Agora, Inc.

Good day and thank you for standing by. Welcome to the Agora Inc. Third Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. And now, I'd 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 morning, everyone, and thank you for joining us for Agora's third quarter 2022 earnings conference call. Our earnings results, press release, SEC filings, and a replay of today's call can be found on our website at investor.agora.io. Joining me today are Tony Zhao, founder, chairman, and the CEO, Jim Bowen, our CFO. Reconciliations between our GAAP and 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 the actual results may differ materially. These forward-looking statements are subject to risks, uncertainty, assumptions and other factors that could affect our financial results and the performance of our business and 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 makes no obligation to update any forward-looking statements we may make on today's call. With that, let me turn it over to Tony.

Thanks, Fiona, and welcome everyone to our earnings call. Our revenue for the quarter was $41 million, a decrease of 9% year-over-year, and flat quarter-over-quarter. During this quarter, 36,000 new applications registered on our platform, and our total number of registered applications exceeded half a million. At the end of September, our number of active customers was close to 3,000, adding more than 400 compared to one year ago. In the past few quarters, we faced an extremely challenging operating environment. Our revenue was hit by restrictive regulations in certain markets, which was the main reason behind year-over-year revenue decrease. More recently, inflationary pressure, interest rate hikes, and continued turbulence in global capital market have impacted some of our customers' business expansion plans and their ability to raise funding, which in turn limited their usage of our products. Lastly, the appreciation of the US dollar also had a negative impact on our non-US dollar denominated revenues. Despite those macro changes, Despite those macro challenges, we continue to see strong demand for our products for new use cases, such as live video shopping, which didn't really exist in the US market 18 months ago. As we have seen again and again in our history, real-time engagement technology can transform any online activity and make it more immersive and engaging. This is why we remain optimistic about the long-term potential of our technology and products. However, the market environment will likely remain volatile for some time. To cope with such uncertainties, we must remain nimble, laser-focused, and entrepreneurial. In recent months, We have been working hard to improve our operational efficiency and focus our efforts on priorities including enhancing the quality of experience and ease of use of our core products, strengthening our go-to-market efforts, and winning benchmark customers. We have also made a few management changes to streamline our operations and reduce redundancies. including appointing Mr. Shawn Zhong, our chief scientist, since 2018 to take on an expanded role as our chief technology officer to oversee our global R&D organization. Last month, we also made the difficult decision to restructure and reduce our global workforce. Here, I would like to thank again those impacted friends and colleagues for their contribution along our journey. Qingguo will discuss financial impact of the reduction in his remarks. I believe those moves will help us navigate the uncertainties in the near term. And with the right focus and execution, I think we are well positioned to gain market share and emerge from this challenging period stronger than ever. Moving on to product updates. I'm thrilled to announce that in this quarter, we officially launched our next-generation real-time engagement SDK, Warren 4.0, which has major upgrades in three key areas, namely more flexible, simpler to use, and more powerful. First, on flexibility, our SDK 4.0 has an open and modular architecture by design. It breaks down the entire end-to-end transmission path into dozens of loosely coupled components with standardized interface for each module. Developers now enjoy much more granular control over the media pipe to create the optimal experience for their specific use case. Next on simplicity. With just a few lines of code, developers can easily integrate a wide range of first-party and third-party extensions with rich and engaging features such as audio and video effects, virtual backgrounds, transcription, content modulation, spatial audio, AI noise suppression, and more. Being flexible and easy to use does not mean any compromise on performance. For use cases that require high video quality, SDK 4.0 now supports up to 4K video at 60 frames per second. SDK 4.0 also supports multiple media sources from one single user, which is perfect for use cases such as online proctoring or professional music live streaming. For those that require highly synchronized transmission at ultra-low latency, such as online karaoke, we can combine and deliver all sound tracks to all participants precisely at the same time. With our next generation SDK, developers will be able to create innovative and immersive applications at a faster speed than ever before. Moving on to new use cases. The first one is live video shopping, which is growing very fast and we already have several benchmark customers. For example, a leading collectibles auction marketplace leverages our platform to hold live auctions through real-time video. Its CEO describes the marketplace as a course between the streaming platform Twitch and the auction site eBay. It provides real-time auctions where customers can engage with the sellers and each other in a fast-paced video environment where auctions can be completed in as fast as 30 seconds. The second one is professional social networking. A global leading professional social network is leveraging our technology to power its live audio chatroom. These rooms provide creators and influencers the ability to have live, interactive conversations with people all over the world, and users can join speakers on stage and make broader networking connections post-event. Our quality in audio technology and global coverage throughout the world ensures them a premium quality, perfectly matching their position as a professional social network. Moving on to our RTE conference. In October and November, we hosted our iconic global RTE conferences for the eighth consecutive year, where developers, customers, and thought leaders from over 100 countries joined together to discuss various trends and explore the future of real-time engagement. Nearly 500 people attended the in-person program in San Francisco, close to 10,000 more registered for online sessions, and the total number of session views exceeded 500,000. This year also marks the first time that we hosted a dedicated RTE APEC conference. which has been well received and lively attended by local participants. Here, I would like to highlight some of the observations and key messages from the conference. First, on end-user experience. Evidence continues to build across use cases and the geographics that our customers' business success is profoundly dependent on the end-user experience that they can deliver. For example, a small increase in freeze rate in an audio chat room will reduce users' session length and retention rates. Adding AI noise suppression for in-game team audio chat will significantly increase session length. Therefore, it's paramount for developers to partner with the most capable and reliable RT provider in order to have the most advanced building blocks in creating real-time engagement experiences. Second, on the trend of high-definition video, we expect to see the mainstream video resolution in real-time engagement steadily increase from 480p to 720p in response to end users' growing demand for better quality based on the usage of our platform. Other things being equal, changing video resolution from 480p to 720p leads to an approximately 15% increase in overall session length. In case local network conditions cannot accommodate the required bandwidth, our super resolution algorithm can take care of this issue by enhancing video resolution through the same bandwidth with only 3% increase in CPU and memory usage. This upgrade in video quality and experience will bring more business opportunities for our customers and for us, as we have already seen a huge leap in 720p sessions since the beginning of this year. Lastly, on the trend of adding RTE capabilities to IoT device. We are seeing that devices with RTE features are generally sold at higher premium compared with plain vanilla model without such capabilities. Examples include packed feeders with cameras for real-time video treadmills and rolling machines with screens for live streaming classes, and study labs with AR projection capabilities, enabling students to collaborate with their classmates. This type of human touch is only possible thanks to RTE technologies, and we believe these experiences will be one of the fundamental drivers of IoT's future growth. Before concluding my prepared remarks for this quarter, I want to thank all algorithms for your hard work and commitment during this challenging period. The fundamentals and long-term potential of real-time engagement technology remain the same despite the turbulent market environment. We are neither over-optimistic or overly pessimistic about the future of our industry, and we are still in the early stage of building a great company. As someone once said, today is difficult, tomorrow is even harder, the day after that will be great, although most people will be dead before that. I am confident in our strategy for growth. and in your ability to help Agora succeed. What we need is to keep executing with determination and focus. Thank you all. 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 Q3 and then I will discuss outlook for the fiscal year of 2022. Total revenues were 41 million in the third quarter of 2022, a decrease of 9% year-over-year and flat compared to last quarter. The year-on-year decrease was mainly due to restrictive regulations in certain markets which was offset in part by revenue growth in other sectors and regions. If we look at Q3 versus Q2 this year, the recent interest rate hikes and tightening of financing environment had impacted some of our customers' business and their ability to raise funding, which led to reduced usage on our platform. In addition, the continued appreciation of US dollar has impacted our non-US dollar denominated revenues when translated into US dollar amount. Our trading 12-month constant currency dollar-based NAS expansion rate is 84%, excluding ESMAP. Specifically, dollar-based NAS expansion rate was above 130% for the US and international business, which remain strong and healthy. and approximately 70% for the China business, mainly due to restrictive regulations in certain markets. Moving on to costs and expenses. For my following comments, I will focus on non-GAAP results, which exclude share-based compensation expenses, acquisition-related expenses, financing-related expenses, amortization expenses of acquired intangible assets, and income tax related to acquired intangible assets. Non-GAAP gross margin for the third quarter was 59.8%, which was 5.7% lower than Q3 2021, mainly due to increased revenue from our broadcast streaming product, which contributed approximately 8% of our total revenues in the quarter and had lower gross margin. As Tony mentioned just now, we made a difficult decision to restructure and reduce our global workforce last month. The associated severance costs of 3.2 million are reflected in operating expenses in Q3. We also reduced other operating expenses, such as rental, benefits, software, and advertising. Together, we expect to see roughly $9 million of cash savings on quarterly non-GAAP operating expenses in Q4 compared to Q3. Non-GAAP R&D expenses were 25.2 million in Q3, which included a provision of severance costs of 1.9 million. If we exclude the severance costs, the pro forma R&D expenses decreased approximately 14% from Q2 this year. Non-GAAP R&D expenses was 61.4% of total revenues in the quarter, compared to 50.9% in Q3 last year. Non-GAAP sales and marketing expenses were $13 million in Q3, up 17.7% year-over-year, mainly due to team expansion in the US and certain international markets, and increased advertising and event expenses The marketing expenses represented 31.8% of total revenues in the quarter, compared to 24.6% in Q3 last year. Non-GAAP G&A expenses were 7.4 million in Q3, up 8.9% year-over-year, mainly due to team expansion in the US. G&A expenses represented 18.1% of total revenues in the quarter, compared to 15.1% in Q3 last year. Non-GAAP operating loss was 18.7 million, translating to a 45.7 non-GAAP operating loss margin for the quarter, compared to an operating loss margin of 24.6% in Q3 last year. Now turning to cash flow. Operating cash flow was negative 8.8 million in Q3 compared to negative 14 million last year. Free cash flow was negative 9.9 million compared to negative 15.6 million last year. Moving on to balance sheet. We ended Q3 with 400 80 and 3 million in cash, cash equivalents and short-term investments, compared to 641 million at NFQ 2. Net cash outflow in the quarter was mainly due to free cash flow of negative 9.9 million, prepayment for land use right purchase of 137.4 million, net of deposit refunded cash paid for long-term investments of 3.1 million, and share repurchase of 3.1 million. By the end of Q3, we repurchased approximately 13.2 million of our Class A ordinary shares, equivalent to approximately 3.3 million ADS for $23.2 million, representing 12% of a $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. challenging macroeconomic environment, and the turbulence in global capital markets had impacted some of our customers' business expansion and their ability to raise funding, which in turn could limit their usage of our products. With that, we expect total revenues for the full year of 2022 to be in the range of $160 to $162 million. In closing, we made tough decisions in this quarter on the challenging and uncertain macroeconomic environment. Looking forward, we'll stick to our long-term strategy, be laser-focused on key priorities, and continue to improve operational efficiency. With the right focus and execution, I believe we are well positioned to gain market share and emerge from this challenging period stronger than ever. Thank you to the entire agrarian team for your hard work, and thank you everyone for attending the call today. Operator, let's open it up for questions.

Thank you. We will now begin the question and answer session. To ask a question, you will need to press star 1 1 on your telephone. Please stand by while we compile the Q&A roster. Once again, let's start 1-1 for questions. Our first question comes from Daily Lee from Bank of America Securities. Please ask your question, Daily.

Hi, Maxine. Thanks for taking my questions. I have two questions. Firstly, could you share more color on the customer demand trend for the domestic market and overseas, especially in Q4? My second question is regarding the ARPU and gross profit margin. It seems that the implied ARPU or overseas business declined in Q3 versus year-over-year growth in Q2. How do we see the ARPU and gross profit margin change in the following quarter or from last year? Thank you.

I'll take the demand question. In US and international markets, COVID has already passed largely. So in recent quarters, our demand was not really driven by COVID or anything related to COVID. but rather more drive by new use cases, such as live video shopping, as I mentioned earlier, and also increasing adoption in mature use cases, such as live cost, education, and telehealth. Similarly in China, COVID is also, COVID is still an important thing here, affecting the whole macro economy, however, is not anymore a significant direct demand driver for us. Currently, the main challenge on the demand side is rather on also the market economy environment indirectly from the COVID policy adjustment. As we have been seeing in recent company earnings, internet user growth and revenue growth of internet companies have been flat or significantly slowed down. Many companies are also cutting their growth target for next year, which are limiting their usage of our products. However, we do see incremental demand from more traditional enterprises or IoT industries and a few small sectors. Those will continue, the areas that we will continue to invest more into. But it will take some time to run path adoption on those areas.

I'll take this question on ARPU and the GP margin. So in the US market, actually, ARPU and the margin have been quite stable recently. The main challenge was from international markets, such as Southeast Asia, South Asia. In these markets, we do see more pricing pressure, which also affected our pool. because the continued appreciation of U.S. dollar has effectively made our products more expensive in these markets in local currency because we charge one global price in U.S. dollar. And against a lot of these emerging market currencies, U.S. dollar has appreciated more than 10%, in some cases more than 20%. So to better drive demand in these regions, we need to give additional discount and also to be competitive in those markets. So that's a reason behind the recent weakness of our margin in these markets. And also more broadly speaking, as Tony mentioned, rate hike, inflation, the capital market turbulence, the tightening of financing environment have made a lot of customers' business more difficult, which in turn affected demand and our pool. Looking forward, we actually think GP will remain relatively stable. Actually, in this quarter, as I mentioned earlier, the decrease in GP margin was mainly due to a product mix shift. to a lesser extent due to the pressing pressure from these emerging markets. Looking forward, I think the product mix will not further change. So there, we don't see, we are not seeing incremental pressure from Q3.

Thank you, Tony and Kimbo. Thank you.

All right. Thank you for your question. Our next question comes from the line of Tom Tang from Morgan Stanley. Please ask your question, Tom.

I just have a quick question on the guidance. Since we have released our new guidance, just wondering if there's any further insights we can offer on our 2023 outlook. As we have previously mentioned, we want to break even by end of 2023. Just wondering if there's any changes to the plan. Thank you.

Sure, I'll take this one. So as you have noticed, we lowered our three-year guidance for 2022, and this was mainly due to the recent macroeconomic challenges, as I just mentioned, the rate hikes, the financing environment, and all that. So in terms of 2023, it is still too early to give any official guidance But on a very high level, we are targeting 20 to 30 percent growth in U.S. international markets and then very moderate growth in China. But again, all these operating targets are still moving given the highly uncertain macroeconomic environment in U.S. emerging markets and also in China. As to the breakeven timeline, we are still committed to the same guidance. We aim to breakeven non-GAAP on non-GAAP basis by the end of 2023. Okay.

Thank you.

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

Hi, good morning. Thank you management for being asked the questions. I just have one question. So how do we think about the headcount growth in the next few quarters? Do we have an estimate the growth of the R&D and sales marketing employees? And what will this affect the operating expense growth in Q4 and Q1 next year? Thank you.

Yes. I'll take the first part. I think we take very serious consideration before we make the decision to restructure and reduce the workforce. So we don't see in the next few quarters we want to expand the workforce again. We will continue to operate and try to practice a more efficient and leaner operation down the road, similarly to other costs. I don't know if Jim will have anything to add.

Yeah, just to add a few words from a financial perspective. So the recent structuring and the reduction will bring us about $9 million of cash savings in Q4 compared to Q3. And actually, we expect to see some additional savings in Q1 compared to Q4, because the reduction happened in the middle of Q4, so we still had one month of higher cost in Q4. And as Tony mentioned, we do not expect to further increase headcount in 2023. Okay.

Thank you, Tony. Thank you, Jimbo.

As a reminder, to ask a question, please press dial 1-1 on your telephone.

To ask a question, please press star 1 1 on your telephone. For the question, I'll turn the call back to the management team for closing remarks.

Thank you, operator, and thank you, everybody, for attending our call today. If there's any more information, please visit our IR website. Today's presentation and also the speakers' remarks will be also posted on the website. Again, thank you, everybody. Thanks. Thank you.

Bye-bye. Thank you.

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