Agora Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 26, 2024

There are 6 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Agora Inc. 4th Quarter and Fiscal Year 2023 Financial Results Conference Call. Please be advised that today's conference is being recorded. 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.

Operator

Agor. 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. During this call, the company will make forward looking statements about its future financial performance and other future events and trends.

Operator

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 filings with the SEC, including today's earnings press release and the risk factors and other information contained in the financial prospectus relating to its initial public offering. Agora 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

Thanks, operator, and welcome, everyone, to our earnings call. Let me first quickly review our operating results in Q4. Revenue was $15,300,000 for Agora, flat compared to last quarter and RMB 148 million for Shinghua, an increase of 5% quarter over quarter, mainly driven by revenue growth from digital transformation customers. As of the end of 2023, we had close to 1700 active customers for Agora and more than 4,100 for Shingwan, an increase of 18% 12%, respectively, compared to 1 year ago. I'm pleased to announce that we achieved a non GAAP net income of $1,400,000 in Q4, despite a very challenging operating environment.

Speaker 1

Thanks to our effective cost control and relentless drive for revenue growth. Jingbo will discuss in more detail shortly. Now moving on to our business, product and technology update for the quarter. Let's start with Agora. In this quarter, we held a series of webinars to discuss how real time engagement, which combined with state of the art technologies in artificial intelligence and ARVR can greatly influence or even transform various industries, including live shopping, pet house and Internet of Things.

Speaker 1

For example, in live shopping, we see more and more retail brands and platforms relying on interactive live streaming to redefine the way consumers make their buying decisions by creating a personalized, social and engaging experience for the audience, a loyal community of resilient buyers will thrive and help drive sales. The combination of RTE, AI and ARVR is driving a rapid revolution of IoT use cases. For example, heavy machinery operators can work remotely with an enhanced view that sees beyond blank spots, enabling them to carry out challenging tasks in a safe and efficient manner. For autonomous autonomous vehicles or AI powered robotics, human operators can monitor their operations from remote locations and take over whenever necessary. This series of webinars was well received and attracted thousands of participants globally.

Speaker 1

We believe Agora is uniquely positioned to facilitate innovations in this industry. By leveraging our cutting edge RTE technology and deep understanding of industry specific use cases. In this quarter, we also released a brand new beta version of our signaling product, which provides real time data synchronization and low latency event authentication between devices and servers. The new version can now accommodate an unlimited number of users per channel, deliver better synchronization, support storage and manage completing message effectively. It enables a wide range of use cases, such as real time bidding in live shopping, virtual gifting in live streaming, player status synchronization in online gaming, live pooling in education and remote command of IoT devices.

Speaker 1

In December, Twilio announced the upcoming end of life of its programmable video product, which was a competing solution with our video calling product. We have pushed a series of blocks covering guidance and best practice for migrating from Twilio to Agora across major operating system and developer platforms. Additionally, we are offering up to 2 months free to customers who switch from Twilio. We believe Agora is the ideal opportunity for Twilio's video customers base and expect to enhance our global market share following Twilio's exit. We are also thrilled to see OpenAI's recent launch of Sora, a powerful AI model that can create realistic and imaginative video clips based on text instructions.

Speaker 1

It aligns with our early view that multimodal capabilities of generative AI models will advance rapidly, eventually enabling human users to directly interact with AI models in voice and video format. This technology breakthrough in AI will greatly expand the boundary of real time engagement and bring about tremendous new possibilities. I believe Agora is well positioned to play a critical role in facilitating massive gate transmission between AI models and human users. Moving on to Shingwan. Following the availability of Apple Vision Pro earlier this month, we have enabled many customers to launch applications in the Vision Pro app store.

Speaker 1

I have personally used VisionPRO and I believe it marks an important breakthrough in XR technology. The high video resolution and the see through capability of video of Vivint Pro demand higher quality video content and opens the possibility for hologram video content consumption and interactions. For example, people will be able to watch live keynote speech in hologram format on video prod. Our network is well positioned to power such content and interaction. Over the past few months, mini games that overlaid on video live streaming have been gaining popularity among social platforms.

Speaker 1

For example, a round of Ludo can serve as icebreaker in a matchmaking room. Live streaming channels can encrypt team based mini games, where audience can participate by sending bullet chat and GIFs. We have partners with leading mini game developers to offer our customers a wide range of mini games that can be easily embedded into their applications. Early data from our customers shows that the mini game integration has resulted in increased user participation, longer session durations and more monetized opportunities. In this quarter, we also introduced virtual sound card, an advanced feature that simulates key components of a professional hardware sound card, such as the exciter, compressor, equalizer and reverberator to process end users' voice in real time.

Speaker 1

Users can now easily enhance and modify their voices with only a cell phone without the need to purchase a computer with a professional sound card. For example, a customer recently add virtual sound card in their online karaoke rooms. Users can choose from a range of preset specifics to make their voices clearer, sweeter sweater, gentler or more mature. Slightly off key notes can also be adjusted automatically. This capability makes user more confident to participate, therefore, boosting user engagement and stickiness on our customers' platform.

Speaker 1

Before concluding my prepared remarks, I would like to thank both Agora and Shiong Wang team for their commitment and diligence during this challenging period. We not only delivered consecutive quarter over quarter top line growth since the Q2, but also achieved non GAAP profitability in the Q4. Looking ahead at 2024, we will keep focusing on creating customer value and enhancing our competitive advantage with the goal of expanding our market share globally. With that, let me turn 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 Q4 of 2023, and then I will discuss outlook for the Q1 of 2024. Total revenues were $36,000,000 in the 4th quarter, an increase of 2.9% quarter over quarter and a decrease of 10.2% year over year. Agora revenues were $15,300,000 in the 4th quarter, flat compared to last quarter and decreased 3.2% year over year.

Speaker 2

The year over year decrease was primarily due to reduced usage from customers in emerging markets due to challenging macroeconomic environment and tightening financing conditions starting from the second half of twenty twenty two. Shown on revenues were RMB 148,700,000 in the 4th quarter, an increase of 5% quarter over quarter and a decrease of 9.6% 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. The year over year decrease was primarily due to slowing demand from Internet customers due to regulation and general economic conditions. Dollar based net retention rate is 93% for the quarter and 82% for shingwe, excluding revenues from discontinued business.

Speaker 2

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 of transition of land use rights. Adjusted gross margin for the 4th quarter was 65.2%, which was 0.3% higher than Q4 2022 and 1.7% lower than Q3 2023. The year over year increase was mainly due to the change in product mix and the implementation of technical and infrastructure optimizations. The quarter over quarter decrease was mainly due to an increase in on premises solution revenue, which had lower gross margin.

Speaker 2

As we continue to implement effective expense controls, our adjusted R and D expenses decreased 18% year over year to $13,700,000 in Q4. Adjusted R and D expenses represented 38% of total revenues in the quarter compared to 41.6% in Q4 last year. Adjusted sales and marketing expenses were $6,300,000 in Q4, decreased 40.6% year over year. Sales and marketing expenses represented 17.5% of total revenues in the quarter compared to 26.4% in Q4 last year. Adjusted G and A expenses were $5,800,000 in Q4, decreased 20.5% year over year.

Speaker 2

G and A expenses represented 16% of total revenues in the quarter compared to 18.2% in Q4 last year. Adjusted EBITDA was negative 2,000,000 translating to a 5.6 percent adjusted EBITDA loss margin 4th quarter, significantly lower than the adjusted EBITDA loss margin of 21.1 percent in Q4 last year. Non GAAP net income was $1,400,000 in Q4, translating to a 3.9% net income margin for the quarter compared to a non GAAP net loss margin of 39.3% in Q4 last year. As Tony just mentioned, thanks to our effective cost controls and relentless drive for revenue growth, we achieved profitability on a non GAAP basis for the first time in more than 3 years. This demonstrates the resilience of our business amid a very challenging operating environment as well as our continued discipline and efforts in optimizing our cost structure.

Speaker 2

Now turning to cash flow. Operating cash flow was positive $3,700,000 in Q4 compared to negative $4,600,000 last year. Free cash flow was positive $3,400,000 compared to negative $6,100,000 last year. Moving on to balance sheet, we ended Q4 with $371,800,000 in cash, cash equivalents and deposits and financial products issued by banks or $4.03 per ADS. Net cash outflow in the quarter was mainly due to share repurchase of $10,100,000 which was offset in part by free cash flow of $3,600,000 dollars Since the Board approved our share repurchase program in February 2022 and as of December 31, 2023, we had returned approximately $104,300,000 to shareholders through share repurchases, reducing our share count by roughly 18%.

Speaker 2

So far, we have completed 52% of US200 $1,000,000 share repurchase program. We are pleased to announce that our Board has authorized another 12 months extension of a $200,000,000 share repurchase program through end of February next year, with all other terms unchanged, which is a vote of confidence in our financial strength and long term prospect of the business. Now turning to guidance. Due to seasonal impact, especially reduced usage in certain regions during Lunar New Year. For the Q1 of 2024, we currently expect total revenues to be between $32,000,000 $34,000,000 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 very proud of our execution and strong financial results during this challenging period. Returning to profitability is a remarkable milestone. Thank you to both Accord and Shuang teams for their hard work and sacrifice in the past quarters. Thank you, everyone, for attending the call today. 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.

Speaker 3

Thank you. Thanks for the opportunity to ask questions. First, congratulations on the non GAAP profit in last quarter 2023. I have three questions here. The first one is what is the management outlook in term of the 2024 full year profit?

Speaker 3

Do you think the profitability in the past quarter will be sustained or even be improved in 2024, especially consider the guidance in Q1 implies some year on year revenue decline, whether the positive profit can be maintained? That's the first question. The second one is, we would like to have some update in terms of the domestic Internet companies going abroad, whether Agora can benefit from that in the overseas market? And what is the revenue split between Agora and Shingwan in the coming 2024 full year? Do you think the Agora revenue contribution will continue to drop a little bit or will turn around in terms of the total contribution?

Speaker 3

The third question is regarding the partnership with VisionPRO. What will be the revenue model behind this kind of partnership? Will it be based on the consumer time spent? And if not, what will be the revenue model? Thank you.

Speaker 2

Thank you. I'll take the first question. Yes, the Q1 revenue guidance would imply a year on year revenue decrease. And as you know, Q1 is generally the lowest season for the business. If you look at our numbers in the past few years, revenue generally dipped a little bit in Q1 sequentially compared to Q4.

Speaker 2

That's due to both seasonality. As I mentioned. In some other regions where we operate, Lunar Chinese New Year is a low season for social apps and for education, apparently. So usage will drop during that holiday. And also for digital transformation businesses, a lot of the projects tend to be we tend to book through the revenues towards the end of the year.

Speaker 2

So Q1 is also a low season. Compared to last year, obviously, we had the China Internet regulatory changes, testing of the environment in Q2. So last year, Q1 was a relatively higher base. So that's on Q1 guidance. In terms of full year 2024, obviously, there remains a lot of uncertainty around the world, including the macroeconomic environment, funding environment and so on.

Speaker 2

So I will try to give you my best estimate. So we expect our revenue to grow on year on year basis starting from Q2. And our goal is to reach double digit revenue growth in Q4 year on year. And regardless of revenue growth, we do not expect expenses will grow this year compared to the most recent base. So it's going to be a pretty stable cost base with moderate revenue growth.

Speaker 2

So if you run the numbers, hopefully, we'll be able to get closer to profitability and even improve the profitability for the second half of the year. But as to Q1, it will be challenging to achieve profitability in Q1 given the revenue dip. Debt. That's the second question.

Speaker 1

Yes. About how can Internet Companies going overseas, I think we are in a very strong unique position to help them because on one side, we do have a strong and very influential customer base in China Internet Industry. A lot of them were actively planning going overseas or expanding in global market. While we help them, we can leverage a lot of our existing partnership and customer base knowledge and the market knowledge with our global practice with local customer base and market already. And we have been helping people with all those knowledge and know how already and those are the unique advantage we could help to help them to grow into a bigger global market.

Speaker 2

And in terms of revenue split, we don't think it will change very significantly. However, we do we are a little bit more optimistic about our core business, given especially the resilience we have seen in the U. S. Market and as a developed market and also some of the emerging use cases we see there. And as Tony mentioned, Toyota exit, they also give us additional room to grow in those markets.

Speaker 2

So we expect some moderate increase in terms of the percentage from the contribution coming from the core business as we move along in 2024.

Speaker 1

About the Vimpra, the revenue model is going to similar to what we do. We are still going to be enable use cases and customers by selling API based capabilities. Although, with increased offering from our overall product portfolio, we might have more diverse pricing model with all the different SKUs, different product we are selling into. But overall, it will tie to consumer usage on VisionPro. And in mid term to long term, we do see the powerful impact where Vivintra can enable a lot more attractive use case new use cases or make some new use cases more viable or more meaningful for consumer or business use cases, where we would be able to support both like persona based social interactions or business collaborations in that platform.

Speaker 1

And we also anticipate a lot of other XR device will catching up, will play catch up with Virepro. So to make this capability to be available more widely for customers and consumers.

Speaker 3

Thank you. Can I follow-up with one quick question? One, Jingbo mentioned OpEx will be flattish. Do you mean that flattish versus 2023 full year or flattish versus the last quarter in 2023? Because over the past year, the sequential quarterly OpEx has been on a downward trend.

Speaker 3

So I would like to clarify whether it's a year on year or based on Q1? Thank you.

Speaker 2

The base will be 4th quarter. It will probably not be exactly the same. It might fluctuate a little bit, but it will not be significantly higher from the pacing in

Speaker 3

Q4. Got it. Thank you.

Operator

Thank you. And I show our next question comes from the line of Harry Schwen from Bank of America. Please go ahead.

Speaker 4

Thanks management for taking my questions. I also have 3 questions. The first one is on the demand outlook. Can I just share more color on the demand outlook, competition landscape and price trend in both overseas and domestic market? And the second question is, what does management see the potential impact on business from the OpenAI's video generator, Solar?

Speaker 4

And the third question is on the potential market share gain. Management said that after Twilio exiting the market, the company could potentially differentiate? And how will Agora assist this opportunity? And what is the current acceptance from the customers transitioning from trailer service to other service? Thank you.

Speaker 1

All right. I'll take those questions. First of all, in terms of the market and competitive landscape, we see in U. S. And international markets, we do see strong growth momentum in media and entertainment sector and telehealth verticals.

Speaker 1

Live shopping, IoT, particularly in developer market, those are the areas that we see strong growth momentum. Price wise, we see more pressure in emerging market where it's impacted by macro environment, including the currency exchange rate, etcetera. Price has been healthy and stable in developed market, U. S. And European market.

Speaker 1

Twilio's about Twilio's athletes, our what we're seeing in terms of competition, Twilio's asset is only a sign of competitors leaving the market. It's not just Twilio. There are other startup competitors who are struggling and downsizing of their operations. We expect we will be gaining market share with those changes. In China market, we see growth potentials in going overseas, all the especially Internet companies based in China now looking heavily in going overseas expansion.

Speaker 1

And also digital transformation is still having a clear trend to grow. And also IoT side of the customer base are seeing more actively growth. Overall usage in both markets, we actually see still growing despite all the regulatory and macro changes, which is the foundation of overall customer value growth and revenue growth. Price wise, in China market generally dropped about 10% over the last few years and often happened in beginning of the year. This put some pressure to our Q1 results.

Speaker 1

Together with the seasonality issue of like Chinese New Year activity change or consumer behavior change, our gross margin but our gross margin remains quite healthy. In terms of competitive landscape, it's largely unchanged in China market during the past quarter. While there are we continue to see there are more competitors kind of backing off, which in last quarter, we see another large Internet company reduce their team in this area in Q4. I expect market to continue to consolidate. The next question is about the latest OpenAI offering in video generation.

Speaker 1

I think this is only the very early stage of video format generating model. But we can see the huge potential and the possibility lies ahead. Currently, the model is able to generate a short video clips based on text, image or video prompting, and it can already be used in some of customers' use case to enhance user experience. For example, the virtual background of a video chat room or live streaming session can be a short video clip generated by AI model as a overall background. It could be either realistic or imaginary to perfectly match the context or topics of the channel.

Speaker 1

This will create more engaging and immersive experience for audience. In the future, we believe human user will be able to directly interact with AI models in voice and video format, as we mentioned before. This will make us the crucial the critical infrastructure as massive amount of data will flow between users and AI models in real time. Maybe to add a little to Twilio's assets, we think, like I said, it's only merely a sign of competitors leaving this market, the backing off or focusing on their more administrative business. And as I mentioned, we see this happens in both global market and China market, including, let's say, in U.

Speaker 1

S. Market, it's not just Twilio. There are some other smaller competitors also downsizing or stop working in this area. The competitive environment with that, we see is clearly improving. Of course, Twilio has still a sizable customer base, which we already start to work on to convert them.

Speaker 1

So this is the clear room for us to grow into.

Speaker 4

Thank you, management. This is very clear. Thank you.

Operator

Thank you. Thank you. And I show our next question comes from the line of Bing Dwan from Nomura. Please go ahead.

Speaker 5

Yes. Hi. Thank you, management, for the opportunity to ask the question. Just one follow-up question from me about Twilio's exit in the Programmable Video Product segment. So can you share more color about the reason behind this?

Speaker 5

Is this more because of the competition, the fierce competition or because of the demand is not growing strongly in the U. S. Market. And about we offer 2 months free customer switch from Twilio. How do we think that would affect our user growth and top line growth in the next 1 or 2 quarters?

Speaker 5

Thank you.

Speaker 1

I do think Twilio's asset is mainly because of fierce competition in this area because as we routinely state, this area is a very tech savvy sector, whereas all the offerings requires a lot of investment in technology and product. Some competitors' product only build on top of WebRTC open source projects or a simple rather lean layer of technology add ons, which can only serve a friction part of the demand for our RT use cases, which, of course, limited their capability to expand and grow in this area. And especially for a company like Plilio, they might want to be more focused on their mainstream business. We see that's the main reason. There could be a reason that COVID demand is also fading away.

Speaker 1

But as I mentioned in our earlier statement, we while the COVID demand is fading away, we do see there are growth very active use cases growth in developer marketing and global market. So I would rather just put that as another factor in their leaving. In terms of our offerings, I do think the 2 months free offer for a lot of small, midsized customers is a very important reason for them to consider and makes them easier to decide to jump on our platform. We do have some other strengths and collaborations or work with the rather large customer base, which our team is focusing on to help them to migrate to our platform.

Speaker 5

Thank you very much.

Speaker 4

Thank you.

Operator

I'm showing no further questions in the queue. This concludes our Q and A session. Thank you everybody for attending the company's call today. As a reminder, the recording in the earnings release will be available on the company's website at investor. Agora.

Operator

Io. And if there are any questions, please feel free to e mail the company. Thank you and have a good day.

Speaker 1

Thank you. Bye bye. Thank you.

Speaker 3

Bye bye.

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Agora Q4 2023
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