Agora Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 30, 2023

There are 6 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Agora Inc. First 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

I'd now like to hand the conference over to the IR Director, Ms. Fiona Chen. Please go ahead, ma'am.

Speaker 1

Thank you, operator. Good morning and evening, everyone. Thank you for joining us for Agora Inc. Q1 2023 earnings conference call. Our earnings results, press release, earnings presentation and an explanatory note on certain reporting and disclosure investor.

Speaker 1

Agora. Io. Joining me today are Tony Zhao, Founder, Chairman and CEO Jingbo Wang, our CFO. Reconciliations between our GAAP and non GAAP results can be found in our earnings press release. During this call, we will make forward looking statements about our future financial performance and other future events and the trends.

Speaker 1

These statements are only predictions that are based on what we believe today and actual results may differ materially. These forward looking statements are subject to risks, uncertainties, assumptions and other factors that could affect our financial results and the performance of our business and which we discuss in detail in our filings with the SEC, including today's earnings, press release and the risk factors and other information contained in the final prospectus relating to our initial public offering. Agora Inc. Remains no obligation to update any forward looking statements we may make on today's call. With that, let me turn it over to Tony.

Speaker 1

Hi, Tony.

Speaker 2

Thanks, Fiona, And welcome, everyone, to our earnings call. Before diving into our operational results for the quarter, I would first like to make a few remarks regarding recent changes in the organizational structure of our company. Since our inception 9 years ago, we have mostly operated under the Agora brand globally To better meet the requirements of our customers and compete more effectively in the unique markets we serve, We will now operate 2 independent divisions under the same holding company. Our Agora division will focus on our business In the US and international markets, our Shingwan division will focus our business focus on our business in the China market. Agora and Shuang will each be run by a local management team and adopt local standards and best practice.

Speaker 2

We have appointed Stanley Wei as Chief Operating Officer of Agora and Robin Liu as We believe this strategic reorganization will allow us To optimally focus our resources on the specific needs and priorities of each business, Agora will focus on acceleration of growth and on gaining market share in the US and international markets, Leveraging our leading technology and comprehensive product offerings, Shen Wang will focused on enhancing our quality of experience advantage and improving the ease of adoption of our products, Further strengthening our competitive position in the China market. By empowering the local management team Of each division, we will be able to respond more quickly to the needs of our customers and become more agile as new opportunities emerge. From this quarter onwards, we will report our revenue and operating metrics separately for Agora and Shingwan to help investors better understand the dynamics and our operational results in each of these markets. Our revenue for the Q4 was $15,100,000 for Agora, up 10% year over year and $21,300,000 for XiongWang, down 14% year over year. Agora's revenue growth was primarily due to business expansion and usage growth in U.

Speaker 2

S. And international markets. Shunwan's decrease in revenue was primarily due to the appreciation of U. S. Dollar, our disposal of e small Customer engagement cloud business and decrease in usage from K-twelve academic tutoring customers.

Speaker 2

After adjusting for these factors, Shenhua's revenue would have increased by 3% compared to the same quarter last year. As of the end of this quarter, we have nearly 1500 active customers for Agora and nearly 4,000 for Xiamo, an increase of 31% and 2%, respectively, compared to 1 year ago. Now moving on to our product and technology updates. First, starting with Agora. The flexible classroom, our local APAS solution designed for building scalable and customizable online classroom has continued to gain momentum in the U.

Speaker 2

S. And the global market Previously, we mentioned our partnership with FCC to accelerate the adoption of real time engagements in VR applications. In HPC's wide ecosystem, developers use our video SDK to power real time collaboration between end users Within virtual environments, recently, we were recognized as a Webby Award Honorary Under the category of metaverse, immersive and virtual, best real time experience for how our technology is used in HTC's To further increase the value of our premium and enterprise support package For our customers, we have added integrations with Okta and Datadog. The Okta integration enables The data integration with Agora Analytics enables customers to push analytics data and Visualization. Moving on to Shouang.

Speaker 2

We recently upgraded our real time karate product. When this solution was first launched in 2021, it could accommodate 2 users tuning together at the same time. If a third user wanted to join, 1 of the 2 current users would have to give up the microphone. This limitation was mainly due to the technology challenge at the time of mixing multiple real time Soundtracks in a highly synchronous manner and delivers output to all users with low latency. With our latest version, up to 8 users can now sync together, which unlocks a wide range of new features for our customers' applications.

Speaker 2

For example, all users in the virtual karaoke room can now participate in a singing battle We'll take random turns singing part of songs together. In part by our upgraded product, All customers can now replicate in person karate experience within their application. Next, I would like to discuss the combination of generative AI and real time engagement and the enormous opportunity this combination holds for the future. Since the end of last year, the world has been captivated by the latest advance in large language model and Generative AI. People widely believe that Generative AI, despite being in its early stage, will drive significant paradigm shifts in many industries and real time engagement is no exception.

Speaker 2

Generative AI can empower customers to dramatically enhance new user experience in their applications or create new use cases that were previously impossible. Let's look at some examples. The advent of powerful large language model has significantly improved the performance of chatbots in text format, as can be seen in the growing popularity of chat GPT and AI powered search engines. However, this is only the beginning As AI models continue to evolve and gain more powerful multimodal capabilities, They will become more adept at processing voice and video feeds and generating response in real time. Using IoT Hubbells as input output devices, people will have an all powerful human like AI body that can provide information, carry on tasks or engage in casual chats all through voice and video.

Speaker 2

Education is another industry where people have strong hopes AI powered tutors can generate personalized learning plans and deliver learning content in an interactive manner With everything tailored to best match a student's learning progress, pattern and real time feedback. In addition, AI tutoring can also provide affordable and tailored education opportunity To those who previously did not have access to a quality education, There is also huge potential for generative AI to disrupt the social entertainment and gaming industry. A virtual matchmaker can do the job of making initial introduction and facilitating conversations Just as well as a real person in the dating application, if you need to leave an interactive session for a short while When you come back, a summary can be immediately available for you to catch up. For online social gaming, It will become almost impossible to tell if your teammates or opponents are real player or AI controlled non player characters. Looking at the examples above and many others, we see something in common.

Speaker 2

Generative AI can significantly expand the scope and opportunity of real time engagements. Previously, real time engagement largely took place among groups of people. With the help of large language model, RT can now occur between among people, digital twins of people and fully virtual AI based characters, opening the door to a much broader range of possible use cases. In addition, With greatly enhanced user experience, RT will become more intelligent, immersive and enjoyable. This trend will likely increase the overall usage of real time engagement solutions multiple times and bring more business opportunities.

Speaker 2

We have been working closely with our customers to create pilot applications in certain verticals, and we will continue to monitor the latest developments while assisting our customers in utilizing generative AI in their real time engagement use cases. Before concluding my prepared remarks, I want to thank both Agora and Sheng Wang team for their hard work During this transitional period, I believe this strategic reorganization will sharpen our identity and strengthen our position in both the global and talent markets and most importantly, allow us to serve developers and customers in a more agile and efficient way. With that, let me turn things over to Jingbo, Hu will review our financial results.

Speaker 3

Thank you, Tuncie. Hello, everyone. Let me start by first discussing certain reporting and disclosure adjustments in our financial results. Now I will review financial results for the Q1 and outlook for the Q2 of 2023. Following our recent reorganization, Agora Inc.

Speaker 3

Is now the holding company of 2 independent businesses, Agora and Shungo, which will operate under their own unique brands and distinct legal entities and will be run by separate local management teams. Beginning from the Q1 of 2023, we will report revenues separately for Agora and Shengwo Based on the legal entities with which customer enter into contracts, this differs from our previous practice, which was to separately report revenues for China and U. S. And international based on geographies of usage. For example, certain Chinese customers offered applications that primarily target end users outside China.

Speaker 3

Such revenues were previously included under U. S. And International. We now include such revenues under Shunhua to reflect the domicile of contractual relationships. For the same reason, we will report Number of active customers and dollar based net retention rate or DBRR separately for Okoro and Shungwon.

Speaker 3

Our definition of active customers remain unchanged. The calculation methodology of retention rate is same as expansion rate, which is a term we previously used. As almost all revenues Generated from Agora customers are denominated in U. S. Dollar and almost all revenues generated from Shunwan customers Revenues for Eastmont's chat API business will also be included in calculating active customers and retention rate for Xiongong Business.

Speaker 3

A detailed explanatory note, Including our recast historical results reflecting these adjustments can be found on Investor Relations website. Moving on to our financial results for Q1. Agora revenues were $15,100,000 in the Q1 of 2023, an increase of 10.2% year over year and a decrease of 4.4% quarter over quarter. The year over year increase was primarily due to As we mentioned in previous earnings calls, the interest rate hikes, worldwide inflationary pressure and tightening of inter capital funding Starting from the second half of last year, it negatively impacted some of our customers' business and financial conditions and the ability to raise funding, which led to reduced usage of our products and increased pricing sensitivity. Xueluang revenues were $21,300,000 in the Q1 of 2023, A decrease of 14.5% year over year and a decrease of 12.3% quarter over quarter.

Speaker 3

The year over year decrease was primarily due to the disposal of Vismar's Customer Engagement Cloud Business, a decrease in usage from K-twelve academic tutoring sector following regulatory change and the depreciation of RMB against U. S. Dollar. If we exclude these factors, revenue denominated in RMB would have increased 2.7% year over year. The quarter over quarter decrease was primarily due to the disposal of customer engagement cloud business, Lower usage during Chinese New Year holiday for Internet customers and longer than expected sales cycle for traditional enterprise customers.

Speaker 3

Dollar based net retention rate for Cora is 130%. Dollar based net retention rate for Xiamo is 92%, excluding revenues from the K-twelve academic tutoring sector. Moving on to costs and expenses. For my following comments, I will focus on non GAAP results, which excludes share based compensation expenses, acquisition related expenses, financing related expenses, Amortization expenses of acquired intangible assets, income tax related to acquired intangible assets and Impairment of Goodwill. Non GAAP gross margin for the 1st quarter was 63.3%, which was 0.3% higher than Q1 2022, mainly due to the disposal of Customer Engagement Cloud Business, which had lower gross margin.

Speaker 3

As we mentioned in our previous earnings call, we restructured and reduced our global workforce in Q4 2022. As a result, Non GAAP R and D expenses were $17,400,000 in Q1, a decrease of 31.2% year over year. Non GAAP R and D expenses represented 47.8% of total revenue in the quarter compared to 65.6% in Q1 last year. Non GAAP sales and marketing expenses were $8,500,000 in Q1, a decrease of 26.3% year over year. Sales and marketing expenses represented 23.4 percent of total revenues in the quarter compared to 30% in Q1 last year.

Speaker 3

Non GAAP G and A expenses were $6,900,000 in Q1, a decrease of 7% year over year. G and A expenses represented 18.8% of total revenues in the quarter compared to 19.1% in Q1 last year. Non GAAP operating loss was $9,200,000 translating to a 25.4 percent non GAAP operating loss margin for the quarter compared to an operating loss margin of 49% in Q1 last year. Adjusted EBITDA was negative $6,400,000 translating to a 17.7% Adjusted EBITDA loss margin for the quarter significantly lower than the loss margin of 42.6% in Q1 last year. Investment loss was RMB4.4 million in Q1, primarily due to the fair value change in equity investments of $2,900,000 credit loss in debt investments of $1,200,000 as well as disposal loss of $300,000 Now turning to cash flow.

Speaker 3

Operating cash flow was negative $8,900,000 in Q1 compared to negative $15,900,000 last year. Free cash flow was negative $9,100,000 compared to negative $17,000,000 last year. Moving on to the balance sheet, we ended Q1 with $416,500,000 in cash, cash equivalents, bank deposits and financial products issued by banks. Net cash outflow in the quarter was mainly due to free cash flow of negative $9,100,000 share repurchase of $19,400,000 and cash paid in relation to headquarters project of 5.1000000. During Q1, We repurchased approximately 21,600,000 of our Class A ordinary shares, Equivalent to 5,400,000 ADS for $19,500,000 representing 10% Of our 200,000,000 share repurchase program, as of the end of Q1, We have in aggregate repurchased approximately 57,400,000 of our Class A ordinary shares equivalent to 14,400,000 ADS for $61,300,000 representing 31% of our share repurchase program.

Speaker 3

Now turning to guidance. Recently, we saw increased uncertainties in macroeconomic conditions, Such as foreign exchange rate, inflation and interest rates, which may have greater than expected Impact on our customers' business and in turn add more uncertainty to our revenues. Therefore, starting this quarter, We'll be providing quarterly revenue guidance instead of full year guidance. For the Q2 of 2023, We currently expect total revenues to be in the range of $34,000,000 $37,000,000 This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change. In closing, I want to express my deepest appreciation to both Agora and Xiongong team for your hard work Thank you, everyone, for attending the call today.

Speaker 3

Let's open it up for questions.

Operator

Thank you. Our first question comes from the line of Yang Liu from Morgan Stanley. Please go ahead, Yang.

Speaker 4

Thanks for the opportunity to ask questions. Two questions from my side. The first one is about the outlook. The number implies a largely flattish or slightly sequential decline in Q2. Could management share more about the outlook for Shenhua and Agora differently for the Q2?

Speaker 4

Do you see further diverging of the growth trend or similar trend in the next few quarters for the 2 entities. And my second question is regarding the AI impact to the company. Tony mentioned a lot in terms of The product and the customer demand or use case driven by the new AIGC technology, But I'm wondering if there's any potential cost saving room from the new technology. Thank you.

Speaker 2

All right. I'll talk about discuss The demand from both markets, on Shuang's side, we can broadly push Shuang's customer into 3 segments. 1 is domestic digital native and another is Domestic diesel transformation and going overseas customers. On diesel native customers, Recently, demand remained soft, primarily due to macroeconomic challenges and regulation. However, on this segment, as I mentioned earlier, we also see large opportunities on generative AI powered use cases that would take some time.

Speaker 2

On digital transformation side, recently, we saw longer sales cycle, but there is clearly a lot of unmet demand from traditional enterprises. We expect this segment to generate sustained growth

Operator

for us.

Speaker 2

Ongoing overseas customers, the overall growth momentum has been strong. On Agora side, We see overall positive demand momentum in more developed market, especially on the following verticals: Live streaming e commerce, creator and fans economy, Sports live streaming, future of work. For emerging markets, We see pressure on our customers due to macroeconomic challenges and market competition, such as in South Asia and Southeast Asia. That's from the outlook of the demand side. And generative AI side, we actually have invested in this area for quite some time to help improve the audio video quality.

Speaker 2

And as I mentioned, large language model Can actually help create more use cases in many verticals. But if your question is around reduced cost, I don't think it's going to hugely help us to reduce cost. But in terms of disrupting like many business models like in education, AI powered Tutor can be much cheaper than a real tutor or virtual celebrity or similar Can also be much cheaper or virtual matchmaker, the same sense or even in social space. As you can see, a popular character who's busy talking to people in one social platform Tanvi also an AI powered person to reduce the platform's cost to maintain and pay A real person who's active on that platform. I think on those, it can hugely disrupt their business.

Speaker 4

Thank you.

Operator

Right. Thank you. Our next question comes from the line of Daley Li from Bank of America Securities. Please ask your question, Daley.

Speaker 3

Hi. Thanks management for taking my question. I have one question regarding our international, The Agora business for this quarter has since delivered quite solid growth. I know what's the key drivers for

Speaker 4

Thank you.

Speaker 3

As we explained in previous earnings calls, so the market in China and the market in U. S. And international markets At different stage of development in terms of adopting the RT technology. So China market is comparatively more mature. So in the past 18, 24 months, we certainly see U.

Speaker 3

S. Market is catching up quite rapidly. For example, the live streaming e commerce use case That was already popular in China 2 years ago and probably even earlier. But that's really just taken off in the past 12, 18 months in the U. S.

Speaker 3

And that has driven a lot of new demand for technology. Also, we have been expanding into More geographic regions, South Asia, Middle East and even South America. So that explains the stronger growth momentum on the Agora side. And looking forward, as Tony just explained, In China, we do see more kind of macro challenges, the overall macroeconomic environment and also regulation In terms of the more traditional enterprise customers in China, we also see more budget constraints. So looking at the next few quarters, we are also more optimistic in terms of demand for the aircraft side.

Operator

Thank you. Our next question comes from the line of Ethan Zhang from Nomura. Please ask your question, Ethan.

Speaker 5

Hi. Thank you, management, for taking my question. This is Bing Dwan from Nomura. I have one question regarding the China market. As we noted that there are a few Changes in the competition landscape such as Alicloud's Plan of spinning off and the recent price cuts from the large cloud companies like Alibaba and also some China's telecom So how do we see this impact our Xiong Huang business in China such as The ASP and margins and also about our future market to share in China.

Speaker 5

Thank you.

Speaker 2

First of all, the public cloud price adjustments recently That's not really related to us and giving pressure to us. However, In China, as I mentioned earlier, the overall competition has remained strong for a long time and the demand is actually, Especially for domestic native part is actually soft. With this situation, we do proactively Enhance our competitive edge. Sometimes, we reduce our pricing on certain areas to increase competitive pressure And try to gain more market share. For major public Called previously also rolling out similar service in RPE sector.

Speaker 2

Honestly, there's no one being left. Everyone already released some similar product already. However, over the course of past like 2, 3 years, Many of them have mostly exited the business. They either stopped really selling that product or some already started a partnership with us Thank you.

Operator

I am showing no further questions. I'll now turn the conference back to Fiona for closing remarks.

Speaker 1

Thank you, operator. Thank you everybody for joining our call today. Again, if there are any further questions, feel free to contact us. And also the presentation and the remarks of this call will be posted on our website. Thank you, everybody.

Speaker 1

Thank you.

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

Speaker 3

Thank you, Pepe. Bye.

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Earnings Conference Call
Agora Q1 2023
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