Agora, Inc.

Good day and thank you for standing by. Welcome to Agora Inc. Forkwater 2021 Financial Results Conference Call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the call over to your first speaker today, Ms. Fiona Chen. Thank you. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us for Agra's fourth quarter and the full year 2021 earnings conference call. Our earnings results press release, SEC filings, and a replay of today's call can be found on our IR website at investor.agra.io. Joining me today are Tony Zhao, founder, Chairman and the CEO, and 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 risks, uncertainties, assumptions, and other factors that could affect our financial results and performance of our business, which we discuss in detail in our filings with 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 remains no obligation to update any forward-looking statements we may have on today's call. With that, let me turn it over to Tony. Hi, Tony.

Yes. Thank you, Fiona, and welcome everyone to our earnings call. 2021 was a year of great opportunities and challenges for Agora. I'm extremely proud to see how hard our team worked together across the globe and across every vertical to drive Agora forward. It is exciting to see how much we have accomplished and how much innovation we have fostered with our real-time engagement platform. I am proud to say that as of the end of 2021, the Agora SDKs were installed globally in more applications than any other real-time video or voice SDK by a very large margin, according to data.ai, previously known as FME. Our technology and product innovation of what distinguished us as a pioneer and a leader in real-time engagement. Today, we are powering the new norm of engagement and the emotional human connection, both virtually and in real life. Now, let's shift to our earnings. We delivered another quarter of strong results. Our revenue for the first quarter was $40.4 million, up 21% year-over-year. At the end of December, we had more than 400,000 adjusted apps on our platform, and our number of active customers reached nearly 2,700, adding nearly 600 year-over-year. For the full year of 2021, we poured more than 600 billion minutes of real-time engagement in total. And our revenue was $168 million, which represents an increase of 26% from 2020. If we look at our key markets, revenue from the United States and APAC, including China, recorded the strongest growth in this quarter. We are now powering many leading metaverse platforms in South Korea, many leading online education companies in South Asia, and many highly innovative interactive e-commerce, audio live costs, and virtual events platforms in the US. In China, Our market leadership was clearly demonstrated by a recent IDC report, which ranked Agora as the number one real-time video and voice API provider, with a market share greater than the next seven providers combined. In this quarter, despite the impact of the new regulation on K-12 after-school tutoring sector, revenues from other sectors remained healthy, As real-time engagement use cases continue to expand across regions, our revenue source has also become more diversified. In this quarter, revenue contribution from usage outside of China was 35%, the highest in our history. Moving on to new use cases. One of my favorite use cases in 2021 is with Blue Frog Robotics. This amazing company, powered by Agora technology, is changing the way hospitalized students interact with teachers, classmates, friends, and families through this emotional robot named Buddy. In France, Buddy the robot was deployed to nearly 2,000 school children And the First Lady of France has been a supporter in extending this program across the country. In 2022, you will be seeing much more from BlueFrog's study on how Agora is powering the world for the better. In the Netherlands, Conference Compass, a hybrid event engagement platform focused on global scientific and medical conferences, leveraged Agora's interactive live streaming technology to double their revenue. And a bit closer to home, across the country from our Santa Clara, California, high quarter, the University of Maryland medical system built a fully integrated app into all their backend systems to obtain patient information. They named it Teleport is used across 14 hospitals and 200 departments. Agora is embedded in this platform for all video and audio engagement between doctors and patients, as well as between providers and the staff. In the longer term, I believe Metaverse will become one of the most important use cases for Agora. We have made a significant investment in this field and recently announced several solutions tailor-built for Metaverse, for example, MetaKTV and MetaTab. Our MetaKTV solution is an expansion of our one-stop online quality solution that I mentioned in previous earnings call. On top of our technology, that enables users to sing together at ultra-low latency, and our usage-based copyright solution for hundreds of thousands of soundtracks. MetalKTV reproduces an old-school karaoke room in the virtual world with avatar singers and audiences, stages, party lights, and screens. Always beautiful 3D rendering In this virtual karaoke room, users are able to sing and dance on the stage, or wave and cheer in front of it, and hear and see each other in real time. Our MetaKTV solution allows users to create and customize avatars with hundreds of options, meet friends in a virtual bar or cafe, and engage with each other through voice chat in the shared virtual space. Both MetaKTV and MetaChat are supported by our latest 3D spatial audio technology, which allows users to perceive sound as coming from different locations and distance around the user in the virtual space. Technically, this is a very challenging task because all the sounds generated by users and the environment need to be updated in real time as users move inside the virtual space. Despite the technical challenge, I believe 3D spatial audio is an important technology that makes the virtual world feel real. With spatial audio, users will feel more present and engaged, whether they are in a live-cast session or during a gameplay. These R&D investments have enabled fast go-to-market for our customers. We are seeing many innovative Metaverse use cases from all over the world leveraging our RTE technology. For example, we helped Oasis a popular metaverse platform in Brazil, to enable house parties at their users' virtual home. Powered by our MetaKey TV solution, a company called XR Space built an online karaoke platform called PartyOn, and I welcome you to experience it for yourself. It's available on both smartphones and AR devices. Now, moving on to security, compliance, and privacy protection. As always, they are critical to our success. Recently, we were awarded the ISO 27701 certificate on our information security management system. We also partnered with B-Shop Fox to improve our ability to defend real-world sophisticated attacks. Looking forward, we will continue to work with leading experts to ensure that our security practice remains best in class. Lastly, I would like to take the opportunity to thank our customers and our developer community for their innovation and passion to build RTE all the way with us. I also want to say thank you to all the Agorans for their hard work and dedication to our customers' success. I feel incredibly confident to embrace the promising future of real-time engagement. Let's create and enjoy it together. Now let me turn things over to Jinbo, who will review our financial results.

Thank you, Tony. Hello, everyone. Let me start by first reviewing financial results for the Q4. and then I will discuss our outlook for the fiscal year of 2022. Total revenues grew 21 percent year-over-year to $40.4 million in the fourth quarter of 2021. Total revenues for the fiscal year of 2021 were $168 million, which represented 26 percent year-over-year growth, and exceeded the high end of a guidance range by $3 million. Number of active customers reached more than 2,600, excluding growth for e-smob, up 27% year over year. The growth in revenue and active customers was mainly driven by continued adoption of our technology by worldwide developers, as well as the emergence and growth of new use cases. As we mentioned in previous earnings calls, our revenue growth in the quarter was negatively impacted by the new regulation on K-12 academic tutoring sector in China. We expect such impact to continue and hopefully bottom out in the first quarter of 2022. Our trading 12 months constant currency dollar-based net expansion rate is 104%, excluding ISMAP at the end of 2021. We also calculated adjusted expansion rate to exclude the impact from COVID-19 in the first half of 2020, and the adjusted expansion rate would be 124%. 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, amortization expenses of acquired intangible assets, and income tax related to acquired intangible assets. Non-GAAP gross margin for the fourth quarter was 64%, which was 3.5% higher than Q4 2020. As we mentioned in previous earnings calls, the increase were mainly driven by technical and infrastructure optimizations we have been implementing since the beginning of 2021. Non-GAAP R&D expenses were $23.5 million in Q4, up 80.2% year-over-year, as we continue to hire talented employees and strengthen our R&D team, as well as consolidation of eSmob's R&D team. Non-GAAP R&D expenses were 58.1% of total revenues in the quarter, compared to 39.2% in Q4 last year. Our strategy is to focus on long-term growth opportunities and innovation instead of maximizing short-term profitability. We'll continue to invest 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. Non-GAAP sales and marketing expenses were 12.2 million in Q4, up 76.1% year-over-year, mainly attributable to team expansion and increased advertising and event expenses, including expenses related to our RTE 2021 conferences. Sales and marketing expenses represented 30.2% of total revenues in the quarter, compared to 20.8% in Q4 last year. Non-GAAP G&A expenses were $7.3 million in Q4, up 29.5% year-over-year, mainly due to team expansion and expected credit loss provisions. G&A expenses represented 18.1% of total revenues in the quarter, compared to 17% in Q4 last year. operating loss was 15.4 million, translating to a 38.2 percent non-GAAP operating loss margin fourth quarter compared to an operating loss margin of 14.4 percent in Q4 last year. Turning to cash flow, operating cash flow was positive 5.1 million in Q4 compared to positive 2 million last year. Free cash flow was positive 2.9 million compared to negative 1.4 million last year. Moving on to balance sheet, we ended Q4 with 755 million in cash, cash equivalents, and short-term investments compared to 767 million at the end of Q3. Net cash outflow in the quarter was mainly due to consideration paid for its mob acquisition of 13.9 million. Now turning to guidance. COVID-19 is still an unprecedented variable to our business model, where historical experience may not apply. Our guidance on full-year revenues reflect various assumptions that are subject to change based on uncertainties related to the impact of the COVID-19 pandemic. In addition, as mentioned before, we expect the new regulations on K-12 academic tutoring sector in China will continue to have a significant negative impact on revenues in the near term. With that, we currently expect total revenues for the fiscal year of 2022 to be in the range of $176 million to $178 million. which would represent approximately 5.4% year-over-year growth as midpoint. Today, we announce that our board of directors has authorized a share repurchase program of up to $200 million. The program demonstrates our confidence in the fundamentals, strategies, and long-term growth potential of Cora, and our commitment to enhancing shareholder value. With more than $750 million of cash on hand at the end of 2021, we believe we will be able to continue to invest in our technology and business expansion at the same time. In closing, we are very proud of the execution and strong performance in this remarkable year. Regardless of all the difficulties and challenges, we are confident about the long-term prospect of our business. Thank you to the entire Agora team for your hard work and everyone attending the call today. Hope you are healthy and safe. Let's open it up for questions.

Thank you, Van Eshman. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound or hash key. Please stand by while we compile the Q&A roster. First question comes from the line of Yang Liu from Morgan Stanley. Please go ahead.

Thanks for the opportunity. I have two questions all regarding to the overseas business opportunity. The first one is how do management think about the growing opportunities? With current guidance range, what is the growth for the overseas market and contribution or full-year revenue contribution in 2022 for overseas markets. And the second question is, could management update us in terms of the overseas market growth margin profile in 4Q and 2022 outlook? Thank you. Sure.

I'll talk about the first part. I'll look or see, you know, opportunity. I'm actually very excited about opportunities for us in like North America, Europe, and APAC, excluding China. Many countries in these regions have largely reopened their economy, but we continue to see strong usage numbers. It is clear to me that the pandemic has permanently changed how people work. collaborate and study. I'll mention a few areas where we see enormous growth opportunity. First, feature of work. This would include virtual office platforms, virtual events platforms, online collaboration platforms for creating graphics, documents, and music, and so on. In the past year, we added many virtual event customers They hold all kinds of events, from trade shows to celebrity gym class through our platform. We also have several collaborative design platforms to enable live discussion between users while working on a design project. We're working with virtual office platforms such as Loop and Verbala to define how distributed teams will work together in the future. Most recently, we also helped one of the largest companies in the world by market cap to launch an audio live cost platform for the workplace, reflecting that the trend of a lot of the real-time engagement features previously only available in social apps are now coming to professional apps. With this customer, we went through a very rigorous vendor selection process and have proven and have proved that our product can meet the requirements of large enterprise customers in the U.S. I believe this will open the door for us in many more enterprise opportunities in the future. Second, around education. Recently, we see strong usage growth from education customers in South Asia, Middle East, Europe, and U.S. even after the reopening. We now power many of the largest education technology unicorns in South Asia. What we see is that they are basically replicating what EDU and the TAL did successfully in the past in China, which is leverage Agora's capabilities to build branded and proprietary apps that offer better online classroom experience than standard conferencing apps. These markets have huge populations, and the penetration of RTE-powered online education is still very low, which means there is huge revenue potential for Agora. Metaverse-related use cases. I already talked a lot about Metaverse in my opening remarks. Now we are already power several leading Metaverse platforms in South Korea and Brazil, and we also just announced solutions such as MetaKTV and MetaChat. However, I believe we are only at the beginning of a multiple-year trend that will change how people live their lives online. As I summarized, the opportunities for Agora are very clear. It's now up to us to execute well on our strategy and convert this opportunity into a business outcome. Jingbo may add on more financial side.

Thank you, Tony. So, yes, the guidance at the midpoint represented about 5% year-over-year growth. But I think to understand what it means, what the guidance means, we need to really break down our business into three parts. The first is the non-China business, as Tony just discussed. Then it's the China K-12 business. And finally, the China non-K-12 business. So the K-12 business in China last year represented about 25% of total revenues, and we expect to lose almost all of that revenue stream almost entirely in 2022. So it's not really an apple to apple comparison. between the 168 million and the guided range for next year. A more Apple to Apple comparison would be 2022 guidance versus 2021 revenue excluding K-12 in China. And in that case, the guidance will still imply a healthy growth rate. So if we break down the three parts of the business, the China non-K-12 business we expect to moderate growth in 2022, driven by verticals such as IoT. traditional enterprises, what we call digital transformation, and also buy new products like Fusion CDN and Full Path Accelerator. And also a lot of the new solutions recently released like MatKTV and MatChat. So that's the source of growth in China. Other than China, we already talked about it, so we are quite confident we will be able to deliver very strong growth outside China. In terms of the margins, actually, in the latest quarter, the cross-margin outside China, almost the same. And as we mentioned before, we expect that as we continue to expand our footprint in different regions and continues to scale our infrastructure, we should get additional cost benefit. And in the end, we expect our GP would be actually higher outside China.

Thank you for the questions. As a reminder, if you'd like to ask questions, please press star 1 and wait for a name to be announced. Next question comes from the line of Vincent Yu from Needham and Company. Please go ahead.

Hi, can you hear me?

Yes.

Okay, sure. I have six measurements for taking my question. So, the first question is on our expenses, especially for the market expenses. How are we viewing the growth of our market expenses going forward? Should we expect more and more expenses on this part because of the development in the overseas market? My second question is on the utilization of the cash, and in addition to the Just what I can know, do we have an idea or a plan to make more investments or acquire some non-China business to expand the overseas business development? Thank you.

I guess I'll take both questions. So the first one, I think in the near term, sales and marketing expenses will increase at a moderate pace in absolute dollar terms as we continue to invest in branding, marketing, developer community, especially in markets like the United States. but in medium to long term, we think we'll enjoy a strong operating leverage here. Once we take that developer mind share, And once a platform is integrated into a customer's apps, it becomes quite sticky, and we won't need as much marketing or sales expense compared with now. So we're looking in the longer term, sales and marketing expenses as percentage of revenue should be at a lower level, especially if you consider the complex and developer-driven nature of our products. On the balance sheet, yes, we do have a pretty strong balance sheet, and we'll continue to invest in our business, especially in markets outside China. We'll invest in things like brand marketing, developer community, customer support, product localization, security and compliance, and so on. We expect the size of the teams in Silicon Valley, Singapore, India, to grow rapidly here. while the total headcount in China would remain more or less flat. We will not, in terms of acquisition, we will not rule out the possibility, but it needs to complement our current product portfolio and product strategy. So there's no guarantee we will be able to find a suitable target.

Got it. Thank you.

Thank you for the questions. Once again, to ask questions, please press star 1 and wait for a name to be announced. We've got new questions from the line of Bing Duan from Nomura. Please go ahead.

Hi. Thank you, management. Can you hear me?

Yes.

Thank you, management, for asking the question. I have two questions. One is about the competition landscape. You've mentioned in opening remarks that Agora now has over 40% of the market share. Can you give us more colors on how to think about the the competition in the future. And so for the demand change in China and overseas market, do we expect more competitors in this market, in this RTE market going forward? And do we see any like pricing pressure in the next couple of quarters? And my second question is also about the overseas expansion. So can we say that the gross margins and expense profiles will continue to be under pressure in the next couple of quarters because we do need to tap into the new opportunities in the overseas market? Thank you.

Just let me talk about the competition side. I think the overall competitive landscape wasn't changed much in the past few quarters. And I don't expect to change drastically going forward. With that said, I did see more players trying to enter the RT market from different angles. For example, from a CDN live streaming angle, and Adobe from an audio processing angle. However, so far, I think none of our competitors can match the overall QoE and complete feature set of our product portfolio. As such, serious developers who really understand RTE technology tend to choose Agora. This was confirmed, as you mentioned, by the latest data, for example, the latest App Any data It shows that Agora SDK is being integrated into more unique apps than any other competitors by a very large margin and in almost every geographic. In 2021, we actually invested $111 million in R&D. More than any other competitors in the RTE space, In the future, we will continue to be the most focused. Hello?

telephone line problem. Give us a few.

Why don't I answer the second question first?

I was cutting off, right?

Yes.

You're back. From which part? Sorry, from which part? I can continue.

Why don't we just start from the beginning?

Okay. Okay.

After talk about the, after talk about the app, any data you were cut off?

Oh, okay. All right. I mean, any data was, was, you know, latest sort of industry, you know, kind of data to prove our, our, our market leading position. And I was trying to speak that in 2021, we actually invested $111 million on R&D, more than any other competitors in the RTE space. In the future, we will continue to be the most focused company on RTE and continue to invest in the most R&D resources. So we are very confident that Agora will continue to lead this market.

Yeah, sure. So in terms of the profit outlook for this year, As we mentioned earlier, a priority this year is to invest in, especially in the markets outside China. And we do expect this to cause pressure on the margin in the near term. As you can imagine, a lot of the expenses, the marketing expense, the R&D expense, the G&A expenses, these are not directly correlated with revenue, with the loss of revenue from the K-12 sector. but in the near term, so as we continue to expand on expenses, so that will cause pressure on the net margin. But with our balance sheet, we do think we will be able to, whether through this period, and we think it's in the best interest of the company and our shareholders to invest for the future. I don't know if that answers your question.

Sorry about the previous technological problem. We're actually doing this call in two separate locations. Tony is currently in the quarantine hotel, coming back to China. So operator, if we experience another outage of the desktop online, please let me know.

Thank you. Mr. Tuan, do you have follow-up questions?

No, that's all my questions. Thank you very much. Thank you for your questions.

We'll move on to the next questions from the line of Alan Lee of J.P. Morgan. Please go ahead.

Yeah, thank you, management, for taking my question. I have a follow-up question on the competition and pricing. So I understand you have a clear edge in technology, but I still want to get a sense on what's your pricing strategy, especially in overseas markets? given the revenue drivers seem to shift to overseas increasingly. And also I'm wondering what's the revenue price trend in China, given all the relatively weak demand due to regulation and the macro slowdown. Thank you.

Okay, maybe I'll take this question. So what do we see in the non-China market so far? especially in more developed markets like United States and Europe, is that actually I'm quoting a sales leader within Agora. He said, no customer choose Agora because we are cheap. So customer always choose Agora because of our quality of feature set. And in this market, because RTE experience is so critical to the success of many applications, and the fact that the users can perceive that difference very clearly. Once you have a pickup, immediately all the participants in that session will feel that very clearly. So actually, what we see is customers are willing to pay for a higher quality a more stable service and better security and privacy production standards. So we, I think it's fair to say in these markets, we don't think pricing is the kind of the number one factor in terms of competition. In less developed markets, sometimes we do run into less competition. However, it's still largely in a very orderly fashion. People do take into, take pricing into consideration, but it's one of the considerations. In China, as we mentioned before, this market has been around for several years now. And what we are seeing is similar to many other types of cloud services, pricing is we cut up pricing in terms of discount almost every year. The year-on-year change has been in the range of 10 to 15% in the past four or five years. And the last year was no different. Our strategy is try to, at the same time, cut our income cost at a similar pace so that we can maintain a relatively stable margin.

Okay, got it. Thank you.

Thank you for the questions. Once again, to ask questions, please press star 1. There are no further questions at this time. I would like to hand the call back to the management for closing remarks.

Well, thank you, operator, and thank you, everyone, for attending today's call. Later on, we will have the transcript of the call to be posted on our website, which is semester.agora.io, also along with our earnings filings and the presentation of this call. Well, thank you. Have a great day ahead.

Thank you. Thank you. This concludes today's conference call. Thank you for participating.