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spk06: Good day and thank you for standing by. Welcome to Agora Inc. Second Quarter 2023 Financial Results Conference Call. At this time, all participants are on 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 will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. The company's earnings results press release, earnings presentation, SEC filings, and a replay of today's call can be found on its IR website at investor.agora.io. Joining me today are Tony Zhao, founder, chairman, and CEO, Jingbo Wang, the company's CFO. Reconciliations between the company's GAAP and non-GAAP results can be found in its earnings press release. During this call, the company will make forward-looking statements, about its future financial performance and other future events and trends. These statements are only predictions that are based on what the company believes today, and actual results may differ materially. These forward-looking statements are subject to risk uncertainties, assumptions, and other factors that could affect the company's financial results and the performance of its business, and which the company discussed in detail in its filing with the SEC. including today's earnings press release and the risk factors and other information contained in the final prospectus relating to its initial public offering. Agora Inc. remains no obligation to update any forward-looking statements the company may make on today's call. With that, let me turn it over to Tony. Hi, Tony.
spk03: Hi. Thanks, Alfredo. And welcome, everyone, to our earnings call. Our revenue for the second quarter was $15.3 million for Agora, down 5.6% year-on-year, mainly due to a challenging global market environment and tightening financial conditions of certain customers. Our revenue was 131.5 million RMB for Shunwang, down 11.7% year-on-year, excluding revenue from the disposed customer engagement cloud business, and K12 academic tutoring sector, mainly due to a slowing economy and fast-evolving regulation in certain downstream verticals. As of the end of this quarter, we have 1,560 active customers for Agora and close to 4,000 for Shenhua, an increase of 24% and 5%, respectively, compared to one year ago. Now moving on to our business, product and technology update for the quarter. First, starting with Agora. We recently announced our partnership with ActiveFence, a leading global provider of AI-driven content detection and moderation service. ActiveFence's solution keeps end users safe from the widest spectrum of online harms and unwanted content and malicious behavior, including adult content, bullying and harassment, child abuse, hate speech, illegal goods, violence, and more. We believe content moderation is particularly important for real-time engagement applications, given that content is generated and consumed in real time. Through our extensions marketplace, ActiveFence's content moderation tools allow developers to easily add live audio and video content moderation functionalities to their applications without significant change to their development processes. By detecting and removing all kinds of unwanted harms in real time, Agora and ActiveFence can help customers better handle emerging online safety and compliance challenges while boosting end-user engagement in a safer and more trusted environment. On the use case side, over the past few quarters, we have seen an increase in real-time engagement adoption and usage from vertical social networks or applications for interest-based communities. In typical use cases, creators, experts, or influencers in a specialized area, such as meditation, yoga, astrology, religion, sports, or creative arts, engage with their fan base through video calls or interactive live streaming sessions. A good example is AstroTalk, a prominent an online astrology platform operating in over 60 countries with a network of over 5,000 astrologers. By leveraging Agora's technology, AstroTalk introduced an innovative use case that enables video calls between clients and astrologers to be broadcasted simultaneously to multiple potential customers. The objective was to create a platform that would show astrologers providing live predictions to clients. When clients observe others talking with an astrologer, they are more inclined to engage with the same astrologer. As a result, AstroTalk has experienced remarkable straightforward growth in active sessions following the launch of this feature. Moving on to Shenwang. In the past quarter, we upgraded our solution for high-definition video calling and live streaming. Previously, customers had to separately integrate our video-based product, features, and third-party extensions, such as video enhancement, proprietary codecs, super resolution, beautification, and other video effects. and it often took substantial time to find the most suitable architecture and specifications for the customer's unique use case. In order to deliver a balanced end user experience, considering video quality, latency, fluency, functionality, and device compatibility. With our new use case oriented solutions, customers can now easily access best practices tailored to their specific use cases, such as single host live streaming, host PK, host audience interaction, multiple host live streaming, and live shopping. Customers not only experience a shorter development time, but also benefit from an enhanced user experience. This ultimately leads to improved end user retention and better monetization opportunities for our customers. For example, a dating platform recently adopted our comprehensive solution to upgrade their one-on-one and live streaming video from standard definition to high definition. In addition to the increase in video resolution, our solution also improved video quality in environment with poor or uneven lighting provided video noise suppression, perceptual video coding, and beautification. As a result of the high definition upgrade, the average user duration increased by more than 10%. Meanwhile, hosting matchmakers and the dating platform itself also generated higher tips and revenue. In early July, Shenwang was chosen as one of the 26 leading companies to showcase AI innovations at the 2023 World Artificial Intelligence Conference. Shenwang demonstrated its AI-powered noise suppression capabilities based on deep learning algorithms. which can effectively remove more than 100 types of unwanted background noises and echoes, ensuring a distraction-free and more immersive experience for end users. Our AI noise suppression has been widely used by our customers across verticals such as telehealth, remote collaboration, social and gaming. For example, a voice social platform realized a 5% increase in average session length after integrating our AI noise suppression in their application. Before concluding my prepared remarks, I would like to invite all of you to our upcoming RTE conferences. On Agora's side, the RTE program this year will consist of three events. We will launch with RT Life Shocking, a month-long webinar series focused exclusively on this rapidly evolving space. Regional events for RT India and RT APEC will take place on October 5th. RT India will be a fully virtual event highlighting how RT technology is facilitating the evolution of new communities within face tech, astrology, social, media and entertainment, live shopping and gaming. RTE APAC programs will be hosted in Korean and Indonesian languages, featuring key leaders and discussions around metaverse, education and live shopping. We are excited to continue growing our global RTE community and foster the spirit of innovation through our conferences. On Shunwang's side, the conference will be held in Beijing from October 24th to 25th. This year's conference will center around how the future of RTE will be shaped by generative artificial intelligence and high-definition immersive experiences, together with industry leading experts and practitioners, we will explore and envision the possibility and advancement that this technology will bring to RTE. With that, let me turn things over to Jingbo, who will review our financial results.
spk01: Thank you, Tony. Hello, everyone. Let me start by first reviewing financial results for the second quarter. and then I will discuss outlook for the third quarter of 2023. Quarter revenues were $34 million in the second quarter of 2023, a decrease of 16.9 percent compared with the same quarter last year, and a decrease of 6.6 percent quarter over quarter. Agor revenues were $15.3 million in the second quarter of 2023, a decrease of 5.6% year-over-year and an increase of 1.3% quarter-over-quarter. The year-over-year decrease was primarily due to reduced usage of our products and customers increased pricing sensitivity due to challenging macroeconomic environment starting from the second quarter, second half of last year. The quarter-over-quarter increase was primarily due to usage growth and the emergence of new use cases, such as vertical social networks, as Tony just mentioned. Shown on revenues were RMB 131.5 million in the second quarter of 2023, a decrease of 19.8% year-over-year, and a decrease of 9.9% quarter-over-quarter. If excluding revenues from the disposed CEC business, and K-12 academic tutoring sector revenue decreased 11.7% year-over-year and 8.8% quarter-over-quarter, which was primarily due to slowing general economic conditions and fast-evolving regulations in certain downstream markets. Dollar-based net retention rate for Agora is 108%, Dollar-based net retention rate for Shenwang is 91%, excluding revenues from the K-12 dynamic titling sector. Moving on to cost and expenses. For my following comments, I will focus on non-GAAP-adjusted financial measures, which exclude share-based compensation expenses, acquisition-related expenses, monetization expenses of acquired intangible assets, income tax related to acquired intangible assets, impairment of goodwill, depreciation of property and equipment, and amortization of land use rights. The adjusted gross margin for the second quarter was 67.2%, which was 2.6% lower than Q2 2022, mainly due to a change in product mix, and was flat compared to Q1 2023. As mentioned in previous earnings calls, we have structured and reduced our global workforce in Q4 2022, and we have continued to implement effective expense controls. As a result, adjusted R&D expenses were 16.6 million in Q2, decreased 37.4% year over year. Adjusted R&D expenses represented 48.8% of total revenues in the quarter, compared to 64.8% in Q2 last year. Let's just say sales and marketing expenses were 7.1 million in Q2, decreased 34% year over year. Sales and marketing expenses represented 20.9% of total revenues in the quarter, compared to 26.3% in Q2 last year. Adjusted G&A expenses were 6.2 million in Q2, decreased 9.5% year over year. G&A expenses represented 18.2% of total revenues in the quarter, compared to 16.6% in Q2 last year. Adjusted EBITDA was negative 6.6 million translating to a 19.5% adjusted EBITDA loss margin for this quarter, significantly lower than the adjusted EBITDA loss margin of 37.4% in Q2 last year. Investment loss was $1.9 million in Q2, primarily due to loss on investments in certain private companies of $4.9 million, which was offset in part by the fair value change in equity investments of $3 million. Non-GAAP net loss was $6.6 million in Q2, translating to a $19.4 million non-GAAP net loss margin fourth quarter compared to a net loss margin of 50.8% in Q2 last year and 25.1% in Q1 this year. One extraordinary P&L item this quarter is the impairment of goodwill. In Q2, we completed the integration of e-smarts operation, after which we only identified one reporting unit. Considering the negative impact on market demands as a result of the challenging global macroeconomic environment and regulatory changes in certain sectors, we performed quantitative impairment tests on goodwill and recognized the full impairment of Goodwill in relation to the SMAP acquisition, which is $31.9 million. As of the end of Q2, there was no more Goodwill outstanding on balance sheet. Now turning to cash flow. Operating cash flow was negative $5.3 million in Q2 compared to a negative $23.8 million last year. Free cash flow was negative 5.6 million compared to negative 24.2 million last year. Moving on to balance sheet, we ended Q2 with 391.6 million in cash, cash equivalents, bank deposits, and financial products issued by banks. Net cash outflow in the quarter was mainly due to free cash flow of negative 5.3 million and share repurchase of 21 million. Since the Board approved our share repurchase program in February 2022 and as of June 30, 2023, we have returned approximately $82 million to shareholders through share repurchases, demonstrating the Board's commitment to safeguarding shareholder value and its confidence in the long-term prospect of the company. As of June 30, 2023, the company had approximately 97.5 million ADS outstanding, reflecting a reduction of approximately 14.9 million ADS, or 13% reduction of total shares outstanding from January 31, 2022, before the share repurchase program started. So far, we have completed 41% of our $200 million share repurchase program, which will expire at the end of February 2024. And we intend to continue to undertake this meaningful capital return for our shareholders. Now turning to guidance. For the third quarter of 2023, we currently expect total revenues to be between US dollar 34.5 to 36.5 million. This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change. In closing, we are confident about the long-term prospect of the global market for real-time engagement technology, and we are well prepared for near-term uncertainties and challenges. Thank you to both Accord and Shonwon teams for your hard work, and to our investors for your trust. Thank you, everyone, for attending the call today. Operator, let's open it up for questions.
spk06: Thank you, sir. As a reminder, to ask a question, you will need to press star 11 on your telephone. to withdraw your question, please press star one one again.
spk07: Please stand by while we compile the Q&A roster.
spk06: And I show our first question comes from the line of Yang Liu from Morgan Stanley. Please go ahead.
spk02: Hi, this is Lydia representing Yang Liu from Morgan Stanley. So our question is for management. Can you review your observation of the demand recovery situation both in domestic and overseas market and as well as your outlook for the second half of this year thank you sure in terms of the market i would divide this into the u.s international market and china market so for the u.s and international market we do see
spk01: Pretty healthy demand from verticals such as e-commerce, vertical social networks, focused on certain interest groups like Tony just mentioned. Education and IoT is a sector that doing pretty well at the moment. On the other hand, emerging markets and certain use cases that were popular during the pandemic, such as online events, are relatively weaker. On the China side, demand from digital transformation sector is more resilient, such as financial institutions, large enterprises, and also we see healthy demand from professional training, non-academic education, and within the social entertainment sectors, despite the pretty challenging regulatory environment in China, we see promising growth from customers operating apps outside China. We see pretty healthy demand growth there. And on top of the original situation, I'd also like to comment on the product side. On the product side, we see a lot of customer demand, new demand for AI-based features. such as content moderation, real-time transcription, and also pretty healthy demand for recent high-definition video products. So in terms of three-year outlook, we are cautiously optimistic that demand will gradually improve. Overall, can we say remainder of the year driven by these new products I just mentioned? and at the same time offset by ongoing macro challenges, both in China and also in other emerging markets.
spk07: Thank you.
spk06: As a reminder, to ask a question, you would need to press star 11 on your telephone. And I show our next question comes from the line of Harry Zhuang from Bank of America Securities. Please go ahead.
spk04: Hi, thanks management for taking my question. I have two questions. First one is regarding the margin trend. Can you give us the outlook of the gross margins in the next two quarters and also about the next year? And the second question is what is the plan for the AI products and the future revenue contribution for the company? Thank you.
spk01: Yeah. On the gross margin, as you can see, is basically flat. And it's currently at a pretty healthy level. So we do expect gross margin to remain relatively stable for the remainder of the year as we continue to optimize our cost structure. As for next year, it's probably still early to say, plan certainly to try to maintain a stable and healthy gross margin levels.
spk03: As to the AI-related development and the prop, actually our high-definition video initiative is a product that leverages AI capabilities to greatly improve video performance. We believe we We are the first one that are able to provide mobile real-time video to the level of true HD state. The first mature mobile 1080p real-time video solution is based on this HD initiative. Also, our third-party extensions, like what I mentioned in opening remarks, active fans are also leveraging AI technology to moderate real-time content and activities. Or like one of our other products, real-time transcription is also leveraging AI. Also, as a much bigger trend, the AIGC development is very encouraging. We firmly believe generative AI will expand the boundaries of RTE and significantly enhance end-user experience. But it won't be a short-term revenue contributor as the voice and video multimodal capabilities are still at their early stage for all major large models. We have been working closely with customers on certain vertical use cases, leveraging AIGC, such as AI-powered game players and real-time voice-based AI We expect to make product launch announcement in the coming months. In addition, AIGC will also be one of the main topics of our upcoming RTE conference in October. We will also have the latest demo showcase during this conference on AIGC. Please join us for a deeper and more detailed discussion.
spk07: Thank you.
spk06: As a reminder, to ask a question, you will need to press star 1-1 on your telephone.
spk07: And to withdraw your question, please press star 1-1 again. I show our next question comes from the line of Haran Wong from CITCIS. Please go ahead.
spk08: Yeah.
spk05: Hello. Can you hear me?
spk08: Yes.
spk05: Yeah, thank you. Actually, two questions from my side. And the first one is that, has there been any change in the company's guidance on the profit? And will there be any more related optimizations within the year? Thank you.
spk01: So can you repeat your second question?
spk05: And will there be any more related optimizations about the human resource? within the year. Yeah, thank you.
spk01: Yeah, I'll take both questions. So despite the recent macroeconomic challenges and regulatory challenges, we remain committed to our goal of achieving non-GAAP net income break-even in Q4 this year. So again, non-GAAP net income level break-even in Q4 this year. So as you can see, in the past few quarters, we have effectively reduced operating expenses by roughly 30%. So we believe we are now operating at a quite efficient level with the right team size. So our focus in Q3 is really to drive revenue growth rather than further cutting headcount and cost. But as we see revenue recover and we make incremental small incremental savings, we think we still have a good chance of achieving a net income per capita towards the end of the year.
spk08: Okay, thank you. Very clear.
spk05: And my second one is that, has there been a noticeable change in the domestic and international competitive environment? Yeah, that's my last one. Thank you.
spk03: Sure. There hasn't been much change in overall competitive landscape. In China, competitive landscape remains the same as previous quarter. But in the US and international markets, we see slightly increasing competition from regional startups. I think this is a good thing overall for the industry, with more choices for customers and more ideas to drive the industry forward. Together, we will create a more vibrant market and accelerate the adoption of RTE technology in general. The recent macro environment challenge However, we also impact those competitors, especially for smaller players in the market. We also saw some companies went out of business. Overall, competitive landscape remains largely the same. We're still the clear leader in this space in terms of technological performance and completeness of features. With the right focus and execution, I think we are well positioned to gain market share during the challenging period.
spk08: Okay, thanks a lot. Thank you.
spk06: Thank you. I'm sure no further questions in the queue. This concludes our Q&A. Thank you, everybody, for attending the company's call today. As a reminder, the recording and the earnings release will be available on the company's website at investor.agora.io. And if there are any questions, please feel free to email the company. Thank you.
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