Agora - Earnings Call - Q3 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to Agura Inc 3Q twenty twenty Financial Results. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded. I would now like to hand the conference over to your speaker, miss Fiona Chen.

Thank you. Please go ahead.

Speaker 1

Thank you, operator. Good evening, and good morning, everyone. My name is Fiona. I am the Investor Relations Director at Agora. Thank you for joining Agora's third quarter twenty twenty earnings conference call.

Joining me today are Tony Zhao, Founder, Chairman and CEO and Jimbo Wang, CFO. Our earnings results press release and a slide deck can be found on our IR website at investor.agora.io. 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 and trends, including guidance. 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 performance of our business. We will discuss them in detail in our filings with the SEC, including today's earnings press release and risk factors and other information contained in the final prospectus relating to our initial public offering. Agora assumes no obligation to update any forward looking statements we may make on today's call. With that, let me turn it over to Tony.

Speaker 2

Thank you, Brianna. Tony, please. Welcome to our hello? You hear

Speaker 3

me? Yes.

Speaker 2

Alright. Thank you, Brianna, and welcome everyone to our earnings call. This is the first quarter in two thousand twenty that was impact free from the COVID situation in China. As COVID nineteen gradually paid off between late May and early June. So even resolve the short term demand caused by COVID in China, we still deliver another quarter of outstanding results.

This revenue of US30.8 million for the third quarter, an increase of 81% year over year. Our number of adjusted applications reached more than 240,000 at September, adding nearly 10,000 per month in q three. Our number of active users reached more than 1,800 up 95% year over year. Outside of China, we continue to see strong demand for our real time voice and video products in both mature use cases, such as entertainment and gaming and emerging use cases, such as education and virtual events. We also made solid progresses in our product, brand, and ecosystem in this quarter.

In part in particular, I'm proud of our marketing and design team who created an amazing team at our RTE twenty twenty virtual conference. With more than eight, with more than 8,000 registered attendees and tens of thousands of attendees registered viewers, 170 guest speakers, and over 100 com companies all over the world. Also had our first RPU startup challenge with more than a 130 startups joining the competition. More than something than 75% of this startup are already funded, and 50 of them were selected to join our startup program, where they will receive training, platform usage credit, and dedicated technical support. At Agora, we constantly support startups at early stage, cultivate innovation, and accelerate the emergence of new use cases for RTE technology.

At RTE twenty twenty, the discussions were focused not only with with not only with what exists today, but how to reimagine tomorrow's innovation or innovative RT application and build the future together. The traditional concept of communication is all about exchange of information, but creating a successful real time engagement use cases requires a lot more than that. It is about creating a shared moment and space for people to experience and interact with. To do that, we focus our attention on the three pillars of real time engagement, shared contact, interactivity at any scale, and ubiquity. To create shared contact, we offer more than just video and voice, but also use case specific tool such as signaling signaling virtual event virtual environment, automate augmented the object, content moderation, voice recognition, and so on.

We can't do all of this ourselves, so we have a partner with leading third party service providers. Now many of those features can be easily used by developers as plug ins in our platform. Our plan is to make Aurora platform the engine for drop for developing any real time engagement application. Shared contacts also depends on having smooth, flat, and data free experiences that emulate real life. That is why we are rolling off our experience level agreement or XLE.

With XLA, Agora will not only let you know that the number of minutes you are running on are of premiums quality, but we will also guarantee our performance on the four core metrics that are critical to end user experiences. Channel joining successful rate, audio fluency, video fluency, and transmission latency. Since its launch, we have signed up dozens of well known Internet companies for the accuracy. Of course, fully immersive experience should be available for any size of gathering, which brings us to the second pillar of real time engagement, interactivity at any scale. Since the very beginning, we have designed our platform to be highly scalable.

For example, recently, we supported an education customer in South Asia with more than 50,000 concurrent video user in one full fully interactive classroom. At Algora, we feel real time business should be our available anywhere to any to everyone and in any app. So that brings us to our third pillar, ubiquity. For this to become reality, we have been making our technology broadly available and easy to adapt. We are committed to supporting all popular operating systems, browsers, and development frameworks.

Early earlier this year, we add React Native and FARTA SDK to our list of supported SDKs. In this quarter, we also released our annual SDK for gaming and RTOS SDK for IoT devices, which will release more space for RT use cases to grow. As we discussed in the past, we have seen aspiring entrepreneurs who have some great ideas and lack the time and resources to build an app from scratch. So we want to make it even easier for anyone to create their own RTE apps. For this reason, we launched the Agora Education Application Pass and Agora RTE app builder.

With Agora Education APAS, you can create an online education application with very limited coding, whether it's one on one classroom, small class, or interactive large class with massive number of attendees. Agora's RTE app builder goes even a step further. Whether you are seasoned developer or a product manager, we can now create a product ready a production production production ready conference app with no coding at all in a matter of minutes. And you can then customize the design and specify specification of the app in many ways based on your unique requirements. Last but not the least, security, compliance, and privacy protection are critical to our success.

In this quarter, we made steady progresses in enhancing our operational standards, such as best practice in software development, big access amendment, and end to end encryption. Recently, we were awarded three ISO certificates on our information security management system, which further a a test to our rigorous security practice and strengthen the trust developers have in Agora. Now let me turn this over to Jingbo, who will review our financial results.

Speaker 3

Thank you, Tony. Hello, everyone. Let me start by first reviewing financial results for the Q3, and then I will discuss our outlook for the full year. Total revenues grew 81% year over year to US30.8 dollars in the third quarter of twenty twenty, which is mainly due to the increase in volume for both our LED and voice products. At the September, we have powered more than four hundred billion minutes of real time engagements per month on average in this year.

As you probably already know, the COVID nineteen pandemic has been well contained in China by late May, after which most offline activity and travel gradually return to normal. As a result, I would say usage in Q3 had almost no direct impact from COVID in China. That being said, the usage in Q3 was still significantly higher than the same period last year, reflecting the increasing penetration of contextual real time engagement in our activities and in long term behavior shift. The usage in Europe and rapidly, on the other hand, was still was still at heightened level due to both our market expansion efforts and the prolonged impact of COVID nineteen. Demand for use cases such as education, work events, and entertainment continues to grow.

Our trailing twelve month constant currency dollar based net expansion rate was 188% at the September. This number has been positively impacted by the stack of usage this year due to COVID-nineteen. Fortunately, the situation has stabilized in China and hopefully the other regions as well in the near future. Afterwards, we expect our expansion rate will likely come back to levels similar to what we saw in 2018 and 2019. Now turning to cost, expense and margin.

Please note that the usage of our products and timing of our hiring and marketing initiatives might fluctuate from quarter to quarter, which cause our profitability to fluctuate significantly as well. Nevertheless, we remain focused on capturing long term growth opportunities and keep making investments from innovation. For my following comments, I will focus on non GAAP results, which excludes share based compensation expense. Non GAAP gross margin for the third quarter was 62.5%, which was 6.8% lower than Q3 last year and 6.1 lower than Q2 this year. The decrease in gross margin was mainly due to our international expansion in regions with higher infrastructure costs, such as Southeast Asia, South America and Oceania.

To that extent, the gross margin was also affected by higher bandwidth costs in China, as one of main Chinese telecom companies raised their nationwide prices in this quarter. Non GAAP R and D expenses were less than 11,600,000.0 in Q3, up 80% year over year as we continue to build our R and D team. Non GAAP R and D expenses was largely flat at 37.5% of total revenue in the quarter compared to 37.6% in Q3 last year. Innovation is critical for our success. We continue to invest significantly further in our R and D capabilities in order to further strengthen our technology leadership and broaden our API portfolio.

Non GAAP sales and marketing expenses were US5.9 million dollars in Q3, up 35% year over year, mainly attributable to team expansion and increased advertising expenses. Sales and marketing expenses represented 19.2% of total revenue in the quarter compared to 25.8% in Q2 last year. We believe this has again demonstrated the efficiency and scalability of our development center, Kokomarc Mob. Non GAAP G and A expenses were $3,300,000 interest rate, up 135% year over mainly due to team expansion and professional services related to information security management. G and A expenses represented 10.8% of total revenue in the quarter compared to 8.1% in Q3 last year.

Non GAAP operating loss was $1,300,000 translating to a 4.2% non GAAP operating loss margin for the quarter compared to a loss margin of 1.9% in Q3. Adjusted EBITDA was negative $105,000 in Q3 with a negative 0.3% margin compared to a 1.1 margin in Q3 last year. Turning to cash flow. Our operating cash flow was negative $1,900,000 in Q3 compared to negative $54,000 Free cash flow was negative $5,100,000 compared to negative $1,300,000 last year. Net cash outflow in Q3 was mainly due to the purchase of servers and network equipment as we continue to expand our software defined zero time network.

Moving on to balance sheet. We ended US635 million dollars in cash, cash equivalents and short term investments compared to US641 million dollars at the end of Q2. The decrease was due to the net free cash flow of $5,100,000 and payment of professional service fees related to our IPO. Now turning to guidance. COVID-nineteen is still an unprecedented variable for business model where historical experience may not apply.

Our guidance on full year revenue reflects a number of assumptions that are subject to change based on uncertainty related to the impact of the COVID-nineteen pandemic. With that, for the full year of 2020, we maintain our previous guidance The total revenue of 43,000,000 are expected to be in the range of $125,000,000 to $130,000,000 which would represent approximately 94% to 102% year over year growth. In closing, the execution performance in Q3 met our expectation, which means we are making long term investments on innovation and will continue to support our developers and customers around the world. Thank you to the entire Agua team and everyone, and hope you are healthy and safe. Let's open up for questions.

Speaker 0

Thank you so much. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, you will need to press star and one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Again, it's star and one And our first question comes from the line of Yang Li from Morgan Stanley.

Your line is now open.

Speaker 4

Thanks for the opportunity to ask questions. Three questions from my side. The first one is could management update us in terms of the progress of penetrating online education customer in terms of their big class use cases? We see big potential there and previously management mentioned that some big customers doing testing. Could you please update us progress?

The second question is related with competition. We saw some fundraising movement from your peers in the capital market, a private capital market. Could you please update us if you have more intensified competition while pitching customers or penetrating customers? The third question is related with the gross margin outlook. As Jimbo mentioned that one Chinese telco raised the price, do you see any risk of the other two will also raise the price in future?

And what will be the gross margin trend in the next few quarters? Thank you.

Speaker 2

Okay. I'll talk about the progresses on use cases, especially for the larger classroom experience. It's true that we are actively working with customers on what we call super small class, you know, use cases because this is one step further in enhancing the user, you know, student and teacher experience in large class classroom use cases. The use cases like this, you know, students can, you know, take a class with hundreds or thousands or even tens of thousands of other students in one same classroom so that there there could be a unique teacher teach them together. But they're they're in the classroom experience.

You know, maybe every ten to fifteen minutes, the student will, you know, will be, you know, will be, you know, four small groups of four to six in in small group, and they can work on assignment and discuss with each other or even, you know, like, a formal competition within your small group to compete on who's going to win on answering certain questions. And then come back to you know, after that, come back to the large classroom session. So this new format combines the efficiency of large classes and the of small of small classes. And, like, the the the completion could launch within the small classroom will further enhance the students' attention or focus in the, you know, content being teach being being teach being taught in that classroom section. It's going to significantly improve the learning experience and the outcome.

And there are several other, you know, interesting new cases, you know, like, you know, in virtual work play and also in some gaming and social use case as well. So we you know, outside of education, we are also working on some other interesting use cases as well. Now about the competition, it's true that I think this year, maybe, you know, due to both COVID, you know, caused demand and, of course, our, you know, in the public market. So there are more, you know, companies looking at the space, and there are, you know, you know, on ratings for different, you know, small companies or new product rollout in the space. So we think, you know, those indicate the potential and opportunities in RTE path industry are recognized by more and more people, like, you know, today.

And as we point out early, those lessons, I think, also shows industry are gradually coming to a consensus that this is not a old, you know, stuff, you know, similar to either web conference or other, you know, products offered by, you know, traditional company. Rather, it's a whole new industry that's focused on real time engagement, you know, and the concept of real time engagement is more, you know, and more being adapt by by all industry peers instead of the old concept of RTT. We're happy to see our early predictions and judgments are proved to right. And meanwhile, you know, with the newcomers and the competition, we also think our, you know, our competitive position, you know, quite clear and strong. Like, in technical and RTE involve a lot of technical challenges from performance to scale to features, and each uses have different requirements, you know, to support.

You know, as I mentioned, you know, our platform actually support hundreds or thousands of different use cases. And it also requires different priorities among various aspects of the solution. Working with our customers, we have developed a soft solution for more than a 100 use cases with, you know, certain volume already, which has been used in millions of of. Our big analytic analytics and XRA assurance also unique in in this industry today. And to offer managed five, we also by far, have the largest developer community for our team.

It's nearly 10,000 new apps with just the other month. They support, by far, the latest range of platform and development in frameworks.

Speaker 3

I'll I'll take the third question on margin. So as to the telco raising the price, we do not expect that that will happen with the other two telcos given the one that made the price this quarter, originally, had the lowest price amongst them, and the effort was really to close the the pricing gap. And after the recent adjustment, the projects are more similar industry main purpose. So we do not expect any short term trend. Actually, the general trend on gross margin, as I mentioned earlier, it was affected by both the international sanctions and also the incoming cost.

It still is slightly longer term as we can enhance our gross margin in three ways. Number one is always innovation, create more innovative products and features. So that's always the best way to create more value for our customer and generate higher margin. And that's why we have been investing in R and D very heavily. And secondly, XLA will be a great way to help us charge different prices based on different level of quality frames.

For use cases where the highest possible quality needed, we'll be able to achieve our growth higher growth market over time. And lastly, we'll continue to reduce bandwidth and server cost to only optimization and better reuse of resources. So we are actually long term optimistic about gross margin. In the near term, because all these efforts will take time to be reflected in the accounts, so we do expect gross margin to remain under pressure, but unlikely to decline significantly from what we saw in Q3.

Speaker 4

Thank you.

Speaker 0

Thank you so much. And our next question comes from the line of Emerson Chen from Bank of America. Your line is now open.

Speaker 2

Hi. Thank you, management. I have three questions. My first question is regarding the LTE adoption and engine barrier. What LTE use case we found the most challenging to serve in terms of technology, and how should we look at the technological barrier of LTE in the future?

Is it going to be higher, let's say, due to more advanced use case emerging or the engine barriers of RTE especially getting lower. Secondly, our revenue in QP grew 80% year on year, and we maintain our full year guidance. Meaning q four revenue to be up about 40% at the midpoint. So can you give us more color on the reason behind potential slowdown in q four and what we have seen so far in q four? My last question is regarding the COVID impact.

I just want to get a rough sense of how much COVID you contribute. So revenue growth is still free. I suppose this should be coming from overseas market. So how much percentage of revenue is still be coming from overseas? Thank you.

Sure. I'll I'll take the RTD fit question. Actually, in general, I think RTE faces many challenge in almost all use cases. We actually think there are many challenge in, you know, in the three pillars I was talking about just just on in the in the opening remarks, like share contact. How do you support all the different contact or environment or background in your case with the you know, I have to create.

And also, you know, any scale in the, you know, interaction, you know, from very small ones to very large ones. And lastly, about ubiquity. Like, we need to continue to support all tools and frameworks. Sometimes the offers do not really meet, you know, all of those framework framework of tools, but they want to have the flexibility and the availability of the support for that platform. So when they choose those source or or happens to to build their RTU cases, they will consider the the the ones that have the most support for almost all, you know, tools they want.

They they might potentially use. And, you know, ARVR is definitely, you know, a hard one because, you know, they are definitely demanding more communication power, more, you know, the you know, more transmission bandwidth, etcetera. But but there is a you know, even, like, in a, you know, large classroom experience I was just talking about, being able to score tens of thousands concurrent students, and they can break out in, you know, matter of seconds to, you know, thousands of small groups. And then form meaningful, like, you know, small group discussion or competition within the group and come back in another, you know, second. And we we can organize all that in a in a in a programable way.

All those, you know, have some challenge in in in how they design the technical infrastructure because you have to imagine that the student and teachers could come from all over the world and all these different equipment or devices to join the session. But they all desire to have the same high level quality assurance.

Speaker 3

Okay. So on the second question about revenue guidance, I would say we are definitely not suggesting a quarter on quarter slowdown in q four. As always, we don't want to be aggressive in guiding the markets, and we don't feel it's necessary to adjust the media guidance frequently unless there is a sudden change in expectation. As for q four, so far, I would say we are encouraged by what we have seen so far in q four, and, hopefully, we will be able to deliver another strong quarter. And as to the revenue mix and impact from COVID, that's right.

In q three, I would say there was almost zero impact from COVID in China. And outside China, some contribution of the China was more than 20%, probably more than 20% in Q3.

Speaker 2

Okay. China.

Speaker 3

Yeah. For the China. And I wouldn't say that 20% was due to COVID. It's probably actually, the majority of that 20% was due to our own market expansion effort there, a smaller there's more portion there can be due to the short term demand from COVID. Okay.

You're still here?

Speaker 0

Okay. It seems that he disconnected his line. Thank you. Yeah. We'll move on to our next question.

Comes from the line of Rich Valera from Needham. Your line is now open.

Speaker 5

Thank you, and thank you for the opportunity to ask some questions here. First, I just wanted to clarify the comments on Q4. I apologize, but the line is a little difficult to hear. But Jingbo, did you say that you did not expect a quarter over quarter decline in Q4? I just wanted to make sure I understood what your comments were with respect to the Q4 outlook.

Speaker 3

Sure. Obviously, Q4 is still only half this week, so it's too early to say. But I guess what I wanted to clarify was we are not guiding a Q on Q slowdown in Q4.

Speaker 5

Okay. That's perfect. And then, you've had a couple of quarters of really strong new customer growth, I think probably two of the strongest quarters in your history in Q2 and Q3. And I'm wondering if you can talk about when you expect to see them starting to generate revenue and maybe if you've seen any early signs of those added in Q2 starting to generate revenue and just how we should think about those contributing to future revenue growth?

Speaker 3

Sure. In general, new customers will take three to six months to fully ramp up, and this has been actually staying this year. But the difference this year is the fluctuation in the first six to three to six months is much is much, much bigger due to COVID. Imagine a education customer who joined the customer in January or February. They will suddenly have very high usage despite all the technical difficulty initially.

But given the situation back then, they had to they had to go with it, whatever, the situation. So you have very high initial usage. But then as China reopened late May, early June, that you did put four. And that's why it's a lot harder to to tell from the data we've seen so far. But, generally, we see that trend is the same.

So these customers, will continue to generate revenue, but just the short term pattern was very heavily distorted.

Speaker 5

Understood. And final question for me. In terms of customer concentration, I think last quarter you didn't actually have any 10% customers, but I believe you had two customers that were 9% of revenue. I was wondering if you could comment you know, who you know, your largest customers this quarter, how big they were, and maybe the status of those two nine percent customers from last quarter. Thank you.

Speaker 3

Sure. This quarter, we had one customer slightly above conversion, and then top 10 in total was 37%. And the the 10% customer was one of the key members and customers last quarter. The other customer was smaller. As I explained, all the some of the education use cases, especially for public schools.

Obviously, after reopening, we would fall back.

Speaker 5

Got it. That's very helpful. Thank you for taking the questions.

Speaker 0

Thank you so much. Once again, ladies and gentlemen, if you wish to ask a question, it's star and one on your telephone. Again, it's star and one if you wish to ask a question. Again, ladies and gentlemen, it's starring one if you would like to ask a question. There were no further question at this time.

Speakers, you may continue.

Speaker 1

Thank you, operator. If there any if any investors or research analysts have any questions, please feel free to reach out to us through our IR email or any our IR website. Today's webcast and also the presentation is available on our IR website as well. So thank you, everybody.

Speaker 3

Thank you.

Speaker 0

Thank you. And that does that does conclude our conference for today. Thank you for participating. You may all now disconnect.