you think which have could have much

Speaker 1

Yes. You're right. As I also talked about, there are many Financials in all sorts of use cases like AI companions, AI game players, etcetera. However, as I also mentioned, we rolled out this AIGC RT SDK module in the last few months. We do have optimistic view of those potentials, just In a very basic concept, there is going to be much more real time audio video traffic among Not just humans, but between human and AI models.

Speaker 1

That's the long term future. However, the development is still undergoing. I think there's a lot of things need to figure out for large language model to be able to really act as Human like personas like the AI company or player in certain games, That's where we work with we work hard with a lot of our customers and partners together to try to bring it to real life. And I don't want to overestimate in near term of such growth. This is really like in the states that we and our customers and partners trying to validate and break through into

Speaker 4

Thank you.

Operator

Thank you. Thank you. There are no further questions. Thank you everybody for attending this company's call today. As a reminder, the recording and the earnings release will be available on the company's website at investor.

Operator

Agora. Io. And if there's any questions, please feel free to e mail the company. Thank you, and have a great day.

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Agora Q3 2023
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