Agora, Inc.

Good day and thank you for standing by. Welcome to Agora Inc. second quarter 2022 financial results 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 1 on your telephone. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Ms. Fiona Chen, Head of Investor Relations. Thank you. Please go ahead, ma'am.

Thank you, operator. Good evening, everybody. Good morning for the people in Indonesia, and thank you for joining us for AGRA's second quarter 2022 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 Chow, our founder, chairman, and CEO, Jin Guo 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 the performance of our business, which we discuss in detail in our filings with the SEC. including today's earnings press release and the risk factors and other information contained in the final prospectus relating to our initial public offering. Agora remains no obligation to update any forward-looking statements we might make on today's call. With that, let me turn it over to Tony. Tony?

Yes, thanks Fiona, and welcome everyone to our earnings call. Our revenue for the quarter was $41 million, a decrease of 3% year-over-year, and an increase of 6% quarter-over-quarter, bringing us back on the growth track after regulatory change in the K-12 education sector in China. During this quarter, 33,000 new applications registered on our platform. At the end of June, our number of active customers exceeded 2,800 adding over 400 compared to one year ago. In the U.S. and international markets, demand for our real-time engagement platform remains strong. Our revenue for this segment recorded a 63% increase compared with the same period last year, with a dollar-based net expansion rate consistently above 130%. percent since 2021. Following our announcement of the promotion of several key executives in May, I'm confident that we are well positioned to enhance our go-to-market efficiency and expand our platform globally. In recent months, we have witnessed a strong response to our sub-second interactive live streaming product globally. We believe this product has the potential to disrupt the traditional CDN-based live streaming market, as it can deliver live streaming experiences at lower latency in a highly synchronized fashion with only a moderately higher cost. We already have several benchmark customers in the sports and gaming live streaming sector. Powered by this product, our customers can create a wide range of engaging and interactive experiences for their end users, such as chat among audience and in-game live betting. For example, NBC Group, the largest media company in the Middle East and North Africa, uses this product on their social gaming platform, Weezo, to offer game players high-quality interactive live streaming and it has become one of the biggest attractions of the video platform. With Agora-powered live streaming in place, NBC has already seen a 10% increase in new user growth. And South Asia's leading video live streaming platform, Vololive, is also powered by this product. We provide the platform's technology backbone powering live streaming and interactive features that enable content creators, entertainers, and influencers to broadcast interactive live streaming to their audience and monetize directly through consumer transactions from their fans. We believe this product will substantially enlarge our total addressable market as more and more live streaming platforms with legacy technology embrace our sub-second live streaming solutions. Next, on to our new products. In US and international markets, we beta released Agora Chat, which is a powerful tool for developers to add messaging to any application. Agora Chat provide comprehensive features and functions, such as rich media messages, message translation, user presence, and type indicator, chat history export, content moderation, and much more. Agora Chat has the broadest compatibility with operating systems and third-party development frameworks among similar messaging API products in the market. It is also very easy to use, especially for those who are already using our real-time video or voice product. Through a few lines of code, developers can seamlessly create an immersive and engaging experience for their end users to send messages, emojis, and multimedia files from within their real-time engagement sessions. I am also glad to say that Aurora Chat is a perfect demonstration of the business synergies from our integration of EaseMob over the past year. By combining EaseMob's experience in providing messaging APIs in Asia market. With Agora's industry-leading global infrastructure, we're able to offer a highly competitive product for customers in the US and international markets. Now let's move to our business update in China. Revenue from China in this quarter recorded a 1% quarter-over-quarter increase as a shortfall in K-12 academic children's sector was more than compensated for by the growth in other sectors. Our revenue in sectors other than KCHAO continues to grow healthily with an approximately 13% increase compared with the same period last year. Our leading market position in China is once again demonstrated by IDC's recent published report on the video cloud market in 2021. According to the IDC report, Agora maintained its number one position in RTC solutions in China, with a market share greater than the next seven companies combined. Agora also recorded the largest revenue growth among all players. In China, we formed a partnership with the China Audio Video Copyright Association, also known as CAVCA. the only association approved by the National Copyright Administration to undertake collective rights management for copyright and related rights in video and audio works in China. Through this partnership, we are now able to provide a one-stop solution for our customers to manage their use of music works in their live streaming sessions. And more importantly, in full compliance with the latest copyright laws, and regulations in China. Under a digital rights management system that covers more than 100,000 music works in high definition, each and every usage of these works in our customer's application is now traceable. Our customers can choose from paying per use, paying per usage, or flat fee with unlimited access. and corporate owners will then be duly compensated. We believe our partnership with CAVCA and this one-stop solution bring profound value to our customers and will help make our Meta KTV a go-to product for delivering immersive real-time karaoke experience in the metaverse. Before concluding my prepared remarks for this quarter, I would like to invite all of you to attend our RTE 2022 conferences. The North American conference will take place from October 10th to October 12th, and you are welcome to join either online or in person in San Francisco. The Asia Pacific conference will be held online from October 21st to October 24th. We expect to bring the brightest minds in the business and technology field to explore the future of voice video, Internet of Things, metaverse, and more. With that, let me turn things over to Jingbo, who will review our financial results.

Thank you, Tony. Hello, everyone. Let me start by first reviewing financial results for K2, and then I will discuss all for the fiscal year of 2022. Total revenues were $41 million in the second quarter of 2022, a decrease of 3.2% year over year, and an increase of 6.2% quarter over quarter. As we mentioned in previous earnings calls, our revenue growth in this quarter was negatively impacted by the new regulation on K-12 academic tutoring sector in China. Our revenues from this sector were approximately $1 million in the second quarter of 2022, compared to 12 million from the same period last year. On the other hand, our growth momentum in other geographies and sectors remained solid in this quarter. In particular, revenues from U.S. and international markets grew 63.2% year over year, and 13.4% quarter-over-quarter to 18.6 million in Q2, representing 45.4% of our total revenues. Our Trading Cosmos constant currency dollar-based NAS expansion rate is 95%, excluding ESMOD. Specifically, expansion rate was about 130% for the US and international business, which remains strong and healthy, and approximately 80% for the China business, which was negatively impacted by the K-12 sector. Moving on to cost and expenses. For my following comments, I will focus on non-GAAP results, which excludes 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 fourth quarter was 65.8%, which was 4.3% higher than Q2 last year, mainly driven by technical and infrastructural optimizations. Non-GAAP R&D expenses were $25 million in Q2, up 30% year over year. as we continue to hire talented employees and strengthen our R&D team. Non-GAAP R&D expenses were 66% of total revenues in the quarter, compared to 49.2% in Q2 last year. Non-GAAP sales and marketing expenses were 10.9 million in Q2, up 16.8% year over year, mainly attributable to teams' expansion and increased advertising and event expenses as we continue to step up our go-to-market efforts globally. Sales and marketing expenses represented 26.6% of total revenues in the quarter, compared to 22.1% in Q2 last year. Non-GAAP G&A expenses were $7 million in Q2, up 23.1% year-over-year. mainly due to team expansion and expected credit loss provisions. P&A expenses represented 17% of total revenues in the quarter, compared to 13.3% in Q2 last year. Non-GAAP operating loss was 17.8 million, translating to a 43.4% non-GAAP operating loss margin fourth quarter. compared to an operating loss margin of 22.3% in Q2 last year. Exchange loss was 5.3 million in Q2, mainly due to US dollar appreciation and an increase in the balance of RMB denominated cash and short-term investments held by our subsidiaries in Hong Kong, whose functional currency is US dollar. The anticipation of funding RMB to subsidiaries in mainland China. In addition, U.S. dollar appreciation adversely affected our revenue in China by approximately 4%. Now turning to the update on land-use rights purchase. As we announced on June 28, we entered into an agreement to acquire the land-use rights for approximately 42 square meters of land in the riverside area of Yangpu District, Shanghai through a joint venture with two independent third parties. We hold a 46% equity interest in the joint venture. The aggregate consideration for acquiring the land use right is approximately RMB 2.5 billion, and we had fully paid our share of the consideration in July. We plan to build a new headquarters on the premises. Turning to cash flow, operating cash flow was negative 23.8 million in Q2 compared to negative 8.3 million last year. Free cash flow was negative 24.2 million compared to negative 11.5 million last year. Moving on to balance sheet, we ended Q2 with 641 million in cash equivalents and short-term investments compared to $718 million at the end of Q1. Net cash outflow in the quarter was mainly due to free cash flow of negative $24.2 million, deposit paid for land use by purchase of $34.2 million, cash paid for long-term investment of $4.2 million, and share repurchase of 12.2 million. By the end of Q2, we repurchased approximately 9.7 million of our Class A ordinary shares, equivalent to approximately 2.4 million ADSs for approximately $19.8 million, representing 10% of our $200 million share repurchase program. 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 reflects various assumptions that are subject to change based on certainties related to the impact of the COVID-19 pandemic. With that, for the full year 2022, we maintain our previous guidance on total revenues for the full year. are expected to be in the range of 176 to 178 million. In closing, we're proud of our execution in the quarter on the very challenging macroeconomic environment. Thank you to the entire Agor team for your hard work and everyone attending the call today. Hope you are all healthy and safe. Let's open it up for questions. Thank you.

As a reminder, to ask a question, you will need to press star 11 on your telephone. Please stand by while we compile the question and answer roster. So once again, that's star 11 for questions. Our first question comes from the line of Yang Liu from Morgan Stanley. Yang, your line is open. Please ask your question.

Thanks for the opportunity. I have two questions here. The first one is, could management update us in terms of the overseas market demand for RTE, especially the demand from startups? Because on the positive side, we see a good pickup in terms of the new customer this week, this quarter. But on the negative side, we also from time to time hear that the overall overseas funding environment is getting tougher and a lot of startups cannot raise equity or raise funding in the market. So could you please update us in terms of what Agora is seeing on the demand? And the second question is growth margin, because we see a very good pickup in growth margin this quarter. What should be the outlook in the second half of this year? Do you think this is a structural or sustainable trend, or is it helped by some one-off benefits? Thank you.

I'll take the business trend on our customers' fundraising, et cetera. Overall, we do hear some startups talking about fundraising getting harder, and evaluation is much lower now. But we don't have a strong impression of difficulties from our customer base. We have a very diverse customer base, from large to very small ones. In some individual case, we see things like customers slow down their own hiring. delay rollout of new product or features, or become more sensitive to infrastructure costs, et cetera. I believe this is normal, given the challenging market environment we are in today. In terms of impact to our own business, despite the challenge I mentioned just now, we see that overall trend of adoption of real-time engagement technology by developers and users remains strong, especially for on the global market. This is why we still achieved a strong revenue growth in Q2 in the U.S. and international markets with revenue up 63% year-over-year. We will continue to monitor the situation closely and see how it takes off.

Okay, I'll take the second question on GDP margin. So in the past six quarters, since beginning of 2021, Our backend engineering team has really worked very, very hard to optimize infrastructure costs and improve our architectural design so that the same task consumes less server and bandwidth resources. So this has resulted in a very significant reduction in COGS per minute of video or voice call delivered. And this is why, despite an annual decrease in selling prices, average selling prices, of about 10 to 15%, which is normal for cloud services like ours, we were still able to improve our GP margin, non-GAAP GP margin, from 58% in Q2, or in Q1 last year, to 65% in Q2 this year, which is more than 7% improvement. So I guess that's the most important reason. But there was also a small one-off factor in this quarter. eSmob has a small private cloud business which has a lower GPU margin. This quarter, many of their private cloud projects got delayed due to the COVID situation in China. And this actually had a positive impact on the GPU margin because the revenues were delayed. Looking forward, further Vue.js optimization will be harder. And new products, such as the integrated CDN, will have lower GDP margin. So we do not expect GDP margin to increase significantly in the near future. It will likely fluctuate from quarter to quarter in the second half.

Thank you. Just one very quick follow-up here. Could you please update us in terms of the growth margin in China and in global market? Are they quite similar now or is there still a gap between the two markets?

Yeah, so let's remember we see there's no gap between like six quarters ago, the U.S. international market was quite a bit lower, and now the two are basically at parity. There's no difference between the two markets.

Thank you.

Thank you. Our next question comes from the line of Binh Duan from Nomura. Please ask your question.

Binh, your line is open. Please go ahead.

Oh, hi. Sorry. Hi. Good morning, management. So I have two questions. One is about the trend of the operating expense. Can you give us more colors on the second half, especially about the R&D and the sales marketing expense, the expense ratio as a as compared to the first half. And the second question is about follow-up on the overseas market growth. Can you give us some more color about the revenue or volume breakdown by applications or by the vertical segments? Do we see any of the negative impact as more people are getting back to work? Thank you.

Okay, so the first question on expenses. As you can see in the financial statements, the fastest-growing segment of expenses is R&D. We have always invested a lot, invested very heavily in R&D in the past, and we'll continue to do so in the future because ultimately this is where, this is the foundation of a competitive business. But on the other hand, we acknowledge the challenging macroeconomic environment in the U.S., in China, and the other markets as well. So we do intend to get, to become more focused when it comes to R&D. So for example, product-wise, we'll focus on products where we see strong demand such as sub-second live streaming, as Tony mentioned in his opening remarks, or where we have a strong advantage, such as spatial audio. And we'll really focus our resources on these kind of promising products. And customer-wise, we'll focus on large customers and the smaller, small group of really innovative customers who can help us drive our roadmap and really build the future of real-time engagement. And in terms of the organization, we'll streamline our internal processes and bring our engineers closer to our customers. So all these initiatives will improve our R&D efficiency. And hopefully, as our revenues scale, we'll see that percentage drop in the second half. In terms of sales marketing, the increase in sales marketing expenses were mainly due to our expansion in US international markets. In China, actually, that part of the was mostly flat. We think that sales marketing expenses overall will continue to increase in dollar terms, but the pace will slow down. And as our revenue scales, it should also drop as a percentage of revenue. I want to add another point on the G&A expenses. In the past three to four quarters, our G&A expenses was likely affected by the expected credit loss from customers in the K-12 sector in China. And now with that behind us, we expect G&A should also drop in dollar terms in the coming quarters. So that's our expenses. in terms of the US and international market. I think overall, we see growth from many different geographies and verticals. The strongest one, I'll highlight a few stronger ones. In this quarter, we saw very strong growth from the Middle East, Southeast Asia, and North America. And in terms of vertical, education, media, e-commerce, and social generated the majority of the incremental usage on platform. And you mentioned the kind of back to work situation. It's true that the back of work trend has impacted use cases such as remote collaboration and virtual events. that kind of use case. But in use cases like education and e-commerce, actually we continue to see very strong demand. And we are particularly excited about opportunities in media and e-commerce. Because these are the verticals where historically they were under penetrated. by real-time engagement technology, but they certainly have a lot of room for adoption in the future. Like Tony mentioned, a sub-second low-latency live streaming product, it only started to be adopted in the sports live streaming space. So now people are using this technology to broadcast live sports games, and we believe there is So overall, we don't think it's driven by one or two particular use cases. We see very strong adoption across many different regions and use cases.

Thank you.

Once again, ladies and gentlemen, if you wish to ask a question now, please press dial 1-1 on your telephone. Our next question comes from the line of Ellen Lee from JP Morgan. Ellen, your line is open. Please go ahead.

Thanks, management, for taking my question. My question is on competition. So we know that some large platforms have shifted their focus from revenue goes to profitability. So just wondering if this is also the case for private competitors. And could you give us an update on the compare landscape and also the pricing trend in the mass market. Thank you.

We don't see much change compared to last quarter's competition landscape. As you mentioned, large call providers, as we heard also, they reduced their investment in our field, actually, maybe partially due to their effort to to shift focus to more profitability instead of just revenue growth. On private sector, I think there are similar trends where companies all kind of look more on profitability instead of just the growth. But overall, there's no huge change compared to last quarter.

Got it. Thank you.

Again, if you wish to ask a question, please press dial 11 on your telephone. Reminder, it's dial 11 for questions. We have a follow-up question from the line of Yang Liu from Morgan Stanley. Please ask your question.

Just one very quick follow-up in terms of the FX. I think Benjamin mentioned that China part of the business have a few percentage of the FX negative impact in second quarter. And currently, Given the sustained strong of the US dollar, do you think this kind of a trend or this kind of impact will continue in the second half? And also in terms of the full year guidance, management is unchanged, but does it mean that actually the company needs to deliver a little bit more than expected to reach the number given the FX headway? Thank you.

Yes. So for Q2, if the US dollar RMB exchange rate stayed where it was at the end of Q1, we would have made nearly $1 million more in revenue. That's the impact for Q2. So when we give the four-year guidance, we are assuming a constant FX exchange rate. at where it was at the end of Q2. So we are not factoring in any further appreciation on the US dollar. And you are right, to deliver the same guided revenue, we will need to work hard. The full year impact, if it stays where it is now, it will be close to $5 million. So that means we need to make $5 million more.

I've got it. Thank you.

Our next question comes from the line of Boris Van from Bernstein. Boris, your line is open. Please go ahead.

Hi, good morning. Thank you for taking my question. This is Boris Van from Bernstein. I have two questions I would love to ask. The first is regarding, I think, the gross margin performance. I think it's very positive to hear about the reengineering and the past opportunity. Just wanted to check, is this a one-off or is this something that can be continued to gain in terms of further efficiencies on an ongoing basis? And the second question I had was broadly in the same vein around R&D. I would like to hear a little bit more about how do you think about R&D and your investments in R&D going forward? Cause it seems like you have a lot of, um, you know, good news, good use cases. Um, but does this mean that already continues to grow or when we start getting efficiencies in, in RNG, um, over time? Thank you.

Okay. First question on TP margin. Uh, I, as I explained, uh, the important improvement since 2021 was mostly due to the engineering effort to, uh, well, Also procurement effort, but mostly the engineering effort to optimize the technical design so that to do the same thing, we need less server or bandwidth resources than before. We'll continue to optimize the design, but there is this diminishing return of the optimizations. So it will get harder to, it's not like indefinite, you can always gain the same amount of improvement over time. So it will get harder. And that's why we're not guiding kind of a higher and higher GDP margin. And in addition, as I mentioned before, our strategy is really to keep a healthy GPU margin instead of trying to maximize GPU margin whenever we can so that we can keep enough competitive pressures on competitors as well. So that's GPU margin. In terms of R&D, It's true. We are both investing for today and investing for the future. As we expand globally, we see more use cases, we see more regions, more different natural environments, so we need to invest to really optimize the performance there. But we also made a lot of investment for the future. And when we expand our R&D team so much, almost three times in the past two years, obviously there are a lot of inefficiencies. So looking forward, we will, as I said, right, we'll be more focused and we'll really work hard to remove some of the inefficiencies So in simple terms, we do not expect R&D to continue to rise as we expand our operation globally. And there should be actually very strong operating leverage because a lot of the technology, a lot of the products we build can be leveraged across different use cases and across geographies. When we do the education solution we built in China, When we go to Eastern Europe, when we go to South Asia, actually we use essentially the same product with very, very little modification. So actually we think in the end there will be a lot of R&D leverage. So again, we do not expect R&D to rise indefinitely.

All right, Boris, do you have any follow-up questions? Thank you for that.

That's very, very, very, very positive. Would you be in a position that maybe guide us on how are you thinking about the long-term steady state R&D and maybe sales and marketing?

We've always guided that for this business. We see that in the long-term R&D would be somewhere around 30% of revenue, which is high compared to most SaaS or PaaS business because this is really a very sophisticated technology, and that's why we think we'll maintain this relatively high level R&D in the long run. And sales marketing, on the other hand, should be lower, given all the advantage we gained through R&D. So we think that will stay at around 20% in the long run. But that's not, again, that's for a long-term steady state. It's not this year or next year.

Okay, thank you very much. Thank you.

Thank you. As a reminder, to ask a question, please press L11. There are no further questions. I'll now turn the call back to the banishment team for closing remarks.

Thank you, operator, and thank you, everybody, for attending our call today. As a reminder, the recording and the earnings release will be available on our website, investor.agra.io. And if there are any questions, please feel free to email us. Thank you. Thank you.

Thank you.

Bye-bye.

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