Agora Inc (API) 2022 Q3 法說會逐字稿

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

And now I'd like to hand the conference over to Ms. Fionna Chen, Head of Investor Relations. Thank you. Please go ahead, ma'am.

Thank you, operator. Good morning, everyone, and thank you for joining us for Agora's Third 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; and Jingbo Wang, our CFO.

Reconciliations between our GAAP and 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 and trends. 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, 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 undertakes no obligation to update any forward-looking statements we may make on today's call.

With that, let me turn it over to Tony.

Thanks, Fionna, and welcome, everyone, to our earnings call. Our revenue for the quarter was $41 million, a decrease of 9% year-over-year and flat quarter-over-quarter. During this quarter, 36,000 new applications registered on our platform, and our total number of registered applications exceeded 0.5 million. At the end of September, our number of active customers was close to 3,000, adding more than 400 compared to 1 year ago.

In the past few quarters, we faced an extremely challenging operating environment. Our revenue was hit by restrictive regulations in certain markets, which was the main reason behind year-over-year revenue decrease. More recently, inflationary pressure, interest rate hike and continued turbulence in global capital market have impacted some of our customers' expansion plan and their ability to raise funding which, in turn, limited the usage of our products. Lastly, the appreciation of the U.S. dollar also had a negative impact on our non-U.S. dollar denominated revenues.

Despite those macro challenges, we continue to see strong demand for our products for new use cases, such as live video shopping, which didn't really exist in the U.S. market 18 months ago.

As we have seen again and again in our history, real-time engagement technology can transform any online activity and make it more immersive and engaging. This is why we remain optimistic about the long-term potential of our technology and products. However, the macro environment will likely remain volatile for some time. To cope with such uncertainties, we must remain nimble, laser focused and entrepreneurial.

In recent months, we have been working hard to improve our operational efficiency and focused our efforts on priorities, including enhancing the quality of experience and ease of use of our core products, strengthening our go-to-market efforts and winning benchmark customers.

We have also made a few management changes to streamline our operations and reduce redundancies, including appointing Mr. Shawn Zhong, our Chief Scientist since 2018, to take on an expanded role as our Chief Technology Officer to oversee our global R&D organization. Last month, we also made the difficult decision to restructure and reduce our global workforce. Here, I would like to thank again those impacted friends and colleagues for their contribution along our journey.

Jingbo will discuss financial impact of the reduction in his remarks. I believe those moves will help us navigate the uncertainties in the near term. And with the right focus and execution, I think we are well positioned to gain market share and emerge from this challenging period stronger than ever.

Moving on to product updates. I'm thrilled to announce that in this quarter, we officially launched our next-generation, real-time engagement SDK, Agora 4.0, which has major upgrades in 3 key areas, namely more flexible, simpler to use and more powerful.

First, on flexibility. Our SDK 4.0 has an open and modular architecture by design. It breaks down the entire end-to-end transmission path into dozens of loosely coupled components with standardized interface for each module. Developers now enjoy much more granular control over the media type to create the optimal experience for their specific use case.

Next, on simplicity. With just a few lines of code, developers can easily integrate a wide range of first-party and third-party expansions with rich and engaging features such as audio and video effects, virtual backgrounds, transcription, content moderation, spatial audio, AI noise suppression and more.

Being flexible and easy to use does not mean any compromise on performance. For use cases that require high video quality, SDK 4.0 now supports up to 4K video at 60 frames per second. SDK 4.0 also supports multiple media sources from 1 single user, which is perfect for use cases such as online [proprietary] or professional music live streaming. For those that require highly synchronized transmission and ultra-low latency, such as online [karaoke], we can combine and deliver all [fun tracks] to all participants precisely at the same time. With our next-generation SDK, developers will be able to create innovative and immersive applications at a faster speed than ever before.

Now moving on to new use cases. The first one is live video shopping, which is growing very fast, and we already have several benchmark customers. For example, a leading collectibles auction marketplace leverages our platform to hold live auctions through real-time video. Its CEO describes the marketplace as a cross between the streaming platform Twitch and auction site eBay. It provides real-time auctions where customers can engage with the sellers and each other in a fast-paced video environment where auctions can be completed in as fast as 30 seconds.

The second one is professional social networking, a global leading professional social network is leveraging our technology to power its live audio chat room. These rooms provide creators and influencers the ability to have live interactive conversations with people all over the world, and users can join speakers on stage and make broader networking connections post-event. Our quality in audio technology and global coverage throughout the world ensures them premium quality, perfectly matching their position as a professional social network.

Moving on to our RTE conference. In October and November, we hosted our iconic global RTE conferences for the eighth consecutive year where developers, customers and thought leaders from over 100 countries joined together to discuss various plans and explore the future of real-time engagement. Nearly 500 people attended in-person session, in-person program in San Francisco; close to 10,000 more registered for online sessions; and the total number of session views exceeded 500,000. This year also marks the first time that we hosted a dedicated RTE APAC conference, which has been well received and lively attended by local participants.

Here, I would like to highlight some of the observations and the key messages from the conference. First, on end user experience. Evidence continues to build across use cases and geographies that our customers' business success is profoundly dependent on the end user experience that they can deliver. For example, a small increase in freeze rate in an audio chat room will reduce user session lengths and retention rates. Adding AI noise suppression for in-game team audio chat will significantly increase section lengths. Therefore, it's paramount for developers to partner with the most capable and reliable RTE provider in order to have the most advanced building blocks in creating real-time engagement experiences.

Second, on the trend of high-definition video. We expect to see the mainstream video resolution in real-time engagement steadily increase from 480p to 720p in response to end users' growing demand for better quality. Based on the usage of our platform, other things being equal, changing video resolution from 480p to 720p leads to an approximately 15% increase in overall session lengths. In case local network conditions cannot account the required bandwidth, our super resolution algorithm can take care of this issue by enhancing video resolution through the same bandwidth with only 3% increase in DPO and memory usage. This upgrade in video quality and experience will bring more business opportunities for our customers and for us as we have already seen a huge leap in 720p sessions since the beginning of this year.

Lastly, on the trend of adding RTE capabilities to IoT devices. We are seeing that devices with RTE features are generally sold at higher premium compared with plain vanilla model without such capabilities. Examples include (inaudible) with cameras for real-time video, treadmills and rolling machines with screens for live streaming classes and study [lengths] with AR projection capabilities, enabling students to collaborate with their classmates. This type of human touch is only possible, thanks to RTE technologies, and we believe these experiences will be one of the fundamental drivers of IoT's future growth.

Before concluding my prepared remarks for this quarter, I want to thank all Agorans for the hard work and commitment during this challenging period. The fundamentals and long-term potential of real-time engagement technology remains the same despite the turbulent market environment. We are neither overoptimistic or overly pessimistic about the future of our industry, and we are still in the early stage of building a great company.

As someone once said today is difficult, tomorrow is even harder, the day after, that will be great, although most people will be dead before that. I'm confident in our strategy for growth and in our ability to help Agora succeed and in your ability to help Agora succeed. What we need is to keep executing with determination and focus. Thank you all.

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 Q3 and then I will discuss the outlook for the fiscal year of 2022.

Total revenues were $41 million in the third quarter of 2022, a decrease of 9% year-over-year and flat compared to last quarter. The year-on-year decrease was mainly due to restrictive regulations in certain markets, which was offset, in part, by revenue growth in other sectors and regions.

If we look at Q3 versus Q2 this year, the recent interest rate hikes and tightening of financing environment has impacted some of our customers' business and their ability to raise funding, which led to reduced usage on our platform. In addition, the continued appreciation of U.S. dollar has impacted our non-U.S. dollar denominated revenues when translated into U.S. dollar amount.

Our trailing 12 months constant currency dollar-based net expansion rate is 84% excluding Easemob. Specifically, dollar-based net expansion rate was above 130% for the U.S. and international business, which remain strong and healthy; and approximately 70% for the China business, mainly due to restrictive regulations in certain markets.

Moving on to cost and expenses. For my following comments, I will focus on non-GAAP results, which exclude share-based compensation expenses, acquisition-related expenses, financing-related expenses, amortization expenses of acquired intangible assets and income tax related to acquired intangible assets.

Non-GAAP gross margin for the third quarter was 59.8%, which was 5.7% lower than Q3 2021, mainly due to increased revenue from our broadcast streaming product, which contributed approximately 80% of our total revenues in the quarter and at lower gross margin.

As Tony mentioned just now, we made the difficult decision to restructure and reduce our global workforce last month. The associated severance costs of $3.2 million are reflected in operating expenses in Q3. We also reduced other operating expenses such as rental benefits, software and advertising. Together, we expect to see roughly $9 million of cash savings on quarterly non-GAAP operating expenses in Q4 compared to Q3.

Non-GAAP R&D expenses were $25.2 million in Q3, which included a provision of severance costs of $1.9 million. If we exclude the severance costs, the pro forma R&D expenses decreased approximately 14% from Q2 this year. Non-GAAP R&D expenses was 61.4% of total revenues in the quarter compared to 50.9% in Q3 last year.

Non-GAAP sales and marketing expenses were $13 million in Q3, up 17.7% year-over-year, mainly due to team expansion in the U.S. and certain international markets, and increased advertising and event expenses. Sales and marketing expenses represented 31.8% of total revenue in the quarter compared to 24.6% in Q3 last year.

Non-GAAP G&A expenses were $7.4 million in Q3, up 8.9% year-over-year, mainly due to team expansion in the U.S. G&A expenses represented 18.1% of total revenue in the quarter compared to 15.1% in Q2 last year.

Non-GAAP operating loss was $18.7 million, translating to a 45.7% non-GAAP operating loss margin for the quarter compared to operating loss margin of 24.6% in Q3 last year.

Now turning to cash flow. Operating cash flow was negative $8.8 million in Q3 compared to negative $14 million last year. Free cash flow was negative $9.9 million compared to negative $15.6 million last year.

Moving on to balance sheet. We ended Q3 with $483 million in cash, cash equivalents and short investments compared to $641 million at the end of Q2. Net cash outflow in the quarter was mainly due to free cash flow of negative $9.9 million; prepayment for land use right purchase of $137.4 million, net of deposit refunded; cash paid for long-term investments of $3.1 million; and share repurchase of 3.1 million (sic) [3.5 million]. By the end of Q3, we repurchased approximately 13.2 million of our Class A ordinary shares, equivalent to approximately 3.3 million ADS or $23.2 million, representing 12% of our $200 million share repurchase program.

Now turning to guidance. COVID-19 is still an unprecedented variable on our business model, where historical experience may not apply. Our guidance on full year revenues reflects various assumptions that are subject to change based on uncertainties related to the impact of the COVID-19 pandemic. In addition, challenging macroeconomic environment and the turbulence in global capital markets have impacted some of our customers' business expansion and their ability to respond which, in turn, could limit their usage of our products. With that, we expect total revenues for the full year of 2022 to be in a range of $160 million to $162 million.

In closing, we made tough decisions in this quarter under a challenging and uncertain macroeconomic environment. Looking forward, we will stick to our long-term strategy, be laser focused on key priorities and continue to improve our operational efficiency. With the right focus and execution, I believe we are well positioned to gain market share and emerge from this challenging period stronger than ever.

Thank you to the entire Agora team for the hard work and thank you, everyone, for attending the call today.

Operator, let's open it up for questions.

(Operator Instructions) Our first question comes from David Lee from Bank of America Securities.

I have 2 questions. Firstly, could you share more color on the customer demand trends for the domestic market and overseas, especially in Q4?

My second question is regarding the ARPU and gross profit margin. It seems that the implied ARPU of overseas business declined in Q3 versus year-over-year growth in Q2. How do we see the ARPU and gross profit margin to trend in the following quarter or next year?

I'll take the demand question. In U.S. and the international markets, COVID has already passed largely. So in recent quarters, our demand was not really driven by COVID or anything related to COVID, but rather, more driven by new use cases such as live video shopping, as I mentioned earlier, and also in increasing adoption in mature use cases such as live cast education and telehealth. Similarly in China, COVID -- also COVID is an important thing here, affecting the whole macro economy. However, it's not anymore a significant demand driver for us. Currently, the main challenge on the demand side is rather on also the macroeconomic environment, indirectly from the COVID policy adjustment.

As we have been seeing in recent company earnings, internet user growth and revenue growth of internet companies have been flat or significantly slowed down. Many companies are also cutting their growth targets for next year, which are limiting their usage of our products. However, we do see incremental demand from more traditional enterprises or IoT industries and a few small sectors. Those will continue, the areas that we will continue to invest more into, but it will take some time to ramp up adoption on those areas.

I'll take the question on ARPU and the GP margin. So in the U.S. market, actually, ARPU and GP margin have been quite stable recently. The main challenge was from international markets, such as Southeast Asia, South Asia. In these markets, we do see more pricing pressure which also affected ARPU because the continued appreciation of the U.S. dollar has effectively made our products more expensive in these markets in local currency because we are charged on global price in U.S. dollar. And against a lot of these emerging market currencies, the U.S. dollar has appreciated more than 10%, in some cases, more than 20%. So to better drive demand in these regions, we need to give additional discount and also to be very competitive in those markets.

So that's the reason behind some weakness in ARPU and GP margin in these markets and also, more broadly speaking, as Tony mentioned, by the rate hike inflation, the capital market turbulence, the tightening of financing environment has made a lot of the customers' business more difficult which, in turn, affected demand and ARPU.

So looking forward, we actually think GP will remain relatively stable. Or actually, in this quarter, as I mentioned earlier, the decrease in GP margin was mainly due to a product mix shift and, to a lesser extent, due to the pricing pressure from these emerging markets. And looking forward, product mix will not further change. So there, we are not seeing incremental pressure from [industry].

Our next question comes from the line of Tom Tang from Morgan Stanley.

I just had a quick question on the guidance. Since we have released a new guidance, just wondering if there's any further insights we can offer on our 2023 outlook. As we have previously mentioned, we want to break even by end of 2023. If there's -- just wondering if there's any changes to the plan.

Sure. I'll take this one. So as you have noticed, we rolled out our full year guidance for 2022, and this was mainly due to the recent macroeconomic challenges, as I just mentioned, the rate hikes, the financing environment and all that. So in terms of 2023, it is still too early to give any official guidance. But on a very high level, we are targeting 20% to 30% growth in the U.S. and international markets and a very moderate growth in China. But again, all these operating targets are still moving given the highly uncertain macroeconomic environment in the U.S., the emerging markets and also in China. And as to the breakeven time line, we are still committed to the same guidance. We aim to break even on a non-GAAP basis by the end of 2023.

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

I just have one question. So how do we think about the head count growth in the next few quarters? Do we have an estimate of the growth of the R&D and sales marketing employees? And will this affect the operating expense growth in Q4 and Q1 next year?

Yes. I'll take the first part. I think we take a very serious consideration before we make the decision to restructure and reduce the workforce. So we don't see, in the next few quarters, we want to expand the workforce. Again, we will continue to operate and try to practice a more efficient and leaner operation down the road, similarly to other costs.

I don't know if Jingbo has anything to add.

Yes. Just to add a few words from a financial perspective, so recent restructuring and the reduction will bring us about $9 million of cash savings in Q4 compared to Q3. And actually, we expect to see some additional savings in Q1 compared to Q4 because the reduction happened in the middle of Q4, so we still had 1 month of higher cost in Q4. And as Tony mentioned, we do not expect to increase head count in 2023.

(Operator Instructions) No further questions, I'll turn the call back to the management team for closing remarks.

Thank you, operator, and thank you, everybody, for attending our call today. If there are any more information, please visit our IR website. Today's presentation and also the speakers' remarks will be also posted on the website. Again, thank you, everybody. Thanks.

Thank you. Bye-bye.

Thank you.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.