Agora Inc (API) 2022 Q1 法說會逐字稿

Good day, everyone. Thank you for standing by. Welcome to Agora, Inc. First Quarter 2022 Financial Results Conference Call. (Operator Instructions) Please be advised that today's conference call is being recorded. (Operator Instructions).

I would now like to hand the call over to your first speaker today, Ms. Fionna Chen. Thank you. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us for Agora's First Quarter 2022 Earnings Conference Call. Our earnings results press release, SEC filings and a replay of today's call can be found on our IR website at investor.agora.io.

Joining me today are Tony Zhao, Founder, Chairman and CEO; Jingbo Wang, CFO. Reconciliations between our GAAP and the 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 interim. These statements are only predictions that are based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to risks, uncertainties, 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 remains no obligation to update any forward-looking statements we may make on today's call.

With that, let me turn it over to Tony. Hi, Tony.

Thanks, Fionna, and welcome, everyone, to our earnings call. As many of you may have known, one of our global headquarters, Shanghai was hit by an outbreak of Omicron in March. The city has been in lockdown for nearly 2 months now and has just started the process of resuming off-line business activities. During this time, our teams in Shanghai have been working remotely, and there has been no interruption of our business operations, our research and development efforts. Here, I would like to express my sincere gratitude and care to all of our team members impacted by COVID.

Before going through our performance in Q1, let's take a look at our leading market position and recognition by independent market observers. According to a recent industry report from CIC, Agora continued to be the undisputed leader in the global real-time engagement platform as a service market with more than twice market share than our nearest competitor both in terms of revenue and number of minutes delivered in 2021. As of March 2022, we maintained our #1 market share in RTE SDK installation globally.

In regions like the North America, Southeast Asia and Middle East, our SDK installation market share is dominant compared to other RTE or public cloud service provider. For example, if we look at the top 10 social dating apps globally, all of them have RTE features embedded and half of them are powered by Agora. And if we further look at different regions, we power 5 out of the top 10 social dating apps in North America and 7 out of the top 10 in China.

Also in this quarter, Agora was selected as a finalist for Fast Company's World Changing Ideas 2022. Every year, Fast Company owners, the businesses and organizations driving change in the world. This year, in the workplace category, Fast Company selected Agora as a finalist to recognize our innovations in connecting virtual worlds of the metaverse to the physical one. None of this would be possible without our team's strong commitment to driving technology and product innovations, and our customers' trust and the confidence in us.

Next, let's move to our business update in Q1. Our revenue for the first quarter was $38.6 million, 4% year-over-year. During this quarter, 34,000 new applications rejected on our platform. At end of March, our number of active customers exceeded 2,700, adding nearly 400 compared to 1 year ago. Our results in this quarter were impacted by the drop in demand from K-12 academic tutoring customers in China due to regulation. On the other hand, we continue to see strong growth momentum in markets such as Middle East, Southeast Asia and Europe, which not only offset most of the shortfall from K-12 use case but further diversified our revenue mix and enhanced our business resilience.

More importantly, we are excited to see solid evidence of a long-lasting shift in people's mindset and behavior as they continue to move their lives online and spend more time in virtual engagement sessions. Even in countries where lives have largely returned to pre-pandemic norms, we believe this is an irreversible trend across all regions and verticals, which will bring tremendous market opportunities for us.

Next, I will walk you through some important updates on our use case solutions and technology and product advancements during this quarter. In our last earnings call, we talked about our Meta Chat, Meta Live and MetaKTV solutions that enable developers to easily create immersive and entertaining voice chat, live streaming and karaoke experience within 3D virtual space.

Recently, we launched Meta interactive game to further strengthen our metaverse product offerings. Through partnership with game developers, we bring lightweight party games to video and voice chat room or live streaming sessions, which add another dimension of fun and engagement to the users. In addition to video and voice engagement, our customers can seamlessly embedded such game -- can seamlessly embed such games in their social and entertainment applications to enhance user experience and engagement.

Moving to another vertical where we see many new use cases that strive to make the world a better place, the Internet of Things or IoT. We recently launched a turn-key software solution for IP cameras such as video doorbell or smart speakers. Our solution powers critical functions of the device including real-time monitoring, two-way video calling, remote control and recording, leveraging our knowledge and expertise in RTE devices with our solution can establish video session in just 1 or 2 seconds with very low latency. Our module is efficient in power usage and its compact enough to fit on almost any small and low-cost devices.

Another interesting use case in the IoT space is NuEyes, a leading augmented reality smart glass that allows user hand-free access to the visualization of real-time information, including 3D modules, designs and data whether being used for an [underground] utility safety check or on the construction site of sky scrapers, workers can leverage our video APIs to safely transmit visual information to make informed decisions quickly.

Our local and local platform continued to gain traction among developers globally. For example, Study.com, a leading online education platform is using our local solution, App Builder, to accelerate its digital transformation. Study.com has traditionally been an on-demand off-line course powerhouse, but will soon enable live children as a part of their offerings using App Builder.

On the technology front, we launched our proprietary AI-powered noise suppression algorithm in this quarter. Traditional noise suppression algorithm works fine on general occasions, but sometimes fails to catch unique noises in specific use cases, such as the sound of breathing and swallowing when singing a song. Our AI-powered algorithm can deal with over 100 types of background noises, which gives developers the flexibility to build the best noise suppression for very specific use cases. In addition, our algorithm is designed to be compact and efficient. And therefore, performs very well on web browsers.

Lastly, on our team, I'm glad to announce that Mr. Roger Hale, former Chief Security Officer, a personal data privacy and protection company, BigID, has joined Agora in the same role. Roger will work with our executive team to navigate compliance and security and determined risk management and security best practices for the organization. He will also serve as a process owner of our business -- of our assurance activities related to the availability, integrity and confidentiality of customers, business partners, employees and business information.

Security and compliance have never been more critical than they are today, with an impressive track record and many years of experience and expertise, we are very excited to welcome Roger to the team. In addition to the hiring of Roger, we're also growing our executive team through internal promotions, including Chief Strategy Officer, Chief Revenue Officer and Chief Experience Officer. This moves are aimed at streamlining our global go-to-market efforts and further enhancing our developer experience. I'm confident that our expanded executive team will continue to drive innovations at Agora and help create a world where real-time engagement is ubiquitous.

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 the Q1, and then I will discuss our outlook for the fiscal year of 2022. Total revenues were $38.6 million in the first quarter of 2022, a decrease of $1.6 million or 4.1% year-over-year. Our revenue growth in this quarter was negatively impacted by the new regulation on K-12 academic tutoring sector in China. Our revenues from K-12 academic tutoring sector in China were approximately $40 million in the fiscal year of 2021. Our revenues from the sector were approximately $1.3 million in the first quarter of 2022, a decrease of approximately $10 million from the same quarter last year.

On the other hand, our growth momentum in other geographies and sectors remained strong in the quarter. In particular, revenue from U.S. and other markets outside China grew almost 50% year-over-year and 16% quarter-over-quarter to $16.4 million in Q1, representing 42.5% of total revenues. As we continue to expand globally, our revenue base also became more balanced and resilient. In this quarter, revenue contributed from top 10 customers were 22% compared to 35% in the same quarter last year.

Our trailing 12 months constant currency dollar-based net expansion rate is 95% in the quarter, excluding Easemob. The expansion rate was also negatively impacted by the K-12 sector, and expansion rate in other sectors and geographies remain very healthy.

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, amortization expenses of acquired intangible assets, and income tax related to acquired intangible assets. Non-GAAP gross margin, fourth quarter was 63%, 4.6% higher than Q1 last year. As we mentioned in previous earnings calls, the increase was mainly driven by technical and infrastructure optimizations we have been implementing since the beginning of 2021.

Non-GAAP R&D expenses were $25.3 million in Q1, up 45.3% year-over-year as we continue to hire talented employees and strengthen our R&D team. Non-GAAP R&D expenses were 65.6% of total revenues in the quarter compared to 43.3% in Q1 last year. With the enormous opportunities RTE technology presents globally, we will continue to invest heavily in R&D to strengthen our technology leadership and empower emerging use cases. In the near term, our plan is to keep R&D expenses at a relatively stable level in dollar terms and focus our resources on high ROI projects to maximize long-term impact.

Non-GAAP sales and marketing expenses were $11.6 million in Q1, up 34.5% year-over-year, mainly attributable to team expansion and increased advertising and event expenses as we continue to step up our go-to-market efforts globally. Sales and marketing expenses represented 30% of total revenues in the quarter compared to 18.6% in Q1 last year. Non-GAAP G&A expenses were $7.4 million in June, up 64.7% year-over-year, mainly due to team expansion and expected credit loss provisions. G&A expenses represented 19.1% of total revenue in the quarter compared to 11.1% in Q1 last year. Non-GAAP operating loss was $18.9 million translating to a 49% non-GAAP operating loss margin fourth quarter compared to an operating loss margin of 13.9% in Q1 last year.

Turning to cash flow. Operating cash flow was negative $15.9 million in Q1 compared to a negative $2.7 million last year. Free cash flow was negative $17 million compared with negative $8 million last year. Moving on to balance sheet. We ended Q1 with $718 million in cash, cash equivalents and certain investments compared to $755 million at the end of Q4 last year. Net cash also in the quarter was mainly due to free cash flow of negative $17 million, cash paid for long-term investments of $13.9 million and share repurchase of $7.6 million.

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 reflect various assumptions that are subject to change based on uncertainties related to the impact of the COVID-19 pandemic. With that, for the full year 2022 we maintain our previous guidance, the total revenues for the full year are expected it to be in the range of $176 million to $178 million.

Now turning to the update on the status under Holding Foreign Companies Accountable Act, or the HFCAA. On May 4, 2022, the SEC provisionally named Agora as a commission-identified issuer under the HFCAA, following our filing of annual report on Form 20-F for the fiscal year ended December 31, 2021. We understand that the SEC made such identification pursuant to the HFCAA and its implementation rules issued around it. And this indicates that the SEC determines that Agora used auditor who's working paper cannot be inspected or investigated completely by the PCAOB to issue the auditing for our financial statements included in the 2021 Form 20-F.

In accordance with HFCAA, the SEC determined that Agora file audit report is by a registered public accounting firm that has not been subject to inspection for the PCAOB for 3 consecutive years beginning in 2021, the SEC shall prohibit growth share or ADS from being traded on a national securities exchange or in over-the-counter trading markets in the U.S. We will continue to monitor market developments, actively explore possible solutions to protect interest of stakeholders and strive to maintain our listing status only NASDAQ.

In closing, we delivered a strong first quarter performance in this challenging year. We are excited and very confident about the long-term prospects of our global business. Thank you to the entire Agora team for your hard work and everyone attending the call today, and hope you're healthy and safe. Let's open it up for questions.

(Operator Instructions)

We have a question from the line of Yang Liu from Morgan Stanley.

I have 3 questions. The first one, could management share what is the revenue growth outlook for the 3 business lines that is overseas business, the China K-12 and also China non-K-12 in the next few quarters? Is it fair to say that first quarter this year should be the last quarter to see negative impact from the education regulation? And also, we are curious about the outlook for the China non-K-12 business as well. That is the first one. The second one is on the gross margin because we see that a 62.4% gross margin in first quarter is quite good, considering losing some education-related volume.

Do you think this number will be a relatively sustainable in future? Or there will be some fluctuation either on the downside or upside on gross margin, especially given the overseas parties growing very rapidly? And the third question is regarding the renminbi depreciation recently. I know the company's revenue have both China part and the non-China part and also the cost and OpEx also have China and non-China part, what is the overall impact of the FX to the future P&L? Could management share a little bit on that?

I guess these are all for me. So on the first question regarding 3 business lines. So if you look at the last 12 months, so basically, roughly speaking, China K-12 was down 90% in Q1 versus Q1 last year, and non-K-12 business in China was up around 15%, and U.S. and other international markets was up about 50%. So that's the loss on loss. So I guess you are right that hopefully this will be the bottom for the K-12 impact in China. We still have some revenue in that sector about $1.3 million in the quarter, but that's much less significant now.

And if we look forward in the next 12 months, we'd expect something similar, say, around 50% growth in the U.S. and other international markets and around 15% to 20% growth in China. Obviously, there are a lot of macro uncertainties both in China and also in the U.S. So these numbers are obviously subjected a lot of assumptions, but that would be the current expectation.

The second question on gross margin, so actually, we think the technical optimization has been very effective. There was some net impact from the loss of the K-12 model, which caused the reduction in utilization rate of our infrastructure, but that was compensated by a very efficient cost optimization. And as K-12 is largely gone now, we don't expect this impact to continue in the future. So actually, we are expecting K-12 margin to remain relatively stable in the remainder of the year compared to Q1. Obviously, there will still be some period-to-period fluctuation. But we don't expect it to be very significant.

The third question on RMB depreciation. It's completely right that, that impact on both the top line and the bottom line. So roughly speaking, RMB has depreciated by about 5% in Q2 so far compared to Q1. On the revenue side, about 60% of our revenue is currently denominated in RMB. So assuming the FX rates stayed where it is today, it will have a negative effect of about 3% on our revenue in Q2. And cost and expenses will be effectively in a similar fashion. But net-net, as in impact on the bottom line, will be much less significant.

(Operator Instructions)

Our next question comes from the line of Bing Duan from Nomura.

So my first question is about the impact from the COVID-19 and the lockdown in China since March. And how do you think about the impact to the demand and the volume growth in different verticals, whether it's good or bad? Whether it's positive or a negative impact? My second question is about the competition. So I'm glad to see that we still maintain a global leading position in the global RTE market.

But do you see that the -- going forward, the competition in China will intensify, especially for the large Internet or tech companies, which may ramp up their product launch or their other strategies in this market, in this RTE market? The last question is about the stock repurchase plan. I see we have completed 4% of total $200 million program in 1Q. So can we -- so just want to get your thoughts on how we are going to proceed with the stock repurchase plan in the next couple of months, will we accelerate the repurchase in 2Q and 3Q?

All right. I'll take the first 2. One is on the COVID and lockdown in China. I think the recent lockdown in Shanghai and other cities has been -- has a small positive impact on our revenue, mostly from education sector. The reason why it's only a small impact is twofold. First, this time, only a few cities were affected, not an entire country compared to 2020. Second, K-12 after-school tutoring is gone. So the number of incremental online classes is also much smaller than 2020. In the near term, the overall macro environment in China is very challenging.

We see that general business activities are slowing down, which will affect our customers and their end users. There is also some debate on regulation of social and entertainment apps, and it's unclear how it will play out. In summary, we are very bullish about the long-term perspective of RTE. But there is a lot of macro uncertainties in the near term. We're watching closely and we'll adjust our strategy and operations if needed.

And second, about the competition, there hasn't been too much change in strategy from our main competitors, such as Twilio in the U.S. and Tencent in China. On the RTE side, we are not seeing any big difference from operations. We have a lot of competition already in China markets especially, but we did notice that some competitors is making efforts in the low-latency live streaming area. This proves that our earlier prediction that a lot of streaming services will turn to low-latency technology.

This prediction is actually correct. The industry is embracing it. We think this is an important market with huge potential, and our technology is actually well positioned to capture opportunities in this market. But we did see a few start-ups also raising more funds in this industry. trying to build similar offerings, mostly on the local side.

Overall, I think this is a good thing for the industry with more choices for customers and more ideas to drive the industry forward. Together, we will create more vibrant market and accelerate the adoption of RTE technology in general. With growing competition, we also see that 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 technology performance and completeness of features.

Okay. I'll take the third question on stock repurchase. Yes, we repurchased about $8 million worth of shares in Q1 and repurchase continued in Q2. However, we must add that we do not anticipate that we will accelerate the repurchase given what happened in the past 1.5 months, the lockdown and the general economic uncertainties in China and also the U.S. macroeconomic environment possible recession. So we will be more prudent in terms of the stock repurchase. So that's all I have to share at this point.

(Operator Instructions) We have a follow-up question from Yang Liu of Morgan Stanley.

I have a quick follow-up in terms of the overall demand in overseas markets because we see that several major countries are moving back to normal after the COVID semi lockdown, whatever. And I just want to have an update whether this will impact overseas demand? And what is the current observation from those key markets like U.S. or Middle East and ASEAN markets?

Yes. Sure. Life in most countries have returned to normal. This does have a negative impact on the demand for our services for certain use cases. For example, usage from online events industry is now lower than 1 year ago during the peak of the pandemic. However, if you look at our numbers, our revenue growth in U.S. and other international markets actually accelerated in Q1 that's because there is a much stronger shift in people's mindset and behavior here.

During the past 2 years, people have learned that interactive video engagement can be useful on many occasions outside of video conference. Now a lot of businesses find out ways to leveraging real-time video engagement to conduct their business online, enhance user experience or increase efficiency. For example, we saw strong usage growth from education customers in Southeast Asia, Middle East and Europe, even after the reopening because live video class is a very effective and low-cost way of teaching.

We now power many of the largest education technology unicorns in South Asia. These markets have huge population and the penetration of RTE-powered online education is still very low, which means there is huge revenue potential for Agora.

Another exciting example is media. We finally see that the media industry is starting to embrace RTE technology. Recently, our technology was used to broadcast live sports games to thousands of audience with low latency and highly synchronized viewing experience. We believe this is a large and almost untapped market for us. The last example I want to mention is interactive e-commerce. One of our customers in the U.S. is leveraging our technology to enable video social buying where users can discuss and buy things as a group through video. This offers a very different and more engaging experience compared to traditional online shopping based on broadening catalogs.

To summarize, I think the pandemic has accelerated the adoption of RTE technology across industries. Today, the penetration of RTE is still very low, and there is definitely a long way to go for us.

(Operator Instructions) We have a follow-up question from Bing Duan from Nomura.

I have 2 follow-up questions. One is about the regulations on the social entertainment sector in China. Do we -- currently, do we see any potential tightening policies that may affect the demand in this sector? For example, the short video sector. And second one is about our margins growth trend. So I heard that management commented that the GP margin may remain largely stable in the next couple of quarters. Just wonder what would be the trend for R&D and sales and marketing expense in the next couple of quarters? Do we expect to add more headcount in the next few quarters?

Yes, there are notable in the past 1, 2 years, many regulation actions. And as I mentioned just now, there is also some different direction sort of the debate on regulations of social and entertainment apps. For example, there are reissue of game titles and there are ways about stabilizing the overall policy in those areas, but also certain restrictions might roll out for [gifting]. So there are still many changes in this space. And I think as we mentioned earlier, it's a little unclear how it will finally play out. And we are working closely with our customers and related bodies to find out what would be the best for us to help customers and developers.

The second question on margin. So yes, as I said, we expect margin to remain relatively stable. In terms of R&D and sales and marketing, we will improve the R&D efficiency and focus on projects, high ROI projects. So we will also control the headcount. We do not expect R&D head count to further increase. What I mean is that in dollar terms, we want to keep expenses were stable, honestly, in percentage terms, that will depend on revenue growth.

Sales and marketing. Sales and marketing, we do not plan to expand in China. However, we do have plans to further expand our go-to-market efforts outside China. As Tony explained that we still see a lot of opportunities in many markets and many verticals. So there, we will continue to invest. So in the near term, we'll see sales and marketing expenses continue to increase. But we will be more cautious about the efficiency and internal investment, and we intend to immediate next month or quarters that might have some pressure on the bottom line. But we do plan to improve the or control the overall operating margin towards the end of the year.

(Operator Instructions)

At this time, there are no further questions. I'd like to hand the call back to the management for closing.

Thank you, operator. Thank you, everyone, for attending today's call. The replay and the presentation of this call are already posted on our website and the prepared remarks will be posted later after this call. Thank you again. If there is anything, please feel free to reach out to us. Thank you.

That does conclude today's conference call. Thank you for participating. You may now disconnect your lines.