Agora, Inc.

Good day and thank you for standing by. Welcome to Algoros Inc third quarter 2023 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 a session you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question please press star 11 again. please be advised that today's conference is being recorded. The company's earning results, press release, earnings presentations, SEC filings, and the 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, Jimbo Wang, the company's CFO. Reconciliations between the company's gap and non-gap results can be found in its earning 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 the company's belief today, and actual results may differ materially. These four looking statements are subject to risk, uncertainties, assumptions and other factors that could affect the company's financial results and its performance of its business in which companies discuss in details in its filings and the SEC, including today's earnings press release and the risk factors of 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 companies may take on today's call. With that, let me turn it over to Tony. Hi, Tony.

Thanks, operator, and welcome everyone to our earnings call. In the third quarter, our revenue was $15.3 million for Agora, flat compared to last quarter. and 141 million RMB for Shenwang, an increase of 7.4% quarter-over-quarter. As of the end of this quarter, we have more than 1,600 active customers for Agora and more than 4,000 for Shenwang, an increase of 26% and 6%, respectively, compared to one year ago. Now, moving on to our business, product and technology updates for the quarter. Let's start with Agora. We recently announced the general availability of a video-based solution to power live shopping experiences. In recent years, live shopping has disrupted and transformed the entire e-commerce market in China. We believe that the US and other developed market will soon catch up and embrace live shopping as the next big trend. According to McKinsey, live shopping could account for 20% of all e-commerce sales by 2026, and the US live shopping market is estimated to be worth $35 billion by 2024. We're also proud to mention that Agora was highlighted as a leading vendor in Gartner's recent market guide for live commerce in retail. With Agora, brands, marketplace, and platforms can now seize the live shopping opportunity with ease. For example, we recently helped CommonSold, the leading fashion live shopping platform for retailers, to introduce a new functionality that allows sellers to invite external participants into their shows simply by sending them a link or QR code. Sellers can easily add professional hosts, celebrities, influencers, or VIP customers to join their live shopping session via video to provide more engaging content and boost conversion. with the Sandbox, a leading decentralized gaming virtual world to promote real-time engagement and social interactions within the metaverse through voice, video, and chat. The Sandbox chose Agora because of our comprehensive product stack, which can seamlessly integrate 3D spatial audio, persistent text chat, and interactive live streaming functionalities at scale. As a result, players' ability to connect, collaborate, and form meaningful communities in the metaverse is significantly enhanced. Moving on to Shenwang, we recently launched our AIGC RTE SDK, a real-time engagement solution connecting human users with large language models. So far, people have largely interacted with AI models in text format Only recently, companies such as OpenAI have beta launched their direct voice conversation between human users and AI models. However, there is usually a significant delay of six to seven seconds or more to receive a simple voice response. Our solution has been designed to tackle the latency issue so that the users can hear the response within two seconds. This near real-time response is close to the natural pause expected in human-to-human conversations, and therefore provide a much more engaging and near-real experience for users. Our AIGC RT SDK also comes with great flexibility. can easily create their application with the freedom to choose from a wide range of large language models, speech-to-text engines, and synthetic voices to fit their unique use case. A video demo of our AIGC-RT solution can be found in our earnings presentation with more details on its features and capabilities. Please also feel free to download the demo app application and try it yourself. Next, let's move to the real-world factories to see how we assist BMW in their digital transformation journey. Historically, when local engineers needed technical support from a specialist at BMW headquarters in Germany, They had to wait at least 24 hours before the specialist could arrive on site, which could impact manufacturing timeline and even cause delays in delivery. Our solution enables the remote specialist at BMW headquarter to remotely inspect even the smallest detail with HD video and low latency. In addition, when the specialist makes inquiries or provide instructions, local engineers can see exactly where the specialist is marking with the help of AR devices. This solution demonstrates our commitment to becoming a trusted partner of large enterprise for their digital transformation initiatives. Last month, we held our RTE conference for the ninth consecutive year, where we discussed the role artificial intelligence plays in real-time engagements. We have been leveraging AI to enhance the quality of experience in real-time engagement for a long time. We developed the AI-powered real-time on-device noise suppression and echo cancellation algorithms that significantly improve audio quality. On the video front, our AI-based real-time on-device algorithms such as super resolution, perceptual video coding, object segmentation, adaptive coding, and video quality assessments enable us to deliver optimal video quality and viewing experience up to 4K resolution. Many of our customers worldwide have integrated our latest SDKs with these AI technologies and more are in the process to upgrade. With our constant pursuit of more efficient AI-powered SDKs to overcome the limits of device and network infrastructures, we have substantially reduced the barrier to high-quality RTE. This means that people around the world, even those without the latest smartphones or access to high-speed internet, can now enjoy a wide range of RT use cases, just like how they have access to basic utilities such as clean water and electricity. With billions of smartphones and devices powered by our SDK with AI-driven capabilities, We're making solid progress to realize our mission of making real-time engagement ubiquitous and allowing everyone to interact with anyone, anytime, and anywhere. We have also closely followed the development of large-language model and generating AI around the world. As mentioned earlier, our AIGC-RTE solution enables developers to put AI-powered characters into voice conversation with users. We have been working closely with some customers and expect to see them launch their innovative use cases soon, such as AI companions or personal assistants, social deduction games with AI players, and AI tutors to help users learn foreign language As large language models continue to advance in their ability to process and generate multimodal information, substantial amount of data in video and audio format will need to be transmitted between human users and AI models. The volume of such data will one day surpass today's human-to-human traffic, and we are uniquely positioned to become the critical infrastructure that enables human users and AI models to interact with each other through video and audio. Before concluding my prepared remarks, I would also like to announce a change in our board of directors. Mr. Tak Lai Ko has tendered his voluntary resignation due to personal reasons. Tuck has been working with us since our inception a decade ago, first as an investor, then as a director since 2018. I would like to sincerely thank Tuck for his dedicated service and invaluable advice to our board. Ms. Shang Zhong, currently our chief technology officer and chief scientist, has been appointed as the director I would like to warmly welcome Sean to join our board, and I'm confident that Sean's insights and expertise will help the board and the company stay on the forefront of real-time engagement technology and create long-term value to our shareholders. With that, let me turn things over to Jingbo, who will reveal our financial results.

Thank you, Tony. Hello, everyone. Let me start by first reviewing financial results for the third quarter, and then I will discuss outlook for the fourth quarter of 2023. Total revenues were $35 million in the third quarter of 2023, an increase of 2.9% quarter over quarter, and a decrease of 14.6% year over year. Agor revenues were $15.3 million in the third quarter. compared to last quarter and decreased 8.9% year-over-year. The year-over-year decrease was primarily due to reduced usage and increased pricing sensitivity from customers' emerging markets due to challenging macroeconomic environment and tightening financing conditions starting from the second half of last year. Shown on revenues were RMB $141.2 million in the third quarter an increase of 7.4% quarter-over-quarter and a decrease of 9.2% year-over-year, excluding revenues from the disposed CEC business. The quarter-over-quarter increase was primarily due to an increase in revenues from digital transformation customers or large enterprises. This is an area where we have seen strong revenue growth in the past two years. Going forward, we believe digital transformation market will become an increasingly important revenue and profit contributor for the XiongWang business. The year-over-year decrease was primarily due to slowing general economic conditions and fast evolving regulations in certain downstream markets. Dollar-based net retention rate is 98% for Agora and 89% for Xunwo, excluding revenues from discontinued business. 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, financing-related expenses, amortization 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. Adjusted gross margin for the third quarter was 66.9%. 3.3% higher than Q3 2022, mainly due to the change in product mix and the implementation of technical and infrastructural optimizations. As mentioned in previous earnings calls, we restructured and reduced our global workforce in Q4 last year, and we have continued to implement effective expense controls. As a result, Adjusted R&D expenses were $15.7 million in Q3, decreased 36.4% year-over-year. Adjusted R&D expenses represented 44.8% total revenues in the quarter compared to 60.2% in Q3 last year. Sales and marketing expenses were 6.6 million in Q3, decreased 48.8% year-over-year. Sales and marketing expenses represented 18.9% total revenues in the quarter, compared to 31.5% in Q3 last year. Adjusted G&A expenses were 6.2 million in Q3, decreased 15.1% year-over-year. G&A expenses represented 17.6% of total revenues in the quarter, compared to 17.7% in Q3 last year. Adjusted EBITDA was negative 4.4 million, translating to a 12.7% adjusted EBITDA loss margin for the quarter, significantly lower than the loss margin of 40% in Q3 last year. Investment loss was $13.4 million in Q3, mainly due to the fair value change in equity investment of $7 million and loss of investments in certain private companies of $6.3 million. Non-GAAP net loss, excluding investment loss, was $2.2 million in Q3, translating to a 6.3% net loss margin for the quarter. compared to a non-GAAP net loss margin of 42.9% in Q3 last year and 19.4% in Q2 this year. Now turning to cash flow. Operating cash flow was negative 3 million in Q3 compared to negative 8.8 million last year. Free cash flow was negative 3.2 million compared to negative 9.9 million last year. Moving on to balance sheet, we ended Q3 with $373.4 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 3.2 million and share repurchase of 12.5 million. Since the Board approved our share repurchase program in February 2022, and as of September 30, 2023, we have returned approximately $94.3 million to shareholders through share repurchase, demonstrating the Board's commitment to safeguarding shareholder value and its confidence in the long-term prospect of the company. As of September 30, 2023, the company had approximately 94.3 million ADS outstanding, reflecting a 16% reduction in total shares outstanding, compared to January 31, 2022, before the shared repurchase program started. So far, we have completed 47% of $200 million share repurchase program, which will expire as of February 2024, and we intend to continue to undertake its meaningful capital return to our shareholders. Now turning to guidance, for the fourth quarter of 2023, we currently expect total revenues to be between 35.5 and 37.5 million. This forecast reflects our current and preliminary view on the market and operational conditions, which are subject to change. In closing, we are very proud of our execution in this quarter, especially the significant improvement in profitability. will stick to our strategy and be later focused on driving revenues and improving efficiency. For the long run, as Tony just mentioned, we're excited to see emerging IGC use cases, and we are well prepared to help developers combine the power of generative AI and real-time engagement. Thank you to both Agora and Shunwang 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.

Thank you. We will now conduct the Q&A session. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.

Please wait as we compile the Q&A roster. First, we have Tom Tang from Morgan Stanley.

Please go ahead.

Thanks, Maritrin, for the chance to ask questions. This is Tom from Morgan Stanley. So I have two questions. The first one is regarding the 2024 Outlook. And we have a breakdown between Agora and Xinhua, to be exact. And the second question is regarding the competition landscape in both China and other countries.

Thank you. Sure. The status for, you know, both Xiongla and Agora, you know, for Agora's side, I think Agora's global market overall, you know, optimistic about demand in mid-term to long-term. I think one big factor is the pandemic actually really changed consumer behaviors. Before the pandemic, the only scenario where people use real-time audio-video is basically web conferencing. The U.S. market, people are not that get used or familiar with all other use cases like co-watching experience, etc. Now, after pandemic, although in some of the use cases, the volume decreased, but consumers are more adept to all type of real-time engagement activities online, such as shopping with live conversations and relating with live sessions online or co-watching or watch party. I think the overall, those consumer behavior change can help us to see a lot of growth in both use cases and volume. Meanwhile, the market environment is still challenging, but it is for all companies operating in this market. As a matter of fact, we actually see some small competitors start to run into financial difficulties. For 2024, our goal is to stabilize our existing business and grow into new regions and new use cases. In China market, a lot of macro and regulatory headwind, as you probably already know, but usage on our platform continue to grow. Our market share in new app adoptions also increased nearly 20% this year. Our digital transformation business serving large enterprises also grew more than 50% this year. For 2024, we expect our digital transformation business to continue to grow and our goal for the internet business is to further gain market share. On the question about the demand and the pricing, for a grower's market, our number of customers continue to grow at about 25%, as I mentioned earlier. Also, we see some more use cases start to emerge into growth mode, such as live shopping. And also mentioned, consumer behavior change actually give us hope that there will be more growth potential in both use cases and the volume. Overall, the challenging environment is still there and those in near term still impact the operation, but a lot of potentials in the medium to long term timeframe. Pricing wise, more pressure in emerging markets, but price has been healthy and stable in developed market. In China, overall, demand is stable from internet customers, with some bright spots such as online karaoke and premium broadcasting streaming products. We see strong demand from digital transformation side, As I mentioned, pricing in the internet sector generally drops about 10% each year, but our gross margin remains healthy. Pricing in digital transformation is also more attractive in this market.

Thank you.

Next, we have Daily Li. from BOFA Securities.

Hi, Matt. Thanks for taking my question. I have one question about the AEI. You mentioned there's more application scenarios for the AEI, like AEI Assistant, AI Tutoring, et cetera. And would you think the AEI can really have more meaningful revenue contribution for our business, or in which application do you think could have much potential to drive our business growth in the future? Thank you.

Yeah, you're right. As I also talked about, there are many potentials in all sorts of use cases, like AI companions, AI game players, et cetera. However, as I also mentioned, we roll out this AIGC RP SDK module in the last few months. We do have an optimistic view of those potentials. In a very basic concept, there's going to be much more real-time audio-video traffic among not just humans, but between humans and AI models. That's the long-term future. However, the development is still undergoing. I think there's a lot of things we need to figure out for a large language model to be able to really act as human-like personas, like the AI companion or player in a certain game. That's where we work hard with a lot of our customers and partners together to try to bring it to real life. I don't want to overestimate in the near term of such growth. This is really like in the stage that we and our customers and partners trying to validate and break through into each and every use case in the next few quarters.

Thank you.

Thank you. Just a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced.

Thank you. There are no further questions.

Thank you everybody for attending this company's call today. As a reminder, the recording and the earning release will be available on the company's website at investor.agora.io. And if there's any questions, please feel free to email the company. Thank you and have a great day.