Agora - Q2 2024

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Agora, Inc. Q2 2024 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To participate, you will need to press star one one on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star one one 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. The reconciliations between the company's GAAP and non-GAAP results can be found in an earnings press release.

Jingbo Wang (CFO)

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, 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. has no obligation to update any forward-looking statements the company makes on today's call. With that, let me turn it over to Tony. Hi, Tony.

Tony Zhao (CEO)

Hi. Thanks, FIonna, and welcome everyone to our earnings call. First, review our operating results in the past quarter. Agora revenue were $15.6 million in the Q2, up 2% year over year, mainly driven by business expansions in certain use cases, such as live shopping. Shengwang revenue were RMB 132 million in the Q2, up 0.3% year over year and 8% quarter over quarter, mainly due to usage growth of digital transformation and Internet of Things customers. I'm glad to see that both Agora and Shengwang delivered year-over-year revenue growth this quarter, despite a very challenging macro environment. This success is due to our relentless innovation in driving new use cases and enhancing the quality and value of our products in existing use cases.

Jingbo Wang (CFO)

Now, moving on to our business, products, and technology update for this quarter. Let's first talk about Agora. Recently, our real-time speech-to-text product transitioned from beta to general availability. As I mentioned in our previous earnings call, this product enables customers to transcribe the audio of each user in the channel. Text can be distributed as live caption to all channel participants to enhance accessibility and user experience. Throughout the development and beta testing stage, we have improved the performance of our product to accommodate up to three simultaneous speaker and added support for all major languages and dialects. Additionally, our product is integrated with large language models, allowing customers to receive automatically generated summaries of meetings or events and gain insights at the end of each session.

For example, HelloTalk, a leading language learning platform with more than 50 million users, has been one of our customers to first adopt our real-time speech-to-text product. With the integration of our product and the large language model, HelloTalk can now provide their users advanced capabilities, including live language analysis, live translation, language proficiency assessment, creating contextual and personalized learning experiences. Additionally, I'm happy to announce the launch of Agora's new website. At Agora, we believe all our customers are developers at heart. Recognizing the innovative spirit of our new website boosts an intuitive interface, enhanced navigation, and a more modern design to create a cool and sleek user experience. It also offers a wealth of resources tailored to both developers and key business decision-makers. Next, let's turn to Shengwang.

We are excited to announce our recent partnership with Unity China to integrate our in-game voice calling capabilities in Unity China's Tuanjie engine. This collaboration allows game developers to seamlessly add multiplayer voice channel into their games. It is especially appealing to small game studios and independent developers, who often lack the skill set and resources to address all the technical challenges on their own. In addition, our proprietary advanced feature, such as 3D spatial audio, AI noise suppression, and echo cancellation, are available to developers, enabling them to create immersive experiences for players. In this quarter, we have also facilitated wider application of AI in our customers' use cases. For example, we helped Xiao Tian Cai to add real-time transcription for video calling in their latest flagship smartwatch.

Previously, when users conduct video calling, video calls on a smartwatch in noisy environment, it was often difficult to hear the other party clearly. Moving the wrist and watch closer to the ear would make it impossible to see video on the screen, therefore forcing user to make a hard choice between audio and video. Now, with our cloud AI real-time transcription capabilities, users can enjoy video call with captions on their smartwatch, significantly enhance their user experience. Last September, we become the first company to offer real-time voice SDK that enables conversation with generative AI models. Since then, we have facilitated our customers to launch conversational AI applications in various use cases, such as AI companion, productivity assistant, language tutor, and customer service. Although these applications are still in their early stage, we have already seen promising user adoption and engagement trend.

Looking forward, we are committed to staying at the forefront of technology advancement, to enable developers to innovate at a faster pace and build the conversational AI application of tomorrow. This year marks the ten-year, tenth anniversary of our iconic Real-Time Engagement, or RTE conference. This coming October, we will host our RTE conference in Beijing, focusing on the intersection of AI and RTE technologies and the exciting possibility that lies ahead. Experts and practitioners from both the AI and RTE community will gather to share their vision and efforts to create revolutionary technologies, products, and applications. There will also be forums focusing on more traditional verticals such as digital transformation, entertainment, education, and Internet of Things. We welcome you all to attend the conference and experience firsthand the vibrant spirit of the industry.

Before concluding my progress, my pre-prepared remarks, I want to thank both Agora and Shengwang teams for their hard work and commitment during the challenging period. Let's stay focused on creating long-term customer value and strengthen our leading market position. 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 Q2 of 2024, and then I will discuss outlook for the Q3. Total revenues were $34.2 million in the Q2, an increase of 3.6% quarter over quarter, and an increase of 0.5% year over year. We have finally overcome the impact of the pandemic, the macroeconomic turmoil, and regulatory changes, and returned to year-over-year revenue growth for the first time since 2021. Agora revenues were $15.6 million in the Q2, a decrease of 1.3% quarter over quarter, and an increase of 2% year over year. The quarter over quarter decrease was primarily due to reduced usage from customers in emerging markets.

The year-over-year increase was primarily due to business expansion and usage growth in certain verticals, such as live shopping. Shengwang revenues were RMB 131.9 million in the Q2, an increase of 7.6% quarter over quarter, and an increase of 0.3% year over year. The increase were primarily due to increasing revenues from certain verticals, such as Internet of Things. Dollar-based net retention rate is 92% for Agora and 79% for Shengwang, 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, 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 right.

Adjusted gross margin for the Q2 was 63.4%, which was 3.8% lower than Q2 last year, and 0.2% higher than Q1 this year. The year-over-year decrease was mainly due to change in product mix. The quarter-over-quarter increase was mainly due to improved utilization rate of infrastructure. Adjusted R&D expenses decreased 6.6% year-over-year to $15.5 million in Q2, mainly due to our continued cost improvement measures. Adjusted R&D expenses represented 45.4% of total revenues in the quarter, compared to 48.8% in Q2 last year. Adjusted sales and marketing expenses were $5.9 million in Q2, decreased to 16.9% year-over-year. Sales and marketing expenses represented 17.3% of total revenues in the quarter, compared to 20.9% in Q2 last year.

Adjusted G&A expenses were $6.6 million in Q2, slightly increased 6.5% year-over-year, primarily due to the increase of expected credit loss. G&A expenses represented 19.1% of total revenues in the quarter, compared to 18.2% in Q2 last year. Overall, adjusted operating expenses were 6.1% lower than the same period last year, thanks to our effective cost control. Adjusted operating expenses were 2.2% higher than Q1 this year. The sequential increase was mainly because we decided to replace certain share-based compensation with cash compensation for employees in order to reduce dilution for our shareholders when shares are trading at below cash value.

Adjusted EBITDA was -$6 million, translating to a 17.6% adjusted EBITDA loss margin for this quarter, compared to 19.5% in Q2 last year. Non-GAAP net loss was -$6 million in Q2, translating to a 17.5% net loss margin for this quarter, lower than the net loss margin of 19.4% in Q2 last year. Now turning to cash flow. Operating cash flow was -$7.6 million in Q2, compared to -$5.3 million last year. Free cash flow was -$7.9 million, compared to -$5.6 million last year. Moving on to balance sheet. We ended Q2 with $371 million in cash, cash equivalents, bank deposits, and financial products issued by banks, or $4.03 per ADS.

Net cash outflow in the quarter was mainly due to free cash flow of negative $7.9 million and share repurchase of $2.3 million. Now turning to guidance. For the Q3 of 2024, we currently expect total revenues to be between $31.5 and $33.5 million. This forecast reflects our end of sale of certain products with unsatisfactory profitability. Such products generated approximately $2.4 million of revenue in the Q3 of 2023, and $3.3 million of revenue in the Q2 of 2024. The average gross margin of such products was below 10%, so we expect end of sale of such products will lead to a meaningful increase in our gross margin and a positive impact on bottom line in the Q3.

This outlook also reflects our current and preliminary views on the market and operating conditions, which are subject to change. In closing, returning to year-over-year growth is an inspiring turning point under a challenging operating environment. We are excited about emerging use cases, especially the intersection between real-time engagement and conversational AI, and we remain confident about our long-term growth potential. Thank you to both the Agora and Shengwang teams for your hard work and contribution during this period. Thank you, everyone, for attending the call today. Operator, let's open it up for questions.

Operator (participant)

Thank you. And as a reminder, if you do have a question, press star one one on your telephone and wait for your name to be announced. To remove yourself from the queue, press star one one again. Please stand by for our first question. One moment. First question is from the line of Yang Liu with Morgan Stanley. Please go ahead.

Yang Liu (Analyst)

Good morning. Thanks for the opportunity to ask questions. I have two questions here. The first is regarding the business outlook. Jingbo just mentioned that you will phase out some of the low-margin business. Could you please elaborate more about the reason behind that? Related to the competition, or the outlook of that business? And whether, or you mentioned that that business has a quite low growth margin, and I'm not sure whether that business OP margin or net margin is also very bad, or what is the potential impact to the bottom line? And the second question is: based on the company's pipeline, what is your expectation of the future of emerging applications or use cases for RTE, or whatever, AI-related application? If you see any potential booming of the RT usage, could you please share more about that? Thank you.

Jingbo Wang (CFO)

Thank you. I'll take first question. So, yes, so it's already in a sale of certain products in this quarter. And these products, we mentioned a few years back, these were more like CDN-based technology. And given how competitive the market is, these products have pretty low gross margin in the low single digit range. And because there are also related other expenses. So actually, on a net margin, operating margin basis, it's close to break-even or even slightly negative. And as we know, we have been very focused on improving the overall operating efficiency and drive the business towards a sustained profitable growth.

And that's why we believe this business is not generating profit, and we don't see that market turning around very quickly in the near term. And that's why we decide to basically terminate the sale of such products. That doesn't mean we will exit the entire kind of medium latency live streaming market. We are building other innovative products not based on the traditional RTC technology, but more based on the RTC related technology. So we continue to be competing in the market, but we will be more focused on innovation rather than offering more traditional and legacy products.

I'll take the generative AI side of the question. We have been actively talking to leading large language model companies globally with very positive feedback in general. The importance of multimodal capabilities and a highly reliable low latency transmission network is well recognized by all players. We are working closely with many of them to develop multimodal products and solutions. Some of their consumer applications have already integrated with our SDK. Meanwhile, we have also worked together in engaging with AI developer community. You know, if you look at the Hugging Face, there's almost five hundred thousand different models.

Tony Zhao (CEO)

Such, you know, we have, you know, working with them to engage with developer communities on that, to bring the models into real use case. We also partner with companies like Moonshot, you know, for the Taoyuan startup program, to help developers to innovate. Please stay tuned for more announcement in our RTE conference in October.

Yang Liu (Analyst)

Thank you.

Operator (participant)

Thank you. One moment for our next question. It comes from the line of Dali Li with Bank of America Securities. Please go ahead.

Wendy Li (Analyst)

Hi, management. Thanks for taking my question. I have two questions here. Number one is about the revenue by segment. It seems that Shengwang revenue is getting stronger quarter on quarter recovery in Q2 compared to Agora. And what's the key drivers, and how do we see the trend in Q3 for the domestic market and the international one? And the same question about our breakeven target, as we have been trying to control the expenses and also scale down the low margin business. And do we have update about the breakeven target in the coming quarters or sometime? Thank you.

Tony Zhao (CEO)

In terms of the Q3 demand for US and international markets, we see growth momentum in live shopping and IoT verticals, particularly in developed market. Since we become the first company to offer real-time voice SDK that enables a conversation with generative AI models, competitors have also followed us and provide similar products. We believe this will be the new battlefield of RT. With our recent launch of our conversational AI framework, we will gain significant competitive edge to engage with AI developers and serve their applications. In China market, we see growth potential in IoT customers. Also, some strong demand for conversational AI applications. Competitive landscape largely unchanged during the past quarter. Competitive pressure stabilized.

Jingbo Wang (CFO)

Okay, I'll take the second question. So from what we see right now, demand for our core products remain pretty robust. So we do expect sequential revenue growth in Q3 compared to Q2, and hopefully Q4 compared to Q3 as well, and the gross margin of our core products remain very healthy. So you will see a pretty nice uptick in the on gross margin in Q3 and Q4, but as I mentioned, the termination of the certain low-margin products will not impact the bottom line. In terms of the OpEx, we'll continue to manage OpEx very cautiously, and we do not expect OpEx to be higher than Q2 in the coming quarters. If anything, we might try to further improve efficiency.

At this point, I cannot promise the exact timing of the GAAP breakeven, given there are still a lot of moving parts. But we are committed to achieving profitable and sustainable growth. If we think about the business, right, in this quarter, we returned to year-over-year growth after a lot of the macro challenges, the pandemic, the macro economic environment in both China and in the US, given all the rate hikes and funding environment changes, and also the regulations.

Now we have finally come back to revenue growth, and we believe this is a turning point, and core business will continue to grow from this point on. As we maintain our cost discipline and drive efficiency, I believe it's just a matter of time before we achieve that goal, that breakeven, and continue to grow from there. In any case, we expect to achieve such a breakeven on GAAP basis and on continued basis in 2025.

Wendy Li (Analyst)

Thank you, Tony and Jingbo. Thank you.

Operator (participant)

Thank you. And as there are no further questions, I wanna thank everybody for attending the company's call today. As a reminder, the recording of 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. Thank you, everyone.

Jingbo Wang (CFO)

Thank you.

Tony Zhao (CEO)

Thank you.

Jingbo Wang (CFO)

Bye-bye.