Agora - Earnings Call - Q4 2024

Transcript

Operator (participant)

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, and Jingbo Wang, the company's CFO. Reconciliations between the company's GAAP and non-GAAP results can be found in its earnings press release. 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 may make on today's call. With that, let me turn the call over to Tony. Tony, you may begin.

Tony Zhao (Founder, CEO, and Chairman)

All right. Thank you, operator. And welcome, everyone, to our earnings call. I'll first reveal our operating results from the past quarter. This quarter, we achieved GAAP profitability, a significant milestone for our company. This success is the result of strong revenue growth from new use cases and disciplined cost management. While we faced challenges over the past few years, from the pandemic to regulatory changes and macroeconomic pressures, our team's hard work, innovation, and focus have brought us back to profitability. As we look ahead to 2025, we remain committed to driving operational efficiency and delivering sustainable, profitable growth. Total revenue in the fourth quarter was $34.5 million, up 4% year-over-year, excluding revenues from certain end-of-sales low-margin products, mainly driven by business expansion in certain use cases such as live shopping and entertainment.

As of the end of 2024, we had over 1,700 active customers for Agora and close to 2,000 for Shengwang, excluding Easemob, an increase of 2% and 8%, respectively, compared to one year ago. Now, let's turn to our business, product, and technology updates for the quarter. The generative AI revolution is advancing at an incredible pace. Over the past few months, we've seen groundbreaking developments from OpenAI's reasoning model, o1, to Google's multimodal Gemini 2.0, as well as remarkable open-source innovations like DeepSeek. This transformation presents extraordinary opportunity for our business. Our real-time engagement technology is uniquely positioned to enable seamless, voice-based interactions between human and AI models. By moving beyond basic text chat to multimodal conversations, we add a key technology to enable and ensure more intuitive and expressive communication experiences. It also introduces entirely new use cases where text input simply is not practical or efficient.

However, many large language models today still lack robust voice interaction capabilities. For those that do support voice interaction, the experience often falls short with high latency, awkward pauses, interruptions, and sensitivity to background noises, which can lead to a frustrating user experience. To address this gap, we've supported and contributed to an open-source project in our developer community called the Transformative Extensions Network, or TEN. TEN is an automation framework that enables developers to rapidly build multimodal AI agents. It integrates building blocks for speech-to-text, large language models, text-to-speech, retrieval-augmented generation, video understanding, and many other useful modules enabling developers to easily create real-time low-latency AI experiences. Essentially, this framework can enable any text-based large language model to deliver a voice-based conversational experience.

For example, a developer can use TEN to quickly build a voice agent combining Microsoft STT, DeepSeek's large language model, and Fish Audio's text-to-speech, all in a matter of minutes. Since its launch, TEN has become the fastest-growing project of its kind, earning over 4,500 GitHub stars in just a few months. On multiple occasions, TEN topped the trending list as the number one Python project on GitHub and remained on the list for several days. Building on TEN's success, I'm excited to announce the launch of our Conversational AI Engine, an enterprise-grade solution that empowers developers to create interactive voice experiences with any AI model. Whether it's a customer-built model deployed on-premises or a leading large language model accessed via API, our Conversational AI Engine can make it talk and interact naturally with humans. What sets this solution apart is its ability to integrate easily with new AI models.

For instance, we integrated with Google Gemini's Multimodal Live API within 24 hours of its release in last December. The same 24-hour integration was true for DeepSeek in January. Our solution is also compatible with many popular STT and TTS modules. But broad compatibility is not the only advantage. Our Conversational AI Engine elevates the conversational experience in three key areas. First, conversation dynamics. To create natural human-like interactions, the engine intelligently detects and pauses for user interactions within 350 milliseconds, ensuring conversations feel smooth and intuitive. Second, voice processing. Our Selective Attention Locking enables the AI models to focus solely on the primary speaker and topic, filtering out distractions from irrelevant speakers in the background. Additionally, our advanced noise suppression and echo cancellation algorithms ensure that the AI model receives crystal-clear human inputs necessary for generating high-quality responses. Lastly, latency.

Leveraging our global infrastructure, the engine responds to queries in as little as 500 milliseconds, dynamically handling packet loss and minimizing delays across different network conditions. We have been working closely with customers to build and test conversational AI applications across various use cases, from virtual companions and live language tutoring to smart IoT devices, virtual shopping assistants, and customer support. We believe this innovation will accelerate the adoption of conversational AI across industries and become a key driver of our future growth. Before I wrap up, I want to take a moment to thank the incredible teams at Agora and Shengwang. Your dedication and hard work in this fast-evolving environment have been nothing short of inspiring. Today, we are pushing the boundary of real-time AI interactions and unlocking new possibilities for human-AI communication. I'm excited about what lies ahead, and I look forward to sharing more updates with you soon. With that, let me turn things over to Jingbo, who will reveal our financial results.

Jingbo Wang (CFO)

Thank you, Tony. Hello, everyone. Let me start by first reviewing financial results for the fourth quarter of 2024, and then I will discuss outlook for the first quarter of 2025. Total revenues were $34.5 million in the fourth quarter. Excluding revenues from certain end-of-sale low-margin products, total revenues increased 9.1% quarter-over-quarter and 3.6% year-over-year. Agora revenues were $17.4 million in the fourth quarter, an increase of 10.8% quarter-over-quarter and an increase of 13.7% year-over-year. The increase was primarily due to business expansion and usage growth in certain verticals, such as live shopping and entertainment. Shengwang revenues were RMB 122.2 million in the fourth quarter, excluding revenues from certain end-of-sale low-margin products. Shengwang revenues increased 8.2% quarter-over-quarter and decreased 5.4% year-over-year. The quarter-over-quarter increase was primarily due to an increase in revenues from digital transformation customers.

The year-over-year decrease was primarily due to slowing demand from social and entertainment verticals due to regulation and general economic conditions. Dollar-based net retention rate is 95% for Agora and 79% for Shengwang, excluding revenues from certain end-of-sale products and discontinued business. Moving on to costs and expenses, gross margin for the fourth quarter was 66.6%. If we exclude gross profit from certain end-of-sale products, gross margin of continuing business slightly decreased 0.1% over quarter-over-quarter and 0.8% year-over-year. As we mentioned in the last earnings call, we restructured and reduced our global workforce in November 2024. Operating expenses were $28.5 million in the fourth quarter, decreased $4.1 million from $32.6 million in Q2 2024 as a baseline. We expect to see additional savings on operating expenses in Q1 2025. R&D expenses were $14.8 million in Q4, decreased 9.3% year-over-year.

R&D expenses represented 42.9% of total revenue in the quarter compared to 45.3% in Q4 last year. Sales and marketing expenses were $7.3 million in Q4, increased 3.1% year-over-year. Sales and marketing expenses represented 21.1% of total revenues in the quarter compared to 19.6% in Q4 last year. G&A expenses were $6.4 million in Q4, decreased 18.4% year-over-year. G&A expenses represented 18.6% of total revenues in the quarter compared to 21.9% in Q4 last year. Moving on to the bottom line, net income was $0.2 million in Q4, translating to a 0.5% net income margin fourth quarter compared to a net loss margin of 7.2% in Q4 last year. As Tony just mentioned, we achieved a significant milestone this quarter: profitability on a GAAP basis for the first time in several years.

This not only demonstrates our ability to deliver our commitments but also reflects our unwavering focus on creating long-term value for our shareholders. Looking ahead, we remain committed to driving innovation, optimizing operations, and maintaining the financial discipline necessary to ensure continued success. Now, turning to cash flow, operating cash flow was $4.5 million in Q4 compared to $3.7 million last year. Free cash flow was $4.3 million compared to $3.4 million last year. Moving on to balance sheet, we ended Q4 with $363.8 million in cash, cash equivalents, bank deposits, and financial products issued by banks. Net cash inflow in the quarter was mainly due to free cash flow of $4.3 million, which was offset in part by share repurchase of $1.4 million.

Since the board approved our Share Repurchase Program in February 2022 and as of the end of 2024, we have completed 58% of our $200 million Share Repurchase Program. We are pleased to announce that our board has authorized another 12-month extension of our Share Repurchase Program through February 28, 2026, with all other terms unchanged. This decision reflects the board's confidence in the company's long-term growth potential and our commitment to delivering values to our shareholders. Now, turning to guidance for the first quarter of 2025, we currently expect total revenues to be between $31-$33 million compared to $29.7 million in the first quarter of 2024, if revenues from certain end-of-sale low-margin products are excluded. Looking forward, our goal is to maintain sustained profitability through 2025 throughout 2025, driven by strategic initiatives, operational efficiency, and emerging market opportunities in generative AI.

This outlook reflects our current and preliminary views on the market and operational conditions, which are subject to change. In closing, I'd like to express my sincere gratitude to both Agora and Shengwang teams for their incredible effort and commitment. It's what made these achievements possible. And thank you to everyone for attending the call today. Let's open it up for questions.

Operator (participant)

Certainly. Ladies and gentlemen, if you do have a question at this time, please press star one one on your telephone. And our first question comes from the line of Harry Zhuang from Bank of America Securities. Your question, please.

Harry Zhuang (Research Analyst)

Hi, Management. Thanks for taking my question. I'm asking on behalf of Daley Li. I have a few questions. Firstly, on the demand side, what are the trends in overseas and China market, and what are the key sectors that are driving growth in 2025? Secondly, on the AI side, has management recently seen an increase in AI-related demand, and in what scenarios have we seen the application of our AI-related technologies? And lastly, on the profitability side, what are the gross profit margin and GAAP profit targets for 2025? Thank you.

Tony Zhao (Founder, CEO, and Chairman)

Okay. I'll talk about the demand side. On China side, we see demand mostly on the IoT side and the digital transformation side. And of course, AI comes in with more activities to explore the potentials. On the global market, we see live commerce, creator economy, and Chinese companies going overseas are all driving forces to the growth. After our beta launch of our Conversational AI Engine, we have received quite a lot of customer interest actively exploring the opportunity to build with that. So that's in general on the demand side. Specifically around AI, we see growing interest from developers and customers, particularly with recent model launch such as DeepSeek and Gemini and a lot of open-source model launch. Our Conversational AI Engine product is a great fit with that trend to build voice AI agents for our voice AI-based applications.

We see some huge potentials in a couple of use cases like companionship in apps and in both apps and IoT devices, such as companion robots and smart toys for children, and voice AI can also be widely applied in education platforms, especially for language learning and practicing. In enterprise-level applications such as call centers or customer service, there is a clear demand and a lot of experimental activities. On those areas, we actually see many similarities in all major markets, so it happens in parallel in different markets at this moment. In general, we see a lot of interest in exploring all kinds of use cases based on large language models, but our view is the methodologies and tools to build agents are far from mature, so it will still take a long time for sophisticated agents to be built and launched.

In the long term, those agents will be disruptive and create huge volume for us. However, given the reality that the whole technology community is still actively improving the foundation models, infrastructures, tools, and frameworks to upstream agents, we expect current AI adoption to be faster in existing mature use cases where voice AI agents could be used to only replace a segment of the whole customer experience. That kind of experience has a much higher chance of success, especially those replacements focus on replacing some of the human functions to improve the productivity or increase the efficiency rather than creating a whole new use case or a whole new user experience. That's a more successful path we are seeing in the whole experiment of new AI-based use cases. We are working closely with a group of customers at the POC stage and hope we can see some application launch in the coming months. Perfect.

Jingbo Wang (CFO)

Sure. I'll talk about the gross profit and net profit outlook. So in terms of the gross margin, we expect it to maintain at a cost level around 67% as we saw in the fourth quarter. We think that's the right balance between profitability and also competitive pressure on peer competitors. So in terms of the bottom line, I want to start with the revenue, right? So if you look at our revenue guidance for Q1, the midpoint, it implies a year-on-year growth rate of 7.7%. And our plan is certainly to maintain this growth rate throughout the year, if not accelerate. And on the other hand, we don't expect any significant increase in terms of operating expenses. So as a result, we expect to see a stronger growth on the bottom line compared to the top line.

Harry Zhuang (Research Analyst)

Thanks, Management. Thank you.

Operator (participant)

Thank you. And our next question comes from the line of Liping Zhao from CICC. Your question, please.

Liping Zhao (Equity Research Analyst)

Good morning, Tony and Jingbo. Thanks for taking my questions and congratulations for the GAAP profitable quarter. I got two questions here. First is that I noticed that Agora's growth rate in Q4 reached 13.7% year-over-year. Could you give more color on the strong recovery of the growth rate? Should we expect the growth momentum of Agora to continue in 2025? The second question is about the DeepSeek impact. As we see that DeepSeek has significantly boosted adoption in both enterprise side and also consumer side, how do you view the demand for voice and multimodal interaction in the next two years? Which scenarios will be prioritized for Agora and Shengwang to focus on in the next two years? Thank you.

Jingbo Wang (CFO)

I'll take the first question. So yes, Agora delivered a very nice growth rate in the fourth quarter. And as we guided multiple times in the past, so it was driven really by expansion of usage in some novel use cases. For example, live commerce. We talked about this many quarters ago. Two years ago, live commerce was virtually zero, was not a revenue contributor for us. And in less than two years, it grew to more than 10% of revenue globally and close to 20% of revenue for Agora. And it is still growing. And we believe it's still in the early stage of a video-based shopping experience, video-based live shopping experience in the U.S. and other Western markets. Video-based live shopping is already everywhere in all the apps in China. All the shopping apps have that functionality.

But in Western markets, that's still you can only see that in some newer generation apps and not in the mainstream e-commerce apps. So we believe there's still a long way to go. And in addition to that, we have a creator economy, these fan-based social networks, which we don't really see that many in China. But it's a pretty interesting use case. And that's been growing very well. And in addition, we have some customers with Chinese background, but operating completely in Western or Middle East or Southeast Asian markets. They have also delivered growth in the past quarter. So overall, we are still optimistic about the Agora business. And we certainly hope to see further growth.

Tony Zhao (Founder, CEO, and Chairman)

Yeah. I can add more on the growth areas for both sides. As I said, the use case of AI-enabled, conversational AI-enabled can be divided into two categories, basically service agent for efficiency and saving time, and companionship is basically for entertainment and maybe to spend people's more time on having a better emotional support or other social demands. We see companionship apps are very active, especially with IoT devices, and education use cases are also the trend. We already see real volume start to grow on that, but we see a huge potential down the road in the next two years to continue to grow. IoT device, as I said, on companionship is having a clear chance to grow into volume in the next two years. Customer service and call center would transform a lot of the initial volume, maybe outbound calls first to agent-enabled use case.

And some other use cases, including for efficiency side on helping people to run all types of copilot. And those copilots all have a chance to turn into conversational user interactions or interface. So those are the areas we see might have a good chance. And of course, AI community development would also give some strong push, like the open-source community gained a stronger power. And the price is definitely the price of such a large language model kind of keeps dropping quite quickly, all hoping for us to enable those growth. On the overall trend side.

Jingbo Wang (CFO)

Sorry, can you repeat the second question?

Liping Zhao (Equity Research Analyst)

Oh, the second question is about DeepSeek because the company has significantly boosted the adoption of AI in both enterprise side and consumer side. So I don't know whether Agora and Shengwang want to find some trends in these areas and which kind of key business-focused areas for in the next two years.

Tony Zhao (Founder, CEO, and Chairman)

Yes. For DeepSeek, as I mentioned just now a little bit, it definitely gave a strong push to the whole community and agent builders where it supplies a high-intelligence and low-cost model and open-source model on the demand side. So not just on the cost side and the open-source side, but also on the intelligence side, it enhances the quality of the language model capabilities. So that will enable agent building a lot. So we are seeing agent building to be the new buzzword and growing very fast. Technology innovations around building agents is kind of quite active and start to gain more developer attention. And we are part of it, especially enabling voice conversational experiences for all agents. And in the next two years, multimodal or voice conversational AI experience will start to grow into more practical use cases.

Multimodal understanding will also help enrich the power and the kind of the reach of such use cases. Voice interactions will be much more efficient compared to currently text-based interactions and will likely become a critical capability of AI agents. As the multimodal capabilities of AI agents continue to advance, there are more new use cases to be unlocked. On framework side, I think there will be more evolution around multi-agent collaboration, agent orchestration to help developers' agent building activities. This will enable multi-agent coordination and data exchange, paving the way for more complex interactive use cases among human users and AI agents. So those are all factors that are going to accelerate the growth of agents in the next two years.

Liping Zhao (Equity Research Analyst)

Thanks, Tony and Jingbo. That's very helpful.

Operator (participant)

Thank you. And once again, if you have a question at this time, please press star 11 on your telephone. Thank you, everybody, for attending the company's call today. As a reminder, the recording in 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.