Ladies and gentlemen, thank you for standing by, and welcome to Agora Inc. 3Q 2020 Financial Results. I must advise you that this conference is being recorded. I would now like to hand the conference over to your speaker, Ms. Fionna Chen. Thank you. Please go ahead.

Thank you, operator. Good evening, and good morning, everyone. My name is Fionna. I am the Investor Relations Director at Agora. Thank you for joining Agora's Third Quarter 2020 Earnings Conference Call. Joining me today are Tony Zhao, Founder, Chairman and CEO; and Jingbo 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 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 details 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.

Thank you, Fionna, and welcome, everyone, to our earnings call. This is the first quarter in 2020 that was impact-free from the COVID situation in China as COVID-19 gradually faded off between late May and early June. But even without the short-term demand caused by COVID in China, we still delivered another quarter of outstanding results with revenue of USD 30.8 million for the third quarter, an increase of 81% year-over-year. Our number of registered applications reached more than 240,000 at the end of September, adding nearly 10,000 per month in Q3. 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 demand. We also made solid progress in our products, brand and ecosystem in this quarter. In particular, I'm proud of our marketing and design team who created an amazing experience at our RTE2020 Virtual Conference with more than 8,000 registered attendees, and tens of thousands of unregistered viewers, 170 guest speakers and over 100 companies all over the world participated. We also had our first RTE start-up challenge with more than 130 start-ups joining the competition. More than 75% of these start-ups are already founded, and 50 of them were selected to join our start-up program, where they will receive premium platform usage credit and dedicated technical support. At Agora, we constantly support start-ups at early stage to cultivate innovation and accelerate the emergence of new use cases for RTE technology. At RTE2020, the discussions will focus not only on what exists today but how to reimagine model simulation or innovative RTE application and build the future together. The traditional concept of communication is all about the exchange of information, but creating a successful real-time engagement use case requires a lot more than that. It is about creating a shared moment and space for people to interact with the user. We focus our attention on the three pillars of real-time engagement: shared context, interactivity at any scale and ubiquity. To create shared context, the offer is more than just video and voice but also use case specific core such as signaling, virtual environment, augmented reality objects, content moderation, voice recognition and so on. We can't do all of these ourselves so we have partnered with leading third-party service providers. Now many of those features can be easily used by developers as part of a smaller platform. Our plan is to make Agora platform the engine for developing any real-time engagement application. Shared context also depends on having smooth, low-latency experiences that simulate real life. That is why we are rolling out our experience level agreement, or XLA. With XLA, Agora will not only let you know what the number of minutes you are running on are of premium quality, but we will also guarantee our performance on the four core metrics that are critical to any of your experiences: channel join success rate, audio fluency, video fluency and transmission latency. Since its launch, we have signed up dozens of well-known Internet companies for XLA. Of course, fully immersive experience should be available for any size of talent, 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 users in one fully interactive classroom. At Agora, we feel real-time engagement should be available anywhere, to anyone 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 adopt. We are committed to supporting all popular operating systems, browsers and development frameworks. Earlier this year, we added React Native and Flutter SDK to our list of supported SDKs. In this quarter, we also released our Unreal SDK for gaming and RTOS SDK for IoT devices, which will release more space for RTE use cases to grow. As we discussed in the past, we have seen stellar entrepreneurs who have some great ideas but 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 PaaS and Agora RTE App Builder. With Agora Education aPaaS, 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 a massive number of attendees. Agora's RTE App Builder was even a step further. Whether you are a CEO, Director or a product manager, you can now create a production-ready conference app with no coding at all in a matter of minutes, and you can then customize the design and specify the specifications of the app in many ways based on your unique requirements. Last but not least, security, compliance and privacy protection are critical to our success. In this quarter, we made steady progress in enhancing our operational standards such as best practices in software development, data access and management and end-to-end encryption. Recently, we were awarded three ISO certificates on our information security management system, which further attest to our rigorous security practices and strengthens the trust developers have in Agora. Now let me turn this 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 our outlook for the full year. Total revenues grew 81% year-over-year to just over $30.8 million in the third quarter of 2020, which is mainly due to increase in volume for both our video and voice products. At the end of September, we have powered more than 400 billion minutes of real-time engagements per month on average. As you probably already know, the COVID-19 pandemic has been well contained in China by late May, after which most of our activities and travel gradually returned to normal. As a result, I would say the users in Q3 had almost no direct impact from COVID in China. That being said, revenues in Q3 were still significantly higher than the same period last year, reflecting the increasing penetration of contextual real-time engagement in all activities and the long-term retainership. The usage in Europe and the rest of the world, on the other hand, was still at heightened levels with both our market expansion efforts and the prolonged impact of COVID-19. Demand from use cases such as education, virtual events and entertainment continued to grow rapidly. Our trailing 12 months constant currency dollar-based net expansion rate was 188% at the end of September. This number has been positively impacted by the spike in usage this year due to COVID-19. 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, expenses and margin. Please note that the usage of our products and the timing of our hiring and marketing initiatives might fluctuate from quarter to quarter, which causes our profitability to fluctuate significantly as well. Nevertheless, we'll remain focused on capturing long-term growth opportunities and continue making investments in innovation. For my following comments, I will focus on non-GAAP results, which exclude 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 4.1% 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, North America and Oceania. To that extent, the gross margin was also affected by higher bandwidth costs in China as well as the major Chinese telecom companies with their nationwide prices this quarter. Non-GAAP R&D expenses were $11.6 million in Q3, up 80% year-over-year, as we continue to build our R&D team. Non-GAAP R&D expenses was relatively flat at 37.5% of total revenue in the quarter compared to 37.6% in Q3 last year. Innovation is critical to our success. We'll continue to invest significant resources in our R&D capabilities in order to further strengthen our technology leadership and broaden our international portfolio. Non-GAAP sales and marketing expenses were $5.9 million 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 Q3 last year. We believe this has again demonstrated the efficiencies and scalability of a developer's interest in this area. Non-GAAP G&A expenses were $3.3 million in Q3, up 135% year-over-year mainly due to team expansion and professional services related to information security management. G&A expenses represented 10.8% of total revenue in the quarter compared to 8.1% in Q3 last year. Non-GAAP operating loss was $1.3 million, translating to a 4.2% non-GAAP operating loss margin for the quarter compared to a loss margin of 1.9% in Q3 last year. 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 $1.9 million in Q3 compared to negative $54,000 last year. Free cash flow was negative $5.1 million compared to negative $1.3 million last year. Net cash outflow in Q3 was mainly due to the purchase of server and network equipment as we continue to expand our software-defined real-time network. Moving on to the balance sheet. We ended Q3 with $635 million in cash, cash equivalents and short-term investments compared to $641 million at the end of Q2. The decrease was due to the negative free cash flow of $5.1 million and payment of professional service fees related to our IPO. Now turning to guidance. COVID-19 is still an unprecedented variable forecast model, where historical experience may not apply. Our guidance on full year revenues reflects a number of assumptions that are subject to change based on uncertainties related to the impact of the COVID-19 pandemic. With that, for the full year of 2020, we maintain our previous guidance of total revenue for this year is expected to be in the range of $125 million to $130 million, which would represent approximately 94% to 102% year-over-year growth. In closing, the execution performance in Q3 met our expectations. We believe we are making long-term investments in innovation, and we continue to support our developers and customers around the world. Thank you to the entire Agora team. Thanks, everyone, and hope you're healthy and safe. Let's open up for questions.

And our first question comes from Yang Liu from Morgan Stanley.

I have three questions from my side. The first one is, could management update us in terms of the progress of penetrating online education customers in terms of their big class use cases, which have big potential there? And previously, management mentioned that some big customers were doing testing. Could you please update us on the progress? The second question is related to competition. We saw some fundraising movements from your peers in the capital market, private capital market. Could you please update us if you have any more intensified competition when pitching customers or penetrating customers? And the third question is related to the gross margin outlook. As Jingbo mentioned that while Chinese telco raised their prices, do you see any risk of the other two raising their prices in the future? And what will be the gross margin trend in the next few quarters?

I'll talk about the progress 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 use cases because this is one step further in enhancing the student and teacher experience in large classroom use cases. The use case is like this: students can take a course with hundreds or thousands or even tens of thousands of other students in one same classroom so that there could be a lead teacher teaching them together. But during the classroom experience, maybe ten to 15 students will form small groups of four to six in each market, and they can work on assignments and discuss with each other or even have a formal competition within their small group to see who is going to win on answering certain questions. And then come back to the large classroom session. This new format combines the efficiency of large classes and interactivity of smaller classes, and the competition launched within the small classrooms will further enhance the students' attention or focus in the content being taught in that classroom session, which can significantly improve the learning experience and outcomes. There are also some other interesting use cases like virtual workplace and also in gaming and social use cases. So 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 due to both COVID-caused demand and of course, our build in the public market, there are more companies sitting in this space, and there are offerings from different small companies or new product rollouts in the space. So we think those indicate the potential and opportunities in the RTE-PaaS industry are recognized by more and more people today. As we pointed out earlier, those developments also show that the industry is gradually coming to a consensus that this is not old stuff similar to web conferencing or other offerings by telecom companies. Rather, it's a whole new industry that focuses on real-time engagement. The concept of real-time engagement is more and more being adopted by all industry peers instead of the old content RTE. We're happy to see our early prediction and judgment proven to be right. Meanwhile, with the newcomers and the competition, we also think our competitive position is quite clear and strong. RTE involves a lot of technical challenges from performance to scale to features. Each use case has different requirements to support. As I mentioned, our platform supports hundreds or thousands of different use cases. Working with our customers, we have developed the first solution for more than 100 use cases with certain volume that has been used in millions of end users. Our big analytics and XLA assurance are also unique in the industry today. Additionally, we have the largest developer community for RTE with nearly 10,000 new apps created every month. This supports the latest range of platform development apps and frameworks.

I'll take the third question on margin. As for the telcos raising prices, we do not expect that to happen with the other two telcos given that the price this quarter, fortunately, has the lowest price among the three. The effort was really to close the patent gap. After the adjustment, it's more similar among the three telcos, so we cannot expect any short-term changes. Regarding the general trend on gross margin, as I mentioned earlier, it was affected by both international expansion and income and cost. It may look slightly longer-term, as we can enhance our gross margin in three ways: number one, through our innovation to create more innovative products and features. That's always the best way to create more value for customers and achieve higher margins. That's why we cut the marketing and R&D expenses significantly. Secondly, XLA will be a great way to help us charge different prices based on different levels of quality where the highest possible quality needed will achieve higher gross margins over time. Lastly, we will continue to reduce our bandwidth and server costs through smooth recommendations and better use of resources. So we are long-term optimistic about gross margin. In the near term, however, because all these efforts will take time to reflect in the accounts, we do expect gross margin to remain under pressure but unlikely to decline significantly from what we saw in Q3.

Our next question comes from Emerson Chan from Bank of America.

I have three questions. My first question is regarding the RTE adoption and engine barrier. What RTE use cases have you found to be the most challenging to serve in terms of technology? And how should we look at the technological barrier of RTE in the future? Is it going to be higher, let's say, due to more advanced use cases emerging or are the engine barriers of RTE actually lowering? Secondly, our revenue in Q3 grew 80% year-on-year, and we maintain our full-year guidance, meaning Q4 revenue to be up about 40% at this point. Can you give us more color on the reason behind the potential slowdown in Q4 and what we have seen so far in Q4? My last question is regarding the COVID impact. I just want to get a rough sense of how much COVID contributed to our revenue growth in Q3. I suppose it should be coming from overseas market, so how much percentage of revenue in Q3 will be coming from the overseas?

Actually, in general, I think RTE puts us many challenges in almost all use cases. We actually believe there are many challenges in the three pillars I was talking about in the opening remarks: shared context, interactivity from very small ones to very large ones, and lastly, about ubiquity where we need to continue to support all tools and frameworks. Sometimes, the efforts do not really meet all those frameworks of tools, but we want to have the flexibility and availability of the support for that to happen. So when they choose the source or patents to build their RTE use cases, they would consider the ones that have the most support for almost all tools they might potentially use. AR/VR is definitely a challenging area because the business demands more competition for more transmission bundles, etc. Moreover, the large classroom experience we're just talking about requires tens of thousands of concurrent students, and they can break out in a matter of seconds into thousands of small groups and then hold meaningful small group discussions or competitions within the group and come back in another second. Organizing all that requires talent in how we design the technical infrastructure because students and teachers could come from all over the world with different equipment or devices. But they'll all be there to have the same high-level quality assurance.

On the second question about revenue guidance, I would say we are currently not suggesting a quarter-on-quarter slowdown in Q4. As always, we don't want to be aggressive in guiding the markets, and we don't feel it's necessary to adjust our year guidance, particularly with the sudden change in expectation. As for Q4, so far, we are encouraged by what we have seen. We hope to deliver another strong quarter. Regarding the revenue mix and impact from COVID, that's right. In Q3, there was almost no impact from COVID in China. Outside of China, the contribution of China was more than 20% in Q3. I wouldn't say the impact was all due to COVID. Probably, the majority of that conversion was due to our own market expansion efforts, and the smaller portion can be attributed to the short-term demand from COVID.

Yes. And regarding customer concentration, this quarter, we had one customer slightly above 10%. The top ten customers in total made up 37% of revenue. The 10% customer was one of the two that were nine percent of revenue last quarter. The other customer had a smaller share. As I explained, some of the education use cases, especially for public schools, eventually faced a fallback after reopening.

There are no further questions at this time. Speakers, you may continue.

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

Thank you.

Thank you.

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