Agora Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 21, 2023

There are 6 speakers on the call.

Operator

Day and thank you for standing by. Welcome to Agora Inc. 2nd 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 Jingbo 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 what the company believes 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 the performance of its business and which the company discussed in detail in its filing with the SEC, including today's earnings press release and the risk factors and other information contained in the final prospectus relating to its initial public Algorand, Inc. Remains no obligation to update any forward looking statements the company may make on today's call. With that, let me turn it over to Tony.

Operator

Hi, Tony.

Speaker 1

Hi. Thanks, operator, and welcome, everyone, to our earnings call. Our revenue for the Q2 was $15,300,000 for Agora, down 5.6% year on year, Mainly due to a challenging global market environment and tightening financial conditions of certain customers, Our revenue was RMB131.5 million for Xiong Wang, down 11.7% year on year, excluding revenue from the Disposed Customer Engagement Cloud Business and K-twelve academic tutoring sector, mainly due to a slowing economy and fast evolving regulation in certain downstream verticals. As of the end of this quarter, we have 1550 active customers for Agora and close to 4,000 for Sheng Wang, an increase of 24% and 5%, respectively, compared to 1 year ago. Now moving on to our business, products and technology update for the quarter.

Speaker 1

First, starting with Agora. We recently announced our partnership with ActiveFence, A leading global provider of AI driven content detection and moderation service, Active Fence solution keeps end users Safe from the widest spectrum of online harms, unwanted content and malicious behavior, including adult content, We believe content moderation is particularly important for real time engagement applications, given that content is generated and consumed in real time. Through our extensions marketplace, Active Fence's content moderation tools allow developers Without significant change to their development processes, by detecting and removing all kinds of unwanted harms In real time, Agora and Active Funds can help customers better handle emerging online shipping and compliance challenge, while boosting end user engagement in a safer and more trusted environment. On the use case side, Over the past few quarters, we have seen an increase in real time engagement adoption and usage from vertical social networks or applications for interest based communities. In typical use cases, creators, experts or influencers In a specialized area such as meditation, yoga, astrology, religion, sports or creative arts, Engage with their fund base through video calls or interactive live streaming session.

Speaker 1

A good example is AstroTalk, a prominent online astrology platform operating in over Countries with a network of over 5,000 astrologers. By leveraging Agora's technology, astrotalk introduced an innovative use case that enables video calls between clients and astrologers to be broadcasted simultaneously to multiple potential customers. The objective was to create a platform that would show astrologers providing live predictions to clients. When clients observe others talking with our astrologer, they are more inclined to engage with the same astrologer. As a result, AstroTalk has experienced remarkable straightforward growth in active sessions following the launch of this feature.

Speaker 1

Moving on to Sheng Wang. In the past quarter, we upgraded our solution for high definition video calling and Live streaming. Previously, customer had to separately integrate our video based product, Features and the 3rd party extensions such as video enhancement, proprietary codecs, super resolution, and other video effects. And it often took substantial time to find the most useful architecture and considering video quality, latency, fluency, functionality and device compatibility. With our new use case oriented solutions, customers can now easily access best practices tailored to their specific use cases, such as single host live streaming, host PK, Host audience interaction, multiple host live streaming and live shopping.

Speaker 1

Customers Not only experience a shorter development time, but also benefit from an enhanced user experience. This ultimately leads to improved end user retention and better monetization opportunities for our customers. For example, a dating platform recently adopted our comprehensive solution to upgrade their 1 on 1 and live streaming video from standard definition to high definition. In addition to the increase in video resolution, our solution also improved video quality in environment with poor Our uneven lighting provided video noise suppression, perceptual video coding and verification. As a result of the high definition upgrade, the average user duration increased by more than 10%.

Speaker 1

Meanwhile, hosting matchmakers and their and the dating platform itself also generated Higher Tips and Revenue. In early July, Xiong Wang was chosen as one of the 26 leading companies To showcase AI Innovations at the 2023 World Artificial Intelligence Conference, Shunwan demonstrated its AI powered noise suppression capabilities based on deep learning algorithms, which can effectively remove more than 100 types of unwanted background noises and echoes, Our AI noise suppression has been widely used by our customers across verticals such as telehealth, Remote collaboration, social and gaming. For example, a voice social platform realized a 5% increase In average session length, after integrating our AI noise suppression in their application. Before concluding my prepared remarks, I would like to invite all of you to our upcoming RTE Conferences. On Agora's side, the RTE program this year will consist of 3 events.

Speaker 1

We will launch with RT Life's Shocking, a month long webinar series focused exclusively On this rapidly evolving space, regional events for RT India and RT APAC will take place on October 5. RT India will be a fully virtual event, highlighting how RTE Technology is facilitating the evolution of new communities within face tech, astrology, We'll be hosted in Korean and Indonesia language featuring key leaders and discussions around metaverse, Education and live shopping. We are excited to continue growing our global RTE community and foster the spirit of innovation through our conferences. On Shouguang's side, the conference will be held in Beijing From October 24 to 25, this year's conference will center around how the future of RTE will be shaped by generative artificial intelligence and high definition immersive environment immersive experiences, Together with industry leading experts and practitioners, we will With that, let me hand things over to Jingbo, who will review our financial results.

Speaker 2

Thank you, Tony. Hello, everyone. Let me start by first reviewing financial results for the Q2, And then I will discuss outlook for the Q3 of 2023. Total revenues were 34,000,000 and a decrease of 6.6% quarter over quarter. Our core revenues were $15,300,000 in the Q2 of 2023, a decrease of 5.6% year over year and an increase of 1.3% quarter over quarter.

Speaker 2

The year over year decrease was primarily due to reduced usage of our products And customers increased pricing sensitivity due to challenging macroeconomic environment starting from the second quarter second half of last year. The quarter over quarter increase was primarily due to usage growth and the emergence of new use cases, such as vertical social networks, as Tony just mentioned. Xunghong revenues were RMB 131,500,000 in the Q2 of 2023, a decrease of 19.8% year over year and a decrease of 9.9% quarter over quarter. If excluding revenues From the disposed CEC business and K-twelve academic tutoring sector, Shunmang revenue decreased 11.7% Year over year, an 8.8% quarter over quarter, which was primarily due to slowing general economic conditions and fast evolving regulations in certain downstream markets. Dollar based net retention rate for Agora is 108%.

Speaker 2

Dollar based net retention rate for Shunghwa is 91%, 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 adjusted financial measures, which exclude share based compensation expenses, Acquisition related expenses, amortization expenses of acquired intangible assets, income tax related to acquired intangible assets, Adjusted gross margin for the 2nd quarter was 67.2%, which was 2.6% lower than Q2 twenty twenty two, mainly due to a change in product mix. And was flat compared to Q1 2023. As mentioned in previous earnings costs, We restructured and reduced our global workforce in Q4 2022, and we have continued to implement effective expense controls.

Speaker 2

As a result, adjusted R and D expenses were $16,600,000 in Q2, decreased 37.4 percent year over year. Adjusted R and D expenses represented 48.8 Adjusted sales and marketing expenses were $7,100,000 in Q2, decreased 34% year over year. Sales and marketing expenses represented 20.9% of total revenue in the quarter compared to 26.3 percent in Q2 last year. Adjusted G and A expenses were $6,200,000 in Q2, decreased 9.5% year over year. G and A expenses represented 18.2% of total revenues in the quarter compared to 16.6% in Q2 last year.

Speaker 2

Adjusted EBITDA was negative $6,600,000 translating to a 19.5 Percent adjusted EBITDA loss margin, 4th quarter, significantly lower than the adjusted EBITDA loss margin of 37.4 percent in Q2 last year. Investment loss was $1,900,000 in Q2, primarily due to loss on investments in certain private companies of $4,900,000 which was offset in part by the Fair value change in equity investments was $3,000,000 Non GAAP net loss was $6,600,000 in Q2, translating to a $19,400,000 non GAAP net loss margin in the 4th quarter compared to a net loss margin of 50.8% in Q2 last year and 25.1% in Q1 this year. One extraordinary P and L item used this quarter is the impairment of goodwill. In Q2, We have completed the integration of eSmart's operation, after which we only identified one reporting unit. Considering the negative impact on market demands as a result of the challenging global macroeconomic environment and regulatory changes In certain sectors, we performed quantitative impairment tests on goodwill and recognized the full impairment As of the end of Q2, there was no market will outstanding on balance sheet.

Speaker 2

Now turning to cash flow. Operating cash flow was an active $5,300,000 in Q2 Compared to a negative $23,800,000 last year, free cash flow was negative $5,600,000 compared to an negative $24,200,000 last year. Moving on to balance sheet. We ended Q2 with $391,600,000 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 $5,300,000 and share repurchase of 21,000,000 Since the Board approved our share repurchase program in February 2022 and as of June 30, 2023, We have returned approximately $82,000,000 to shareholders through share repurchases, Demonstrating the Board's commitment to safeguarding shareholder value and its confidence in the long term prospect of the company.

Speaker 2

As of June 30, 2023, the company had approximately 97,500,000 ADS outstanding, reflecting a reduction of approximately 14,900,000 ADS or 13% reduction Our total shares outstanding from January 31, 2022, before the share repurchase program started. So far, we have completed 41% of our $200,000,000 share repurchase program, which will expire at the end of February 2024. And we intend to continue to undertake this meaningful capital return for our shareholders. Now turning to guidance. For the Q3 of 2023, We currently expect total revenues to be between US34.5 million dollars to US36.5 million This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change.

Speaker 2

In closing, we are confident about the long term prospects of the global market for real time engagement technology, And we are well prepared for near term uncertainties and challenges. Thank you to both Accord and Shuang teams for your hard work Thank you, everyone, for attending the call today. Operator, let's open it up for questions.

Operator

Thank you, sir. And I show our first question comes from the line of Yang Liu from Morgan Stanley. Please go ahead.

Speaker 3

Hi, this is Lydia representing Yandiao from Morgan Stanley. So our question is For management, can you review your observation of the demand recovery situation, both in domestic and overseas market and as well as your outlook for the second half of this year? Thank you.

Speaker 2

Sure. In terms of the market, I would divide this into the U. S. International market and China market. So for the U.

Speaker 2

S. And international market, we do see pretty healthy demand from verticals such as e commerce, vertical social networks, Focused on certain interest groups like Tony just mentioned, education and IoT is a Factors are doing pretty well at the moment. On the other hand, emerging markets and certain use cases that were popular during the pandemic, such as online events, are relatively weaker. On the China side, Demand from digital transformation sector is more resilient, such as financial institutions, large enterprises. And also we see healthy demand from professional training, non academic education And within the social and entertainment sectors, despite the pretty challenging We see pretty healthy demand growth there.

Speaker 2

And on top of the regional situation, I'd Also like to comment on the product side. On the product side, we see a lot of customer demand, new demand So in terms of full year outlook, we are cautiously optimistic that demand will gradually improve Overall, the remainder of the year driven by these new products I just mentioned And at the same time, offset by ongoing macro challenges, both in China and also in other emerging markets.

Operator

And I show our next question comes from the line of Harry Shuang from Bank of America Securities. Please go ahead.

Speaker 4

Hi. Thanks management for taking my question. I have two questions. Two quarters and also about the next year. And the second question is what is the plan for the AI products and the future revenue contribution for the company?

Speaker 4

Thank you.

Speaker 2

Yes. On the gross margin, as you can see, sequentially is basically flat and it's currently at It might be a pretty healthy level. So we do expect gross margin to remain relatively stable for the remainder of the year As we continue to optimize our cost structure, as for next year, it's probably still early to say, but Plans certainly to try to maintain a stable and healthy gross margin levels.

Speaker 1

As to the AI related development and the prop, actually our high definition video initiative It is a product that leverages AI capabilities to greatly improve video performance. We believe We are the first one that are able to provide mobile real time video To the level of TrueHD state, the 1st mature mobile 1080p Real Time Video Solution is based on this HD initiative. Also our 3rd party extensions, Like what I mentioned in opening remarks, Active Defense also leveraging AI technology to moderate real time content and activities Or like one of our other product, real time transcription, is also leveraging AI. Also, as a much bigger trend, the AIGC development is very encouraging. We firmly believe generative AI will expand the boundaries of RT and significantly enhance end user experience, But it won't be a short term revenue contributor as the voice and video Multi model capabilities are still at their early stage for all major large models.

Speaker 1

We have been working closely with customers on certain vertical use cases, leveraging AIGC, such as AI powered game players and real time voice based AI Companions, we expect to make product launch announcement in the coming months. In addition, AIGC will also be one of the main topic of our upcoming RTE conference in October. We will also have the latest demo showcased during this conference on AITC. Please join us for a deeper and more detailed discussion.

Operator

Thank you. I show our next question comes from the line of Huron Wong from CitSys. Please go ahead.

Speaker 5

Yes. Hello, can you hear me?

Speaker 2

Yes.

Speaker 5

Yes, yes. Thank you. And actually two questions from my side. And the first one is that has there been any change in the company's guidance on the profit? And will there be any more related optimizations within the year?

Speaker 5

Thank you.

Speaker 2

Sir, can you repeat your second question?

Speaker 5

And will there be any more related optimizations about the HMO results within the year? Yes. Yes. Yes. Thank you.

Speaker 2

Yes. I'll take both questions. So Despite the recent macroeconomic challenges and regulatory challenges, we remain committed to our goal of achieving Non GAAP net income breakeven in Q4 this year. So again, some non GAAP net income level breakeven In Q4 this year. So as you can see, in the past few quarters, we have effectively reduced operating expenses by roughly 30%.

Speaker 2

So we believe we are now operating at a quite efficient level with the right team size. So our focus in Q3 is really to drive revenue growth, other than further cutting headcount and cost. As we see revenue recover and we make incremental small

Speaker 5

Okay. Thank you. Very clear. And my second one is that, has there been a noticeable change in the domestic and international competitive environment? Yes.

Speaker 5

That's my last one. Thank you.

Speaker 1

Sure. There hasn't been much change in overall competitive landscape. In China, competitive landscape remains the same as previous quarter. But in the U. S.

Speaker 1

And international markets, We see slightly increase in competition from regional startups. I think this is a good thing overall for the industry With more choices for customers and more ideas to drive industry towards industry forward, together, We will create a more vibrant market and accelerate the adoption of RTE technology in general. The recent macro environment challenge, However, we also impact those competitors. And especially for smaller players in the market, We also saw some companies win out of business. Overall, competitive landscape remains largely the same.

Speaker 1

We're still the clear leader in this space in terms of technological performance and completeness of features. With the right focus and execution, I think we are well positioned to gain market share during the challenging period.

Speaker 5

Okay. Thanks a lot. Thank you.

Operator

Thank you. I'm showing no further questions in the queue. This concludes our Q and A. Thank you everybody for attending the 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 are any questions, please feel free to e mail the company. Thank you.

Speaker 2

Thank you. Bye bye.

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Agora Q2 2023
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