Agora, Inc.

Good day and thank you for standing by. Welcome to Agora Inc. First Quarter 2025 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 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 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, Jingbo Wang, the company's CFO. During this call, the company will make forelooking 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 four looking statements are subject to risks, 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 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 fault-looking statements the company may make on today's call. And with that, let me turn it over to Tony. Please go ahead, Tony.

Thanks, operator. And welcome everyone to our earnings call. I'll first reveal our operating results from the past quarter. I'm very happy to report our second consecutive quarter of GAAP profitability in Q1, driven by double-digit revenue growth year-over-year on a comparable basis and disciplined cost management. This is a great achievement, and I want to thank Agora and Shengwang teams for their efforts and dedication. Total revenue in Q1 were $33.3 million, up 12% year-over-year, excluding revenues from certain end-of-sales low-margin products, with healthy business expansion and net retention rate recovery from both the Agora and Shonwon sites. Our gap net profit for the quarter, though still at a modest base, more than doubled from the previous quarter. As you know, Q1 typically marks our seasonal low point with fewer calendar days and reduced online activity during the New Year holiday period. Considering the seasonal trend and our current business momentum, we're confident that we will maintain gap profitability for the remainder of the year. At the end of Q1, we had more than 1,800 active customers for Agora and close to 2,000 for Shenzhen, excluding Izhma, both representing an increase of 5% compared to one year ago. Now, let's turn to our business product and the technology updates for the quarter. In March, we announced the general availability of our conversational AI engine in China, enabling developers to create interactive voice experience with any large language model. This product has been refined based on extensive customer feedback during the private and public beta phase. Today, this product is still in the public beta stage for the US and global markets, and it already delivers industry-leading performance on latency, noise suppression, interruption handling, and network resilience. Our conversational AI engine unlocks innovation across multiple verticals and uses, from virtual companions and shopping assistants to customer service and all-bound marketing. Particularly, we believe education is where the conversational AI experience can have a huge impact in boosting student engagement with personalized content and adaptive practice. Imagine an AI teaching assistant that talks in real time, adjusting to each student's needs, and providing truly personalized instructions at scale. We are already seeing this vision come to life. Several ad tech customers, such as Dou Shen AI in China, are in the advanced stage of developing AI-powered language tutoring products with our solution. In Q1, We also launched our conversational AI device kit, our 10K turnkey IoT module combining our software call service and high-performance chips from Deccan. This device kit enables device manufacturers to add conversational AI to any IoT devices, from toys and robotics to smart speakers. As a turnkey solution, It can significantly reduce upfront R&D cost and time to market for device manufacturers. For example, our customer RoboPoet announced their latest AI companion robot, Fazuzu, at the Mobile World Congress. Powered by our device kit, Fazuzu listens, senses, and responds in real time, creating personalized support and even emotional connections with end users. We are also making exciting progress on our open source initiatives and developer's ecosystem. Ten, our sponsored open source project for building real-time conversational AI agents continues to gain remarkable traction. With 6,000 GitHub stars, It is the fastest growing project in its category globally. Leading cloud providers, including AWS and Oracle Cloud, are providing support for deploying TEN on their infrastructure. Recently, we launched voice activity detection and turn detection modules as part of our TEN project. which outperforms all existing open source alternatives, further demonstrating our commitment to the community and the conversational AI ecosystem. Over the past few months, we have seen a tremendous amount of interest in our conversational AI products and open source projects. Product registrations and inquiries following the product launch have reached record highs, and our developer workshops in Beijing, Tokyo, and San Francisco have attracted large passionate audience. Today, many customers are working closely with us in proof of our concept development. Before I wrap up, I want to give special recognition to our incredible teams at Agora and Shonwon. In this fast-moving AI revolution, Their dedication and innovative spirit are what allow us to pioneer the future of human-AI interaction. Each day, we are not just keeping pace with changes. We are creating it, unlocking new possibilities, and shaping a new paradigm. The opportunities ahead are truly exciting, and I cannot wait to share our next chapter of progress with all of you. With that, let me turn things over to Jingwo, who will reveal our financial results.

Thank you, Tony. Hello, everyone. Let me start by first revealing financial results for the first quarter of 2025, and then I will discuss outlook for the second quarter. Total revenues for the first quarter reached $33.3 million, exceeding the high end of our guidance range. On a year-over-year basis and excluding revenues from certain end-of-sale low-margin products, revenue growth accelerated to 12.1% up from 3.6% in Q4 last year. This demonstrates a clear pickup in our business momentum. Agor revenues reached 18.6 million in Q1, growing 17.7% year-over-year. and 6.9% sequentially. This sustained performance reflects a successful market expansion and growing adoption, particularly in high-potential verticals such as live shopping and entertainment, where usage continues to grow. Shunwang revenues reached RMB 105.5 million in Q1. Excluding certain end-of-sale low-margin products, Shunwang revenues grew 6.7% year-over-year and declined 13.7% sequentially. The year-over-year growth reflects continued business expansion and adoption in key verticals, such as entertainment and IoT. While the sequential decline is mainly due to normal seasonality, with Q4 historically seeing peak demand for digital transformation projects and Q1 experiencing software activity from social and education customers due to holidays. Dollar-based net retention rate is 96% for Agora and 85% for Shunwang. Both improved from previous quarters. Moving on to cost expenses. Gross margin for the first quarter was 68%. If we exclude gross profit from certain end-of-sale products, gross margin of continuing business increased 0.6% year-over-year and 1.4% quarter-over-quarter. As we mentioned in previous earnings calls, we restructured and reduced our global workforce in November 2024. As a result, operating expenses decreased 6.1 million from 32.6 million dollars in Q2 2024 as a baseline and reached 26.5 million in the first quarter. R&D expenses were $14 million in Q1, decreased 22.7% year-over-year. R&D expenses represented 42.1% of total revenues in the quarter, compared to 54.5% in Q1 last year. So the marketing expenses or 6.2 million in Q1, decreased 8.5% year-over-year, so the marketing census represented 18.7% of total revenues in the quarter, compared to 20.5% in Q1 last year. Q&A census, or 6.2 million in Q1, decreased 25.6% year-over-year, G&E expenses represented 18.8% of total revenues in the quarter, compared to 25.2% in Q1 last year. Moving on to the bottom line, we delivered net income of $0.4 million in Q1, representing a 1.2% net income margin. This represents a substantial turnaround from the 28.7% net loss margin in Q1 last year and marks our second consecutive quarter of GAAP profitability. With our current business momentum and visibility, we anticipate maintaining profitability throughout 2025. Now turning to cash flow. Operating cash flow was 17.6 million in Q1 compared to an active 6.5 million last year. The positive cash flow included $17.8 million in interest proceeds from maturity of bank deposits and financial products issued by banks. Moving on to balance sheet, we ended Q1 with $380.8 million in cash, cash equivalents, bank deposits, and financial products issued by banks. That cash inflow in the quarter was mainly due to operating cash flow. of $17.6 million and the release of $3.5 million in illustrated cash, which was offset in part by a share repurchase of $1.2 million. Since our board approved the share repurchase program in February 2022, we have repurchased $116.4 million worth of shares through March 31st, 2025. So far in Q2, we have already bought back over $8 million worth of shares. We remain committed to creating shareholder value through this program while preserving the financial flexibility needed to invest in future growth opportunities. Now turning to guidance, for the second quarter of 2025, we currently expect total revenues to be between $33 and $35 million, compared to $30.9 million in the second quarter of 2024, representing year-over-year growth rate of 6.8 to 13.3 percent. If revenues from certain end-of-sale, low-margin products are excluded. This all reflects our current and preliminary views on the market and operational conditions, which are subject to change. In closing, I want to take a moment to recognize the exceptional work of the Agora and Shengwang teams. Your dedication and execution have made these outstanding results possible. This quarter, we are proud to have delivered revenue above expectations, achieved consecutive gap profitability, and maintained a robust financial position. Thank you all for joining in today's call. We appreciate your ongoing support. That's opening up for questions.

Thank you. We will now begin the question and answer session. 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. A moment for our first question. Our first question comes from the line of Daily Lee from Bank of America Securities. Please ask your question, Daily.

Hi, my name is Tony and for the introduction for the results. Firstly, congrats on the strong results in 1Q and the solid guidance. And I have two questions here. Number one is, about the AI demand and the language model is getting more powerful. We see more human-machine interaction. What are the key areas you see more AI application? I think you mentioned like combining toys and some edge AI devices as well. So what could be the future growth drivers in the area of AI? That's number one. Number two question is regarding the breakdown for China and the overseas business, and how do we see the demand trend in future by volume and by the ASP trend? Thank you.

I'll talk about AI. First of all, AI agent has been the biggest topic among tech communities this year. However, we will focus on the conversational AI side, which is more directly related to our business. What we see is several key use cases that are most active. First is education use cases, especially around the language learning and practice side, as I just mentioned in the script in my opening remark. side, especially a lot of effort trying to build conversational toys that can really talk to IPs or users with meaningful content. And also there's clear demand around call center services where there's outbound coding for marketing or other purpose. and also customer service in call center use cases. Those are the most clear verticals or use cases in our recent engagement with our developers.

Thank you, Tony. I'll talk about the demand and demand trend. So in the US and global market, as you can see, the growth rate is now in this quarter about 18%, so close to 20% already. So we are seeing growing adoption among, actually not just our customers, more importantly, we are seeing growing adoption among consumers for live video-based shopping and entertainment apps, especially in North America and Europe. These apps we have seen have become really dominant in China for some time. Now we are finally seeing them gaining traction in North America and Europe as well. So that's one of the most important growth drivers in this quarter for us. And secondly, for Asian customers, we are finally seeing some demand recovery, including India, for both education and entertainment use cases. U.S. global market we see pretty solid demand and we think there's still a lot of potential for further penetration. And also in terms of the pricing, with the exception of certain Asian markets, overall the pricing has been quite stable in more developed markets. So in China, also growth rate hasn't come to the level we see in U.S. and global markets. But as you can see, for the Shenzhen business, in Q1 year-over-year, it also delivered 6.7% year-over-year growth. So overall, the demand is recovering. So on several fronts, the social and entertainment fronts, we see that regulation is more stable now. So there's less regulatory impact as we saw last year and the year before. Education demand is also recovering in quite a healthy manner. And IoT and digital transformation, we have been seeing pretty strong demand in the past two years. Pricing-wise, although still it's a very competitive market compared to last year and the year before, pricing pressure is also more moderate in this year. So overall, it looks more positive than in previous years.

Thank you, Tony and Jim. Thank you.

Thank you. Our next question comes from the line of Qianlei Wang from CICC. Please ask your question, Qianlei.

Hi, this is Wang Qianlei from CICC, and thank you for taking my question. My first question is regarding your overseas e-commerce business. In the past, we have seen the live shopping and interactive features becoming increasingly popular in e-commerce, especially in the emerging markets. So could you please provide more details on your current actions and the strategy enabling overseas e-commerce platforms or the applications? And my second question focuses on the AI landscape. So could you elaborate on any issues that you have observed in the downstream demand for AI-powered real-time interaction capabilities? Thank you.

OK. So on live commerce use case, we are deep diving into the use case and continue to maximizing the penetration into the space. There's clear demand and we see a lot of value creation potentials for us to deliver to our customers. And we are continuing to gain new customers while the existing customers' volume is still You know, one side of the effort is trying to improve the video quality, which will give shoppers online shopping, you know, participants better experience in live shopping use case. A lot of the customers actually work local live shopping platforms, so there's literally almost no impact by the recent tariff fall. About AI, again, we will continue to focus on conversational AI, which is really directly related to our business. The recent interest in building conversational AI agent is very clear, and a lot of our customers who saw in the POC stage of their development is getting close to product launch. Now, the key for our growth in terms of service volume or eventually the value create for the customer base is really depending on a product that has already find a product market fit. And the key to that is all those customers' product actually did a lot of deep dive into the vertical use case and leverage and build a good product by finding out enough know-how in that vertical use case so that the customer experience is smooth and compelling enough And that process is why a lot of the customers have been working with us for a while, but still, you know, before it can really achieve a product feed, it will take some time.

Do you have any follow-up questions, Tianlei?

No, that's it. Thank you for those comprehensive answers. That was really helpful. Cheers.

Thank you. As a reminder, before we take our next question, it is star 11 for questions. Our next question comes from the line of Bing Duan from Nomura. Please go ahead, Bing.

Hi. Thank you, Tony and Jingbo, for the giving me the opportunity to ask questions. I have two. First is also about AI. So how do we think about the timing for the massive adoption of the conversational AI as we think that currently there are still some pricing premium compared to the non-AI applications. So when do we see this tipping point for the massive adoptions? And I think a second question is about the competition landscape in China and how do we think about the pricing trends for the overall business and the impact on the gross margins.

Thank you. On the tipping point, I actually talked about a few use cases or verticals that are most active in our work with customers and developers. I want to point out further that even within each and every of those use cases, It's not one category of product. Let's say for call center use case. Each type of call center service for actually a different industry have different know-hows. So that the product market fit will happen gradually for each industry's specific call center use cases. achieve product market fit one by one down the road really depend on how those product, like I said, finding out all the necessary know-hows so to build up a smooth user experience. And the tipping point really relies on the maturity of product market fit of those specific use case. And once it's matured and having a market fit the volume for that specific product will grow significantly and it will naturally expand to all similar product providers in the same sector or in the same use case, which will, again, grow our volume. So that's the thing. However, I do want to mention that the maturity of such product It's not decided by us. It's really decided by each individual vertical use cases for their industry know-how and product design or even launching approach will decide whether the product is going to be successful or not and whether the product market fit is reached or still need more work. So that's the thing. I cannot really give a specific timing for how those products will mature and start to grow exponentially. However, what I want to say is it's not going to be one product and it's not going to be even 10 or 20 products. It's going to be hundreds of different products and gradually reaching the tipping point. That's my view.

Okay, I'll take the question on the competitive landscape. So I think you mentioned China. Yes, China has been a very competitive market. In fact, all the major cloud providers have at some point competed in this market and really, really hard. But now only one of them is still remaining, really. The others are just staying here but with no meaningful market share. So that shows how competitive the market is. But I think in the past few years, the clear trend is consolidation. Now there have been less and less players. Today, really just three. And as conversational AI becomes more and more important, we believe the competition will not be just like real-time communication. It will be real-time communication plus conversational AI. And we have invested heavily on this new area, we cannot see the same for our competitors. So hopefully that will give us a stronger competitive position in the future. And in terms of margin, yes, the competition is more fierce in China, and margin is slightly lower in China compared to the global and U.S. markets. But for us, first of all, we tend to focus higher value use cases, which tend to have higher margins. And secondly, we continue to do a lot of technical optimization on the cost end. And that's why we have been able to maintain a relatively stable gross margin, as you have seen, in earnings. So that will continue to be our strategy going forward.

Thank you, Tony. Thank you, Dimple.

Thank you.

Once again, to ask a question, please press star 11 on your telephone keypad. All right, there are no further questions.

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. And so with that, we conclude the program today. You may now disconnect your lines.