Earnings Call Transcript - API Q4 2023

Operator, Operator

Good day, and thank you for standing by. Welcome to the Agora, Inc. Fourth Quarter and Fiscal Year 2023 Financial Results Conference Call. Please be advised that today's conference is being recorded. The company's earnings results, press release, earnings presentations, 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. 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 the company's belief 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 has discussed in detail in its filings and 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 during today's call. With that, let me turn it over to Tony. Hi, Tony.

Tony Zhao, CEO

Thanks, operator, and welcome everyone to our earnings call. Let me first quickly review our operating results in Q4. Revenue was $15.3 million for Agora, flat compared to last quarter, and RMB 148.3 million for Shengwang, an increase of 5% quarter-over-quarter, mainly driven by revenue growth from digital transformation customers. As of the end of 2023, we had close to 1,700 active customers for Agora and more than 4,100 for Shengwang, an increase of 18% and 12% respectively compared to one year ago. I'm pleased to announce that we've achieved non-GAAP net income of $1.4 million in Q4, despite a very challenging operating environment, thanks to our effective cost control and relentless drive for revenue growth. Jingbo will discuss in more detail shortly. Now moving on to our business, product, and technology update for the quarter. Let's start with Agora. In this quarter, we held a series of webinars to discuss how real-time engagement, which combined with state-of-the-art technologies and artificial intelligence and AR/VR can greatly influence or even transform various industries, including live shopping, telehealth, and the Internet of Things. For example, in live shopping, we see more and more digital brands and platforms relying on interactive live streaming to redefine the way consumers make their buying decisions. By creating a personalized, social, and engaging experience for the audience, a loyal community of repeat buyers will strive and help drive sales. The combination of RTE, AI, and AR/VR is driving a rapid revolution of IoT use cases. For example, heavy machinery operators can work remotely with an enhanced view that feeds beyond blind spots, enabling them to handle challenging tasks in a safe and efficient manner. For autonomous vehicles or AI powered robotics, human operators can monitor their operations from remote locations and intervene whenever necessary. This series of webinars was well received and attracted thousands of participants globally. Mainly, Agora is uniquely positioned to facilitate innovation in this industry by leveraging our cutting-edge RTE technology and deep understanding of industry-specific use cases. In this quarter, we also released a brand-new beta version of our cumulative product, which provides real-time data synchronization and low latency event notifications between devices and servers. The new version can accommodate an unlimited number of users per channel, deliver better synchronization, and support storage and manage conflicting messages effectively. It enables a wide range of use cases such as real-time bidding in live shopping, virtual gifting in live streaming, player status synchronization in online gaming, live polling in education, and remote command of IoT devices. In December, Twilio announced the upcoming End of Life of its Programmable Video Product, which was a competing solution with our video calling product. We have pushed out a series of blogs covering guidance and best practice for migrating from Twilio to Agora, of course, to major operating systems and developer platforms. Additionally, we are offering up to two months free to customers who switch from Twilio. We believe Agora is the ideal alternative for Twilio's video customer base and expect to enhance our global market share following Twilio's exit. We are also thrilled to see OpenAI's recent launch of Sora, a powerful AI model that can create realistic and imaginative video clips based on task instructions. It aligns with our early view that multimodal capabilities of generative AI models will advance rapidly, eventually enabling human users to directly interact with AI models in voice and video format. This technological breakthrough in AI will greatly expand the boundaries of real-time engagement and bring about tremendous new possibilities. I believe Agora is well positioned to play a critical role in facilitating massive data transmission between AI models and human users. Moving on to Shengwang. Following the availability of Apple Vision Pro earlier this month, we have enabled many customers to launch applications in the Vision Pro App Store. I personally used Vision Pro, and I believe it marks an important breakthrough in XR technology. The high-resolution capability and see-through functionality of Vision Pro demand higher quality video content and opens the possibility for hologram video content consumption and interactions. For example, people will be able to watch a live keynote speech in hologram format on Vision Pro. Our network is well positioned to power such content and interaction. Over the past few months, mini games that overlay on video live streaming have been gaining popularity among social platforms. For example, a round of Ludo can serve as an icebreaker in a matchmaking room. Live streaming channels can import team-based mini games where audiences can participate by sending chat messages and gifts. We have partnered with leading mini game developers to offer our customers a wide range of mini games that can be easily embedded into their applications. Early data from our customers shows that the mini game integration has resulted in increased user penetration, longer session duration, and more monetized opportunities. In this quarter, we also introduced a virtual sound card, an advanced feature that simulates key components of a professional hardware sound card, such as an exciter, compressor, equalizer, and reverberator to enhance products end users' voices in real time. Users can now easily enhance and modify their voices with only a cellphone without the need to purchase a computer with a professional sound card. For example, a customer recently added the virtual sound card in their online IoT rooms. Users can choose from a range of pre-set specifications to make their voices clearer, sweeter, or more mature. Slightly off-key notes can also be adjusted automatically. This capability makes users more confident to participate, therefore boosting user engagement and stickiness on our customers' platform. Before concluding my prepared remarks, I would like to thank both the Agora and Shengwang teams for their commitment and diligence during this challenging period. We not only delivered consecutive quarter-over-quarter top line growth since the second quarter but also achieved non-GAAP profitability in the fourth quarter. Looking ahead to 2024, we will keep focusing on creating customer value and enhancing our competitive advantage with the goal of expanding our market share globally. With that, let me turn things over to Jingbo, who will review our financial results.

Jingbo Wang, CFO

Thank you, Tony. Hello, everyone. Let me start by first reviewing financial results for the fourth quarter of 2023. Then I will discuss the outlook for the first quarter of 2024. Total revenues were $36 million in the fourth quarter, an increase of 2.9% quarter-over-quarter and a decrease of 10.2% year-on-year. Agora's revenues were $15.3 million in the fourth quarter, flat compared to last quarter and decreased 3.2% year-over-year. The year-over-year decrease was primarily due to reduced usage from customers in emerging markets due to a challenging macroeconomic environment and tightening financing conditions starting from the second half of 2022. Shengwang revenues were RMB 148.7 million in the fourth quarter, an increase of 5% quarter-over-quarter and a decrease of 9.6% year-over-year excluding revenues from the disposed CEC business. The quarter-over-quarter increase was primarily due to an increase in revenues to digital transformation customers for large enterprises. The year-over-year decrease was primarily due to slowing demand from internet customers due to regulation and general economic conditions. Dollar-based net retention rate is 93% for Agora and 82% 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 excludes share-based compensation expenses, acquisition-related expenses, financing-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 rights. Adjusted gross margin for the fourth quarter was 65.2%, which was 0.3% higher than Q4 2022 and 1.7% lower in Q3 2023. The year-over-year increase was mainly due to the change in product mix and the implementation of technical and infrastructural optimization. The quarter-over-quarter decrease was mainly due to an increase in on-premises solution revenue which has a lower gross margin. As we continue to implement effective expense controls, our adjusted R&D expenses decreased 18% year-over-year to $13.7 million in Q4. Adjusted R&D expenses represented 38% of total revenues in the quarter, compared to 41.6% in Q4 last year. Adjusted sales and marketing expenses were $6.3 million in Q4, decreased 40.6% year-over-year. Sales and marketing expenses represented 17.5% of total revenue in the quarter compared to 26.4% in Q4 last year. Adjusted G&A expenses were $5.8 million in Q4, decreased 20.5% year-over-year. G&A expenses represented 16% of total revenues in the quarter compared to 18.2% in Q4 last year. Adjusted EBITDA was negative $2 million, translating to a 5.6% adjusted EBITDA loss margin for the fourth quarter, significantly lower than the adjusted EBITDA loss margin of 21.1% in Q4 last year. Non-GAAP net income was $1.4 million in Q4, translating to a 3.9% net income margin for the quarter compared to a non-GAAP net loss margin of 39.3% in Q4 last year. As Tony just mentioned, thanks to our effective cost controls and relentless drive for revenue growth, we achieved profitability on a non-GAAP basis for the first time in more than three years. This demonstrates the resilience of our business amid a very challenging operating environment as well as our continued discipline and efforts in optimizing our cost structure. Now turning to cash flow. Operating cash flow was positive $3.7 million in Q4 compared to negative $4.6 million last year. Free cash flow was positive $3.4 million compared to negative $6.1 million last year. Moving on the balance sheet. We ended Q4 with $371.8 million in cash, cash equivalents and deposits and financial products issued by banks or $4.03 per ADS. Net cash outflow in the quarter was mainly due to share repurchase of $10.1 million, which was offset in part by a free cash flow of $3.6 million. Since the Board approved our share repurchase program in February 2022, as of December 31, 2023, we had returned approximately $104.3 million to our shareholders through share repurchases, reducing our share count by roughly 18%. So far, we have completed 52% of the $200 million share repurchase program. We are pleased to announce that our Board has also authorized another 12-month extension of the $200 million share repurchase program through the end of February next year with all other terms unchanged, which is a vote of confidence in the financial strength and long-term prospects of the business. Now turning to guidance. There's a seasonal impact, especially reduced usage in certain regions during Lunar New Year for the first quarter of 2024. We currently expect total revenues to be between $32 million and $34 million. This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change. In closing, we are very proud of our execution and strong financial results during this challenging period. Turning to profitability is a remarkable milestone. Thank you to both the Agora and Shengwang teams for their hard work and sacrifice in the past quarter. Thank you, everyone, for attending the call today. Let's open it up for questions.

Operator, Operator

Our first question comes from Yang Liu from Morgan Stanley.

Yang Liu, Analyst

Thank you. Thanks for the opportunity to ask questions. First, congratulations on the non-GAAP profit in last quarter 2023. I have three questions here. The first one is what is the management outlook in terms of the 2024 full year profit? Do you think the profitability in the past quarter will be sustained or even be improved in 2024, especially considering the guidance in the first quarter implies some year-on-year revenue decline, whether the positive profit can be maintained? That's the first question. The second one is we would like to have some update in terms of the domestic Internet companies going abroad, whether Agora can benefit from that in the overseas market. And what is the revenue split between Agora and Shengwang in the coming 2024 full year? Do you think the Agora revenue contribution will continue to drop a little bit or will turn around in terms of the total contribution? The third question is regarding the partnership with Vision Pro. What will be the revenue model behind this kind of partnership? Will it be based on the consumer time spent? And if not, what will be the revenue model? Thank you.

Jingbo Wang, CFO

Thank you. I'll take the first question. Yes, the Q1 revenue guidance would imply a year-on-year revenue decrease. As you know, Q1 is generally the lower season for the business. If you look at our numbers in the past few years, revenue generally declines in Q1 sequentially compared to Q4. That's due to both seasonality, as I mentioned, in some of the regions where we operate, as well as the Chinese New Year being a low season for social apps and education, meaning usage will drop during that holiday. Also, for digital transformation businesses, many of the projects tend to be booked towards the end of the year. So Q1 is also a low season. Compared to last year, obviously, we have been facing Internet regulatory changes and tightening in Q2. So last year, Q1 was a relatively higher base. So that's on Q1 guidance. In terms of full year 2024, obviously, there remain a lot of uncertainties around the world, including the macroeconomic environment, funding environment, and so on, so I will give you my estimate. We expect our revenue to grow year-on-year starting from Q2. Our goal is to reach double-digit revenue growth in Q4 year-on-year. Regardless of revenue growth, we do not expect expenses will grow this year compared to the most recent base. So it's going to be a pretty stable cost base with moderate revenue growth. If you run the numbers, hopefully, we'll be able to get closer to profitability and even improve the profitability towards the second half of the year. But as for Q1, it will be challenging to achieve profitability in Q1 given the revenue decline.

Tony Zhao, CEO

Yes. Talking about China Internet companies going overseas, I think we are in a very strong unique position to help them because on one side, we do have a strong and very influential customer base in the Chinese Internet industry. A lot of them are actively planning to go overseas or expand in the global market. While we help them, we can leverage our existing partnerships and customer base knowledge along with our global practice with the local customer base and market we already have. We have been helping people with all that knowledge and know-how already, and those are the unique advantages we could offer to help them grow into a bigger global market.

Jingbo Wang, CFO

In terms of revenue split, we don't think it will change very significantly. However, we are a little bit more optimistic about the Agora business, especially given the resilience we are seeing in the U.S. market and other developed markets, along with some of the emerging use cases we see there. Additionally, Tony mentioned Twilio's exit, which will give us additional room to grow in those markets. So we expect a moderate increase in the percentage of revenue contribution coming from the Agora business as we progress through 2024.

Tony Zhao, CEO

Regarding the Vision Pro, the revenue model will be similar to what we do currently. We will continue to enable use case system customers by selling API-based capabilities, although with increased offerings from our overall product portfolio. We might have a more diverse pricing model with all the different products we are selling. But overall, it will be tied to consumer usage of Vision Pro. In the mid-term to long-term, we see the powerful impact where Vision Pro can enable a lot more attractive new use cases or make some existing use cases more viable for consumer or business applications, where we would be able to support both person-based social interactions and business collaborations on that platform. We also anticipate many other ASR devices catching up with Vision Pro to make this capability available more widely for customers and consumers.

Yang Liu, Analyst

Can I follow up with one quick question? Jingbo mentioned the operating expenses will be flattish. Do you mean that flattish versus 2023 full year or flattish versus the last quarter in 2023? Because over the past year, the sequential quarterly operating expenses have been on a downward trend. So I would like to clarify whether it's a year-on-year or based on the first quarter?

Jingbo Wang, CFO

The base will be the fourth quarter. It may fluctuate a little bit, but it will not be significantly higher than the Q4 base.

Operator, Operator

And I show our next question comes from the line of Harry Zhuang from Bank of America. Please go ahead. One quick question? Jingbo mentioned the operating expenses will be flattish. Do you mean that flattish versus 2023 full year or flattish versus the last quarter in 2023? Because over the past year, the sequential quarterly operating expenses have been on a downward trend. So I would like to clarify whether it's a year-on-year or based on the first quarter? Jingbo Wang, CFO, stated that the base will be the fourth quarter. It may fluctuate a little bit, but it will not be significantly higher than the Q4 base.

Unidentified Analyst, Analyst

Thanks management for taking my questions. I also have three questions. The first one is the demand outlook. Could management see more color on the outlook, competition landscape, and price trend in both the overseas and domestic markets? And the second question is, what impact do you see regarding potential competition from AI's video generator? And the third question is on the potential market share gain. I mentioned that after Twilio's exit in the market, the company could potentially gain market share. How will Agora seize this opportunity, and what is the current acceptance from customers transitioning from Twilio service to our service? Thank you.

Tony Zhao, CEO

All right. I'll take those questions. First of all, in terms of the market and competitive landscape we see in the U.S. and international markets, we do see strong growth momentum in the media and entertainment sector and telehealth verticals. Live shopping and IoT, particularly in developed markets, are areas where we see strong growth momentum. Price-wise, we see more pressure in emerging markets, where it's impacted by the macro environment, including currency exchange rates, etc. Prices have been healthy and stable in developed markets, like the U.S. and European markets. Regarding Twilio's exit, what we're seeing in terms of competition, Twilio's assets signify competitors leaving the market. It's not just Twilio; there are other startup competitors struggling and downsizing their operations. We expect to gain market share with these changes. In the China market, we see growth potential from Internet companies based in China looking heavily to expand overseas. Digital transformation continues to have a clear trend of growth. The IoT side of our customer base is also seeing more active growth. Overall usage in both markets is still growing despite all the regulatory and macro changes, which provide a foundation for overall customer value growth and revenue growth. Price-wise, prices in the Chinese market generally dropped about 10% over the last few years, often occurring at the beginning of the year, which puts some pressure on our Q1 results. Together with seasonality issues, such as the Chinese New Year, changes in consumer behavior have affected our gross margin, but our gross margin remains quite healthy. In the competitive landscape, it's largely unchanged in the Chinese market over the past quarter. We continue to see more competitors backing off, as indicated by another large Internet company that reduced their team in this area in Q4. I expect the market will continue to consolidate. Regarding the latest OpenAI offering video generation, I think this is only the very early stage of video format generating models, but we can see the huge potential and possibilities ahead. Currently, the model can generate short video clips based on text, image, or video prompting and can already be used in some of our customers' use cases to enhance the user experience. For example, the virtual background of a video chat room or live streaming session can be a short video clip generated by the AI model as an overall background, either realistic or imaginary to match the context or topics of the channel, which will create a more engaging and immersive experience for the audience. In the future, we believe human users will be able to directly interact with AI models in voice and video format, as we mentioned before. This will position us as critical infrastructure as a massive amount of data will flow between users and AI models in real time. As for Twilio's departure, it's just part of competitors leaving the market, including smaller competitors downsizing or ceasing operations. We anticipate that this will improve the competitive environment for us. Of course, Twilio has still a sizable customer base, which we are already starting to convert.

Unidentified Analyst, Analyst

Thank you very much. This is all clear. Thank you.

Operator, Operator

And our next question comes from Bing Duan from Nomura. Please go ahead.

Bing Duan, Analyst

Hi. Thank you management for the opportunity to ask a question. Just one follow-up question from me about Twilio's exit in the programmable video product segment. Can you share more insight about the reason behind this? Is this more due to competition or fears of competition, or because of demand not growing strongly in the U.S. market? And regarding our offer of two months free for customers switching from Twilio, how do we expect that will affect our user growth and top line growth in the next one or two quarters? Thank you.

Tony Zhao, CEO

I do think Twilio's exit is mainly because of the fierce competition in this area. As we have repeatedly stated, this area is very tech-savvy, requiring substantial investment in technology and product development. Some competitors' products are built on top of PC open-source projects or are simple technological add-ons, which can only serve a fraction of the demand for our RTE use cases, thus limiting their capability to expand and grow in this area. Especially for a company like Twilio, they might want to be more focused on their mainstream business. We see that as the main reason; there could also be some fading COVID demand. However, while the COVID demand is fading away, we see active growth in various use cases in developed markets globally. I would consider this a contributing factor to Twilio's departure. In terms of our offerings, I believe the two-month free offer will be influential for many small and mid-sized customers to consider and ease their decision to switch to our platform. We have additional strengths and collaborations, or we work with various large customers whom our team is focusing on to help them migrate to our platform.

Bing Duan, Analyst

Thank you very much.

Operator, Operator

I'm showing no further questions in the queue. This concludes our Q&A session. Thank you, everyone, for attending the company's call today. As a reminder, the recording and the earnings release will be available on the company's website at investor.agora.io. If there are any questions, please feel free to email the company. Thank you, and have a good day.

Jingbo Wang, CFO

Thank you. Bye-bye.

Tony Zhao, CEO

Thank you.