Agora, Inc.

Good day, and thank you for standing by. Welcome to the Agora, Inc. Third Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker 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 that your hand has been 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 risks and uncertainties. assumptions and other factors that could affect the company's financial results and the performance of its business in which the company discussed in detail in its filings 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. All right, Tony.

Hey, thanks, operator. And welcome, everyone, to our earnings call. First, we will our operating results in the past quarter. Agora revenue were $15.7 million in the third quarter, up 3% year-over-year, mainly driven by business expansion in certain use cases, such as live shopping. Shown on revenue were 113 million RMB in the second quarter, down 9% year-over-year, excluding revenues from certain end-of-sale, low-margin products, mainly due to challenging regulatory and market environment. Now, moving on to our business products and technology updates for this quarter. As many of you already know, We recently launched our conversational AI SDK in collaboration with OpenAI's real-time API to allow developers to bring voice-driven AI experience to any application. Our joint solution has two distinct advantages. First, OpenAI's GPT-4.0 model is multi-modal, which means it can process voice input from humans directly. without the need to convert words to text, and therefore can understand and respond to human emotions much better than previous text-based models. Second, end-users can enjoy Agora's advanced noise suppression and echo cancellation features, as well as low latency conversations even under challenging network conditions thanks to our global real-time network and optimization algorithms. Since our joint launch with OpenAI in early October, we have seen many fascinating and innovative use cases being developed and brought to market by developers across various verticals. One area where we believe conversational AI will have a significant impact is Internet of Things, or IoT. Many of us have had unpleasant experiences with previous generation of so-called smart speakers or smart assistants, which often struggle to understand our requests and lack ability to speak naturally or making real-time decisions. Now, with our conversational AI SDK, IoT devices connected to an advanced AI model can easily understand complex requests, hold natural conversations, and take actions based on live video feeds. For example, our customer, Mikko, makes advanced educational robots for kids between the age of 5 and 10. Previously, Mikko used our video calling SDK to enable parents to monitor and take and talk to their children, and our signaling SDK to allow parents to move the robots around and follow a child during a video call. Thanks to our compositional AI SDK, Mikko can now add interactive storytelling by advanced AI models in their content platform. The robot can adapt its response and behaviors based on a child's motion and interactions, providing a dynamic learning companion that grows with the child. Last month in Beijing, we hosted our 10th annual RTE conference with a focus on the interests of AI and RTE technologies. Both registration and attendance hit record highs, demonstrating the industry-wide excitement around real-time conversational AI and continued interest from developers on RTE use cases. Its huge market potential and our unique place within its ecosystem. As a conference, we also demoed a conversational AI solution jointly developed with Minimax, a leading AI company. We believe that for conversational AI to succeed, there needs to be a vibrant ecosystem of foundational models and building blocks such as text-to-speech, speech-to-text, streaming, orchestration, and other developer tools. We are now working closely with several leading foundational model companies and other key players to build such an ecosystem together. As part of this effort, we sponsored an open source project in our developer community called Transformative Extension Network, or TEN for short. TEN is the orchestration framework for building AI agents with real-time multimodal AI capabilities. It supports integration with a wide range of large language models, speech-to-text and text-to-speech extensions, and offers flexibility in Azure cloud architecture. With 10, developers can easily create AI agents that not only talk to users naturally, but also understand video feeds from a device's camera. Throughout this process, our global network ensures high performance and low latency interaction between users and cloud-based AI models. To summarize, we believe multimodal AI agents that can interact with humans through natural voice will gain widespread adoption in many use cases, such as customer support, education, and wellness. In these use cases, RTE technology is essential for enhancing the user experience to the point where AI agents can match and even outperform humans. This will drive significant usage growth and create new opportunities for the RTE industry. As an industry pioneer and leader, we are well positioned to become a key infrastructure provider for real-time conversational AI. To support this vision, we recently made some structural changes, aligning our organization to fully leverage the accelerating conversational AI opportunities and operate in a faster, inner, and more responsive fashion. These changes will help us build the next generation real-time engagement technology for the generative AI era and strengthen our position as a leader in real-time engagement space. Today, we also announced that Mr. Roger Hale will leave the company after serving two and a half years as our Chief Security Officer. We are grateful for Roger's dedication and expertise. His leadership has been invaluable in strengthening our security and compliance foundation. Moving forward, Patrick Ferreter and Robin Liu will assume responsibility for security and compliance, and we will continue to uphold the highest standard to protect our customers and stakeholders. Roger will continue to provide strategic advices as an advisor to the company. Before concluding my prepared remarks, I want to thank both the Agora and Shenglong teams for their resilience, dedication, and belief in what we can accomplish together. I believe we are well positioned to harness emerging technologies and innovations to build the best real-time engagement experiences in the generative AI era. 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 revealing financial results for the third quarter of 2024, and then I will discuss outlook for the fourth quarter. Total revenues were $31.6 million in the third quarter, a decrease of 7.7%, quarter-over-quarter, and a decrease of 9.8% year-over-year. If excluding revenues from certain end-of-sale low-margin products, total revenues increased 2.3% quarter-over-quarter and decreased 3.1% year-over-year. Agro revenues were $15.7 million in the third quarter, an increase of 0.4% quarter-over-quarter, and an increase of 2.6% year-over-year. The increase was primarily due to business expansion and usage growth in certain verticals, such as live shopping. Shunwang revenues were RMB 112.9 million in the third quarter, a decrease of 14.5% quarter-over-quarter, and a decrease of 20% year-over-year, if excluding revenues from certain end-of-sale low-margin products. shown on revenues increased 4.2% quarter-of-quarter and decreased 8.7% year-over-year. The quarter-of-quarter increase was primarily due to increase in revenues from certain verticals, such as Internet of Things, as well as usage increase from education vertical during summer vacation. The year-over-year decrease was primarily due to slowing demand from social and entertainment verticals due to regulation and general economic conditions. Dollar-based net retention rate is 94% for Agora and 78% for Shunwa, excluding revenues from certain end-of-sale products and discontinued business. Moving on to cost and expenses, as Tony mentioned just now, we made a difficult decision to restructure and reduce our global workforce this month. The associated severance cost of $4.8 million are reflected in cost of revenues and operating expenses in Q3. As part of the restructuring, we also canceled certain equity awards for the remaining employees. These awards were mostly granted in 2021, while stock price was significantly higher. As a result, share compensation expenses a lot seen as a stock price at the time of the grant, although the cash value of the awards is much lower at today's stock price. According to GAAP rules, the cancellation of these awards will cause immediate recognition of a share-based compensation expense for the remaining awards, which is $11.4 million. However, I want to emphasize that these awards are simply canceled, so the company is not paying any stock, option, or cash to the relevant employees. In other words, there is no actual cost to the company. The 11.4 million expenses in Q3 are only an accounting treatment. Going forward, the cancellation of these awards will free us from this accounting burden. Mostly restructuring, we expect to see savings operating expenses of roughly $4 million in Q4 this year and $7 million in Q1 next year compared to the baseline in Q2 this year. Gross margin for the third quarter was 66.7%, which was 2.7% higher than Q3 last year and 4.7% higher than Q2 this year. The increase was mainly due to the end of sale of certain low-margin products, which was offset partially by higher severance costs in this quarter. If we exclude severance of 0.3 million, pro forma gross margin is 67.7% for the third quarter. R&D expenses were 29.3 million in Q3, which included severance of 3.6 million and equity award cancellation expense of $9 million. If we exclude these two items, performance R&D expenses decreased 17.1% year-over-year to $16.6 million in Q3, representing 52.5% of total revenues in the quarter, compared to 57.2% in Q3 last year. So the marketing expenses or $6.9 million in Q3, which included severance of $0.7 million. If we exclude severance, performance sales and marketing expenses decreased 20.9% over year to $6.2 million in Q3, representing 19.6% of total revenue in the quarter, compared to 22.2% in Q3 last year. P&A expenses. were 9.7 million in Q3, which included severance of 0.1 million and equity award cancellation expense of 2.4 million. If we exclude these two items, pro forma G&A expenses decreased 19.7% year-over-year to 7.3 million in Q3, representing 23.1% of total revenues in the quarter, compared to 25.9% in Q3 last year. Moving on to bottom line. Net loss for the quarter was 24.2 million. If we exclude severance of 4.8 million, equity award cancellation expense of 11.4 million, and losses from equity in affiliates of 4.1 million, pro forma net loss was 3.9 million, translating to a 12.4% net loss margin for the quarter. Now turning to cash flow. Operating cash flow was negative 4.6 million in Q3 compared to negative 3 million last year. Free cash flow was negative 6 million compared to negative 3.2 million last year. Moving on to balance sheet. We ended Q3 with 362.6 million in cash, cash equivalents, bank deposits, and financial products issued by banks, or $3.94 per ADS. Net cash outflow in the quarter was mainly due to free cash flow of negative 6 million and share repurchase of 3.9 million. During Q3, we repurchased approximately 6.8 million of our Class A ordinary shares. equivalent to 1.7 million ADS for $3.9 million, representing 1.9% of our $200 million shared repurchase program. So far, we have completed 57% of our shared repurchase program, which will expire at the end of February 2025. And we intend to continue to undertake meaningful capital return to our shareholders. Now turning to guidance, for the fourth quarter of 2024, we currently expect total revenues to be between $34 and $36 million compared to $31.6 million in the third quarter of 2024 and $33.3 million in the fourth quarter of 2023. if revenues from certain end-of-sale low-margin products were excluded. We also expect significant improvement in net income loss in the fourth quarter. This outlook also reflects our current and preliminary views on the market and operating conditions, which are subject to change. In closing, thank you to both Agora and Shouwang teams for your hard work and contribution during this period. Thank you, everyone, for attending the call today. Let's open it up for questions.