Agora, Inc.

Thank you all for standing by and welcome to the Agora Inc. Third Quarter 2021 Financial Results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question at that time, you'll need to press star 1 on your telephone. I'd now like to hand the conference over to your first speaker, Ms Fiona Chen. Thank you. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us for Agoura's third quarter 2021 earnings conference call. Our earnings results, press release, SEC filings, and a replay of today's call can be found on our I.O. website at investor.agoura.io. Joining me today are Tony Zhao, founder, chairman, and CEO, Jingbo Wang, our CFO. Reconciliations between our GAAP and the 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 trends. 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 risk uncertainties, assumptions, and other factors that could affect our financial results and performance of our business, and which we will discuss in detail in our filings with SEC, including today's earnings press release and risk factors and other information contained in the final prospectus relating to our initial public offering. Agora 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. Tony, please.

Thanks, Fiona. And welcome, everyone, to our earnings call. In the past two months, we hosted our RTE 2021 conference in both the US and China, which attracted thousands of developers, product managers, entrepreneurs, and investors worldwide. At the conference, we announced the Atlas of real-time engagement use cases. which covers over 20 industries and more than 200 use cases in entertainment, social, IoT, education, finance, healthcare, enterprise collaboration, and even smart cities. We also released important new products such as Fusion CDN live streaming, which I will talk about later. Now, about our Q3 performance. we delivered another quarter with outstanding results. I'm pleased to report that our revenues for the third quarter were $45 million, up 46% year over year. At the end of September, we had more than 372,000 registered apps on our platform. Our number of active customers reached more than 2,500, adding over 700 year over year. Next, I want to highlight our advancements on product and use cases in Q3. On the product side, we released two important new products this quarter. First, we recently unveiled Full Path Accelerator, or FPA, our global end-to-end network acceleration product. Unlike traditional network accelerators that mainly improve backbone transmission from one region to another, SPA takes the entire transmission path into consideration, including backbone and LASMA, and optimizes the speed and reliability of transmission in a holistic fashion. SPA is based on our proprietary software-defined real-time network and can accelerate any kind of data, not just video or audio, and for any application, whether it's gaming, e-commerce, collaboration, or a metaverse. With just a few lines of code, developers can integrate FPA into their application and let all their users enjoy a smooth and responsive experience, no matter where they are. Second, We announced our Fusion CVN live streaming product at the RTE 2021 conference. Together with our current interactive live streaming product, we can now deliver a complete solution for live streaming use cases from low latency streaming with our interactive live streaming API and standard latency streaming with our Fusion CVN product. It is important to note that our Fusion CVN is not mere repackaging of traditional CDN or content delivery network. Our Fusion CDN leverages our proprietary SDRTN network to enhance the resilience of uplink transmission and adaptively chooses the best CDN for downlink distribution, depending on end user's location. Therefore, achieving superior end-to-end performance compared to traditional CDN. It also works seamlessly with our existing products, reducing the complexity of integration for developers. Currently, both SPA and Fusion CDN live streaming products are available in China, and we are working very hard to bring both products to developers in US, European, and other markets in the coming quarters. In addition, we also launched our brand new extensions marketplace at RTE 2021 conference. Our extensions marketplace gives developer access to an ecosystem of partner extensions, which enhance real-time engagement, such as AI-based noise filter from both face filter face filters from Banuba, and voice changer from Voicemod. This marketplace is the first of its kind in the RTE category, allowing developers to instantly activate extension capabilities and accelerate time to market for their innovative applications. Moving on to new use cases. We are very happy to see that social deduction games are gaining popularity in more and more regions. Wildlife Studios is one of the largest mobile gaming companies in the world. They recently launched the Suspect game, using Agora to power the native voice chat among players. The voice chat provides players with a frictionless experience and saves them from having to use a third-party tool to talk to each other during a game, and helps to differentiate suspects from other social deduction games. We see this as one evidence of the convergence of social deduction games. We believe there will be more in other regions. Recently, we have seen an accelerating trend of real-time engagement in extended reality environments. creating the infrastructure of Metaverse. A good example is our partnership with Dreamline Maker, a leading virtual idol operator in China. We worked jointly to deliver a best-in-class solution for virtual idol concert. Performance of the virtual idol is driven by a human performer through motion capture. and Agora powers the transmission of motion data and audio data to the physical concert site and simultaneously streams the concert to audience online. Virtual IOs can engage with their audience in detailed 3D environments, which breaks the gap between the physical and virtual worlds, creating a beautiful fantasy world for users. We are also working closely with several Metaverse operators to build a fully interactive spatial audio solution. In the real world, we can easily distinguish sound coming from different directions, and such direction changes when we move our body when the speaker moves. If we were to build a true immersive Metaverse, its audio must take into account the locations and directions of all users, and the surrounding environment. And this is exactly what we are working on. Our solution constantly tracks users' movements in real time, synchronizes every user's location with others, and updates the spatial audio they hear accordingly. If we extend our horizon a little bit, people always talk about metaverse like the one we saw in Ready Player One. In my view, the industry needs to solve at least the following three problems, namely real-time media connectivity, virtual environment construction, and large-scale control signaling before we can have a Ready Player One-like experience. Agora has built industry-leading technology in all these three areas. For example, we have been raising the bar for real-time video and audio experiences. Our content moderation, virtual background, and social audio products, together with extensions from our partners, can significantly simplify virtual environment construction. Our full path accelerator and signaling products are designed exactly for enabling low latency control signals at scale. Our plan is to further enhance our capabilities in these areas and become an instrumental infrastructure provider for Metaverse. Next, I want to update everyone on our business in the US and the rest of the world market. US and the rest of the world has been a key strategic focus for Agora. In the past three years, we have invested significant resources into this market and have increased its revenue contribution from less than 10% to nearly 30%. However, I believe we are far from reaching our full potential in this market, given the rapidly increasing RTE penetration and our technology advantages. In the past few months, we have worked very hard to bring in additional talent and better align our strategy and priorities within the team. CRO and COO of our subsidiary in the US, will depart at the end of the year for personal reasons related to relocation. Reggie will transition his operational responsibilities to Stanley Wei, our chief strategy officer, who has a lot of entrepreneurship experience in both Silicon Valley and China. we will continue to hire additional highly qualified leaders to further strengthen our team in the US and the rest of the world market. Lastly, I would like to take the opportunity to thank all of our customers and developers around the world for trusting Agora to power your real-time engagement applications. I also want to thank all the Agorans for their hard work and dedication to our customers' success. I'm extremely excited about the opportunity ahead of us and look forward to co-innovating with our customers and developers together. Now, let me turn things over to Jingbo, who will reveal our financial results.

Thank you, Tony. Hello, everyone. Let me start by reviewing financial results for Q3, and then I will discuss our outlook for the full year. Total revenues were 46% year-over-year and 6% quarter-over-quarter to $45 million in the third quarter of 2021. Number of active customers reached more than 2,500, excluding those for e-smob, up 41% year-over-year. The growth in revenue and active customer was mainly driven by continued adoption of a technology by developers, as well as the emergence and the growth of new use cases. Revenue growth in the quarter was negatively impacted by the new regulation on K-12 academic tutoring sector in China, and we expect such impact to be more significant in the next two quarters as the government continues to enforce new regulation Our trading 12-month constant currency dollar-based net expansion rate is 104%, excluding this month. As we mentioned in previous earnings calls, in order to help investors better understand our organic growth, excluding the impact from one-off events, such as the complete lockdown in China in the first half of 2020 due to COVID-19, we calculated adjusted total revenues for these periods. If we use adjusted total revenues, the adjusted expansion rate would be 126%. Moving on to cost and expenses. For my following comments, I will focus on non-GAAP results, which exclude share based compensation expenses, acquisition related expenses, compensation expenses of acquired intangible assets, and income tax related to acquired intangible assets. Non-GAAP gross margin for the third quarter was 65.5%, which was 2.7% higher than Q3 last year and 4% higher than Q2 this year. As we mentioned in previous earnings calls, the increase were mainly driven by technical and infrastructure optimizations as we have been implementing since the beginning of this year. Non-GAAP R&D expenses were $20.9 million in Q3, up 112% year-over-year as we continue to hire talented employees and strengthen our R&D team, as well as the consolidation of eSmall's R&D team. Non-GAAP R&D expense was 50.9% of total revenues in the quarter compared to 35.1% in Q3 last year. Again, our strategy is to focus on long-term growth opportunities and innovation instead of maximizing short-term profitability. We've been investing significant resources in our R&D capabilities. in order to further strengthen our technology leadership, provide a more diverse product portfolio, and empower emerging use cases around the world. Mount Gap sales and marketing expenses were $11.1 million in Q3, up 88% year-over-year. mainly attributable to team expansion and increased advertising and event expenses, including expenses related to RT 2021 conference in the US. So the marketing expenses represented 24.6% of total revenues in the quarter, compared to 19% in Q3 last year. Non-GAAP G&A expenses were $6.8 million in Q3, up 121% year over year, mainly due to team expansion and professional service fees. G&A expenses represented 15.1% of total revenues in the quarter, compared to 10% in Q3 last year. Non-GAAP operating loss was 11.1 million, translating to a 24.6% non-GAAP operating loss margin false culture compared to an operating loss margin of 23.3% in Q2 this year and an operating loss margin of 0.8% in Q3 last year. Turning to cash flow, operating cash flow was an active 14 million in Q3. compared to negative 1.9 million last year. Free cash flow was negative 15.6 million compared to negative 5.1 million last year. Moving on to balance sheet, we ended Q3 with 767 million in cash, cash equivalents and short-term investments compared to 827 million at the end of Q2. Net cash outflow in the quarter was mainly due to free cash flow of negative 15.6 million, consideration paid for e-smob acquisition of 20.9 million, and long-term investments of 20.8 million. Now turning to guidance. COVID-19 is still an unprecedented viral 12% model where historical experience may not apply. Our guidance on full-year revenues reflects various assumptions that are subject to change based on the uncertainties related to the impact of the COVID-19 pandemic. In addition, as we mentioned earlier, we expect new regulation on K-12 academic tutoring sector in China will have a significant negative impact on our revenue in the near term. With that, we expect total revenues For the full year of 2021, it will be in the range of 163 minutes to 165 minutes. In closing, we are proud of the execution and strong performance in Q3 and continue to be confident about the long-term prospect of our business. Thank you to the entire Accora team and everyone attending the call today, and hope you are healthy and safe. That's opening up for questions.

Thank you. We will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you need to cancel your request, please press the pound or hash key. Our first question comes from Yang Liu at Morgan Stanley. Please go ahead.

Thanks for the opportunity to ask questions. I have two questions both related with overseas business. The first one is, given the pretty fast reopening post-COVID in the overseas countries, do you see any sign of slowing down in terms of growth in overseas market? And what is the current outlook for this line going into 2022? and what should be the growth driver going forward. And the next question is, what is the margin look like for the overseas business now? As we see a very big jump in the blended growth margin this quarter, is it helped by the overseas scale ramp up? Thank you.

All right, I'll take the first part. So for overseas business, we continue to see strong demand from developers in the U.S., APAC, and other parts of the world, including many new use cases. Some of those are described in our recent release, Atlas, of real-time engagement use cases. In this quarter, revenue from all sides of China actually grew 90% year-over-year and accounted for nearly 30% of our total revenues. U.S. rest of the world market is already our strategic focus and we will continue to invest more to grow into that market. In terms of reopening, many markets, for example the U.S., have largely reopened and many are in the process of further coming back to work or coming back to school. Our observation is that reopening typically reduce demand from use cases such as education and virtual event or virtual collaboration in the short term. Demand from social and gaming use cases are less effective. If we look at the long term, the prolonged work from home experience has changed people's lifestyle. I think digital transformation will also continue after the pandemic. And the way we live our lives will be different permanently. First is the hybrid mode for work, remote working plus coming back is going to be here to stay. And live streaming e-commerce or other form of new way to conduct business is also going to continue to grow. Of course, like I said, Social and gaming use cases we see much less impact and would be growing faster. We will use a lot more real-time video and audio engagement in overall our life and work in almost everything we do online. About the use cases, I can add more. As I mentioned, we published the Atlas for real-time engagement use cases. And there are a few emerging use cases we mentioned last quarter, like online karaoke and live streaming with gaming experience inside. There are more new use cases in the last quarter that grows faster. One direction is the convergence of use cases globally, like the World of Game is an example. It was a popular social deduction game in China that first appeared about four years ago. This quarter, Wildlife Studio, which I mentioned, is from Brazil, a game studio. They do operating globally. They recently launched a similar social deduction game called Suspects using our platform, which becomes very successful. And we also signed several large online education customers in Asia Pacific region, which have use cases very similar to Chinese education companies. Those are all kind of like a convergence of use cases globally. And on collaboration side, there are more verticalized solutions, like a leading graphic design platform, where graphic designers can draw and brainstorm together on the same canvas and chat through real-time voice powered by Agora. And on IoT side, there are use cases like smart vehicle manufacturer would use our platform to enable real-time monitoring So car owners can use mobile phone to connect to the car and see its surroundings in real time to check if anything is wrong. There are also many use cases on Metaverse. Like I mentioned, Dreamland is a virtual I.O. live streaming service. But multiple other applications are onboarding on this corner.

ZHUANJIA ZHUANJIA ZHUANJIA ZHUANJIA ZHUANJIA ZHUANJIA Since the beginning of this year, gross margin has been improving across all regions in China and U.S. It's really driven by relentless technical optimization and improved capacity planning and management. Currently, gross margin outside China is still slightly lower than the gross margin in China. This is because from a technical perspective, China is one big region. Outside China is not one region. It's 10 to 20 distinct regions. The scale of operation in most of these regions is significantly smaller than our scale in China. So we don't enjoy the same level of economy of scale. So we expect that as we continue to scale business outside China, Gross margin will eventually catch up with what we are seeing in China.

Thank you.

Our next question comes from Emerson Chan from Bank of America Securities. Please go ahead.

Hi, Bank of America. I have three questions. My first question is related to our Q4 outlook. I think we have achieved a pretty solid growth in Q3 despite the education happening. If we look at our full year guidance, the required Q4 revenue will decline sequentially quite a bit. So I wonder what are the key drivers behind the sequential decline in Q4 and what we are seeing differently in Q4 versus Q3 so far. That is my first question. My second question is a follow-up on our GP margin outlook, whether we believe our GP margin will continue to improve in the future or we will invest our margin upside for growth, given I believe RTE is still in early stages. Yes. So just, you know, wonder how management strikes a balance between gross margin and top high growth. And lastly, we mentioned we cover 200 use cases from 20 industries. So I just curious how many vertical solution or SDK we have now and how does it compare to our competitors? Whether our competitors are mostly offering general SDK across different use case and what are the key benefits of offering these vertical specific solution versus general SDK. Thank you.

So I will take the first two questions. So on the first question regarding Q4 revenue outlook, so as we mentioned in our last earnings call, K-12 education in China represented about 25% of global revenues in Q2. And in light of the New regulation that came out in July, we revised our four-year revenue guidance. Last earnings lease, we revised the guidance to 159 to 161 million. Now looking back, K-12 education revenue in Q3 was better than our earlier expectation because many tutoring service providers were able to finish their classes in the summer vacation. Now as we go into Q4 and we see that government is moving to enforce new regulation, we have seen that usage from K-12 education sector has dropped to a lower level. So we have updated our full year revenue guidance to 163 to 165 minutes to reflect our best estimate at this point. However, As similar to our situation last quarter, it is very hard to predict how exactly the sector will evolve and play out this quarter, for the remainder of this quarter, and in the coming quarters. And on the second question on GDP margin, as I explained, the improvement in GDP margin mainly due to technical optimization. So looking forward, I think there are several factors at play here. First of all, the lower usage from education customers in China will reduce the utilization rate of infrastructure. So that's an active impact on the GPU margin. On the other hand, we are trying very hard to optimize our cost to offset some of that impact. And in terms of strategy, I think our strategy has always been that we intend to maintain healthy and fair margin, healthy and fair GP margin, instead of maximizing our prices. So generally, as we have done in the past, we will pass on our cost savings to our customers to deliver really the most competitive and the best performance to price ratio for our customers.

All right. About the vertical solution and SDKs, we have dozens of different vertical solutions, as mentioned earlier, like Education APOS, Live Audio Cast, Karaoke, IoT solutions, multiple IoT solutions. We also offer a lot different SDKs to support diverse development platform or environment, like Unity or Unreal or Cocos or Flutter, React Native, et cetera. Those SDKs and the vertical solutions provide use case specific features and higher level APIs so that the developers can integrate and go live with less lines of code and much less effort. The key benefits of those solutions are ease of use for developers. We have by far the most comprehensive vertical offers compared to competitors.

Thank you.

Our next question comes from Vincent Yu from Needham and Company. Please go ahead.

Thank you, management, for taking my question. I have two. One is we do see some weakness in the live streaming industry in China, and what do we expect the trend of this revenue source for our business? The second question is trying to follow up on the overseas business. So in terms of the online conference or the online or virtual kind of meetings, showcase application of our product. Do we see, can mention some insights on the progress in terms of collecting orders in the key markets such as US? Thank you.

Okay, about live streaming. As an industry, it is still growing, but has reached to a relatively mature stage. We think it's actually positive for us because users are no longer excited by traditional form of live streaming such as a talent show or games or game broadcasting. Live streaming operators now need to constantly come up with new engaging experience to attract users. And the most engaging experience is always real-time interactive ones. Essentially, we are not relying on the expansion of user base of live streaming, rather we are relying on penetration of RTE within its user base. For example, the karaoke use case we were just promoting in the last few months, or the interactive games inside the live streaming experience, all kind of new, and we see a very strong demand for using those use cases. And I also mentioned the virtual idol live streaming, or more interactive experience on e-commerce apps. Those are all very active areas, even inside the live streaming industry. Around the progresses about the overseas demand, as I mentioned earlier, we see our US rest of world business has a faster growth rate, but even bigger potential in front of us. Our app registration is currently 12,000 per month, out of which there are two-thirds is from US REST Award. It's much clearly bigger than where the registration comes from in China. So we are also working with several large customers on social and media use cases. Jingbo also talked about Some of those progress is reflected in our growth rate of U.S. rest of the world. But we believe U.S. and rest of the world market has an even bigger potential. One of the driver of U.S. rest of the world growth is the convergence of use case globally. As I mentioned earlier, I've actually talked about how social deduction games, although took years, but now appear in South America and other part of the market. Maybe it's a validation of our logic of those use case would be replicated in different regions. Another example is online education. We see clear trend that the online classroom service is actually being replicated to other regions in this world. So those are all growth drivers for US reservoir market. But the natural demand and unique use cases is also a strong indication of the potential of the market.

Once again, if you wish to ask a question, please press star 1 on your telephone. Our next question comes from Bing Tuen at Nomura. Please go ahead.

Hi, management. Thank you for giving me the opportunity for asking questions. I have two questions. One is regarding the net dollar retention rate. We see some sequential slowdown in the third quarter to the adjusted DRR. is now around 126. So just curious what's the major reason to that and how do we think about the trend in the next few quarters and the major drivers? The second question is about our pricing. So do we see any changes in pricing to our large or strategic customers in a major industry verticals? And what about the trend and how do we think about the impact to the gross margins? Thank you.

So I'll take both questions. Yes, it's true that, thank you for looking at the adjusted expansion rate, because the raw expansion rate was really affected by the spike in demand in the first half of last year in China. So the adjusted number will reflect the organic growth better. Actually, 126% is a pretty healthy level, and it's actually in line with the expansion rates we saw pre-COVID. We think that's a kind of normal, within the normal range we're seeing for this business, and in line with the expectation going into the future. So we don't really think there's anything wrong with that number. In the next few quarters, if we look at the raw expansion rate, we'll be under additional pressure due to the new education regulation in China. Obviously, that's going to become a big drag on the expansion rate. So in terms of pricing, as I explained earlier on the TP market. I think it's very similar to other ISM pass cloud services. Here our aim is to provide customers with the best performance to price ratio or the best value per dollar, right? So, we never had a strategy to maintain the same price or to continue to maximize the price. Actually, that would be very rare, something very rare to see in the eyes of past business. So in the past, we have generally passed on our own cost savings to our customers. That has resulted in a gradual drop in price year over year, which again, is similar to many other cloud services like AWS. And we believe what we saw this year and last year was no different. And we believe this is actually healthy for the growth of the entire market.

Thank you very much.

Once again, if you wish to ask a question, please press star 1 on your telephone. Our next question comes from Alan Lee at JPMorgan. Please go ahead.

Thanks, management, for taking my question. I have two questions. The first one is on your CDN initiative. So just wondering, will we do the CDN business by ourselves or we just leverage our technology capability to help clients choose the best CDN vendor? So what's our business model here? And the second one is on the headcount. So could you give us some color on your headcount plan next year? Thank you.

OK. I'll explain the Fusion CDN offering. I want to emphasize again, it's actually a very innovative product. It's not a mere aggregation of the CDN services. But you're right. We won't build our CDN network. It's going to be integration of existing CDN providers' service, but we add a lot more on top of it. One thing is to leverage our SDRTN network to optimize the upstream quality and efficiency. And also, we have SDK embed into customers' app, where CDN provider does not have that kind of presence. And leveraging that SDK, we have a much better chance to detect and monitor the downlink performance of all CDN services and dynamically choose from the best quality and also the best cost for our app developers and customers. Combine all those, it becomes very good offering for developers to provide a high-quality and cost-effective solution for their long-latency streaming services. And it's going to be a natural extension for a lot of our customers' streaming demand when they are using us for interactive, real-time services. But a lot of times, they also want to use some long-term streaming service. With this offer, I think it's a natural expansion of our existing offer and market.

And just to add one point on the business model, so here we offer an integrated solution. So the CDN providers will become our supplier and will sell the whole solution to our customers. So in terms of the headcount for next year, obviously, as Tony talked about, we are very optimistic about our business outside China, in the US, in APAC, Europe, South America. We continue to see very strong developer sign-ups, customer POCs, and projects ramping up. The business in China is more challenging. given the change in regulation on education. So we will be more cautious about our headcount next year. If we take a step back in the past two years, we roughly doubled our own headcount from 400 to 800. And the acquisition of Isma added another 200. So now we are at about 1,000. So we do not... plan to significantly expand our headcount again next year. And the increase will mainly come from the U.S. restaurant market, and the increase in the China market will be very moderate.

Okay, very clear. Thank you.

Once again, if you wish to ask a question, please press star 1 on your telephone. There appear to be no further questions, so I'll hand back to management for closing. Thank you.

Thank you, operator. Thank you, everyone, for attending today's meeting. Again, if you have any further questions, you may rely on our materials being posted on our IO website or directly email us at investor.agora.io. Thank you again very much. Thank you. Have a nice day. Thank you.

thank you so much this does conclude today's conference call thank you all for joining you may now disconnect