Earnings Call Transcript - API Q4 2021

Operator, Operator

Good day and thank you for joining us. Welcome to Agora, Inc.'s Fourth Quarter 2021 Financial Results Conference Call. I will now turn the call over to your first speaker today, Ms. Fionna Chen. Thank you. Please proceed.

Fionna Chen, Head of Investor Relations

Thank you, operator. Good morning, everyone, and thank you for joining us for Agora's fourth quarter and full year 2021 earnings conference call. Our earnings results press release, SEC filings, and a replay of today's call can be found on our IR website at investor.agora.io. Joining me today are Tony Zhao, Founder, Chairman and CEO; and Jingbo Wang, our CFO. 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. 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, and which we discuss in detail in our filings with the SEC, including today's earnings press release and the risk factors and other information contained in the final prospectus relating to our initial public offering. Agora has no obligation to update any forward-looking statements we may make on today's call. With that, let me turn over to Tony. Hi, Tony?

Tony Zhao, CEO

Yes. Thank you, Fionna, and welcome everyone to our earnings call. 2021 was a year of great opportunities and challenges for Agora. I am extremely proud to see how hard our team worked together across the board, and of course, every vertical to drive Agora forward. It is exciting to see how much we have accomplished and how much innovation we have fostered with our real-time engagement platform. I am proud to say that as of the end of 2021, the Agora SDK was installed globally in more applications than any other real-time video or voice SDK by a very large margin, according to data.ai, previously known as App Annie. Our technology and product innovation are what distinguish us as a pioneer and leader in real-time engagement. Today, we are powering the new norm of engagement and the emotional human connection, both virtually and in real life. Now let's shift to our earnings; we delivered another quarter of strong results. Our revenue for the first quarter was $40.4 million, up 21% year-over-year. At the end of December, we had more than 400,000 registered apps on our platform, and our number of active customers reached nearly 2,700, adding nearly 600 year-over-year. For the full year of 2021, we powered more than 600 billion minutes of real-time engagement in total, and our revenue was $168 million, which represents an increase of 26% from 2020. If we look at our key markets, revenue from the United States and APAC excluding China recorded the strongest growth in this quarter. We are now powering many leading metaverse platforms in South Korea, many leading online education companies in South Asia, and many highly innovative interactive e-commerce, audio live cast, and virtual event platforms in the U.S. In China, our market leadership was clearly demonstrated by our recent IDC report, which ranked Agora as the number one real-time video and voice API provider with a market share greater than the next seven providers combined. In this quarter, despite the impact of the new regulation on K-12 after-school tutoring, revenues from other sectors remained healthy. As real-time engagement use cases continued to expand across regions, our revenue sources have also become more diversified. In this quarter, revenue contribution from usage outside of China was 35%, the highest in our history. Moving on to new use cases; one of my favorite use cases in 2021 is Blue Frog Robotics. This amazing company powered by Agora technology is changing the way hospitalized students interact with teachers, classmates, friends, and families through this emotional robot named Buddy. In France, Buddy the robot was deployed to nearly 2,000 school children, and the First Lady of France has been a supporter in expanding this program across the country. In 2022, you will be seeing much more from Blue Frog, Buddy, and how Agora is powering the world for the better. In the Netherlands, Conference Compass, a hybrid event engagement platform focused on global scientific and medical conferences, leveraged Agora's interactive live streaming technology to double their revenue. A bit closer to home, across the country from our Santa Clara, California headquarters, the University of Maryland's medical system built a fully integrated app into all their back-end systems to obtain patient information. They named it TelePort. TelePort is used across 14 departments. Agora is embedded in this platform for all video and audio engagement between doctors and patients, as well as between providers and staff. In the longer term, I believe the metaverse will become one of the most important use cases for Agora. We have made significant investments in this field and recently announced several solutions tailored for the metaverse; for example, MetaKTV and MetaChat. Our MetaKTV solution is an expansion of our one-stop online karaoke solution that I mentioned in previous earnings calls, on top of our technology that enables users to sing together at ultra-low latency and our usage-based copyright solution for hundreds of thousands of soundtracks. MetaKTV reproduces an old-school karaoke room in the virtual world, with avatar singers and audiences, stages, party lights, and screens, all with beautiful 3D rendering. In this virtual karaoke room, users are able to sing and dance on the stage or wave and cheer in front of it and hear and see each other in real time. Our MetaKTV solution allows users to create and customize avatars with hundreds of options, meet friends in a virtual bar or cafe, and engage with each other through voice chat in the shared virtual space. Both MetaKTV and MetaChat are supported by our latest 3D spatial audio technology, which allows users to perceive sound coming from different locations and distances around the user in the virtual space. Technically, this is a very challenging task because all the sounds generated by users and the environment need to be updated in real-time as users move inside the virtual space. Despite the technical challenge, I believe 3D spatial audio is an important technology that makes the virtual world feel real. With spatial audio, users will feel more present and engaged, whether they are in a live session or during gameplay. These R&D investments have enabled fast go-to-market for our customers. We are seeing many innovative metaverse use cases from all over the world, leveraging our RTE technology. For example, we helped Oasis, a popular metaverse platform in Brazil, to enable house parties at users' virtual homes powered by our MetaKTV solution. A company called XRSPACE built an online karaoke platform called PartyOn, and I encourage you to experience this for yourself. It's available on all smartphones and AR devices. Now, moving onto security, compliance, and privacy protection; as always, they are critical to our success. Recently, we were awarded the ISO-27701 certificate for our information security management system. We also partnered with Bishop Fox to improve our ability to defend against sophisticated real-world attacks. Looking forward, we will continue to work with leading experts to ensure that our security practices remain best in class. Lastly, I would like to take the opportunity to thank our customers and our developer community for their innovation and passion in building RTE together with us. I also want to say thank you to all the Agorans for their hard work and dedication to our customers' success. I feel incredibly confident in embracing the promising future of real-time engagement. Let's create and enjoy it together. Now 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 Q4 and then I will discuss our outlook for the fiscal year of 2022. Total revenues grew 21% year-over-year to $40.4 million in the fourth quarter of 2021. Total revenues for the fiscal year of 2021 were $168 million, which represented a 26% year-over-year growth and exceeded the high end of our guidance range by $3 million. The number of active customers reached more than 2,600, excluding growth for Easemob, up 27% year-over-year. The growth in revenue and active customers was mainly driven by continued adoption of our technology by worldwide developers, as well as the emergence and growth of new use cases. As we mentioned in previous earnings calls, our revenue growth in the quarter was negatively impacted by the new regulation on the K-12 academic tutoring sector in China. We expect such impact to continue and hopefully bottom out in the first quarter of 2022. Our trailing 12-month constant currency dollar-based net expansion rate is 104% excluding Easemob at the end of 2021. We calculated an adjusted expansion rate to exclude the impact from COVID-19 in the first half of 2020, and the adjusted expansion rate would be 124%. Moving on to costs and expenses. For my following comments, I will focus on non-GAAP results, which exclude share-based compensation expenses, acquisition-related expenses, amortization expenses of acquired intangible assets, and income tax related to acquired intangible assets. Non-GAAP gross margin for the fourth quarter was 64%, which was 3.5% higher than Q4 2020. As we mentioned in previous earnings calls, the increase was mainly driven by technical and infrastructure optimizations we have been implementing since the beginning of 2021. Non-GAAP R&D expenses were $23.5 million in Q4, up 80.2% year-over-year, as we continue to hire talented employees and strengthen our R&D team, as well as the consolidation of Easemob's R&D team. Non-GAAP R&D expenses were 58.1% of total revenues in the quarter compared to 39.2% in Q4 last year. Our strategy is to focus on long-term growth opportunities and innovation, instead of maximizing short-term profitability. We will continue to invest significant resources in our R&D capabilities to further strengthen our technology leadership, provide a more diverse product portfolio, and empower emerging use cases around the world. Non-GAAP sales and marketing expenses were $12.2 million in Q4, up 76.1% year-over-year, mainly attributable to team expansion and increased advertising and event expenses, including expenses related to our RTE 2021 conferences. Sales and marketing expenses represented 30.2% of total revenues in the quarter compared to 20.8% in Q4 last year. Non-GAAP G&A expenses were $7.3 million in Q4, up 29.5% year-over-year, mainly due to team expansion and expected credit losses - credit loss provisions. G&A expenses represented 18.1% of total revenues in the quarter compared to 17% in Q4 last year. Non-GAAP operating loss was $15.4 million, translating to a 38.2% non-GAAP operating loss margin fourth quarter compared to an operating loss margin of 14.4% in Q4 last year. Turning to cash flow, operating cash flow was positive $5.1 million in Q4 compared to positive $2 million last year. Free cash flow was positive $2.9 million, compared to negative $1.4 million last year. Moving on to the balance sheet. We ended Q4 with $755 million in cash, cash equivalents, and short-term investments compared to $767 million at the end of Q3. The net cash outflow in the quarter was mainly due to consideration paid for the Easemob acquisition of $13.9 million. Now turning to guidance; COVID-19 is still an unprecedented variable to our business model where historical experience may not apply. Our guidance on full-year revenues reflects various assumptions that are subject to change based on uncertainties related to the impact of the COVID-19 pandemic. In addition, as mentioned before, we expect new regulation on the K-12 tutoring sector in China will continue to have a significant impact on our revenues in the near term. With that, we currently expect total revenues for the fiscal year of 2022 to be in the range of $176 million to $178 million, which would represent approximately 5.4% year-over-year growth at midpoint. Today, we announced that our Board of Directors has authorized a share repurchase program of up to $200 million. The program demonstrates our confidence in the fundamentals, strategies, and long-term growth potential of Agora and our commitment to enhancing shareholder value. With more than $750 million of cash on hand at the end of 2021, we believe we will be able to continue to invest in our technology and business expansion at the same time. In closing, we are very proud of the execution and strong performance in this remarkable year. Regardless of all the difficulties and challenges, we are confident about the long-term prospects of our business. Thank you to the entire Agora team for your hard work and everyone attending the call today. Hope you are healthy and safe. Let's open it up for questions.

Operator, Operator

First question comes from Yang Liu from Morgan Stanley.

Yang Liu, Analyst

Thanks for the opportunity. I have two questions regarding the overseas business opportunities. The first one is, how does management think about the growing opportunities? With current guidance range, what is the growth for the overseas market and contribution or full-year revenue contribution in 2022 for the overseas market? And the second question is, could management update us in terms of the overseas market gross margin profile in Q4 and 2022 outlook? Thank you.

Tony Zhao, CEO

Sure. I will talk about the first part, outlook on overseas opportunities. I'm actually very excited about opportunities for us in North America, Europe, and APAC excluding China. Many countries in these regions have largely reopened their economies, but we continue to see strong usage numbers. It is clear to me that the pandemic has permanently changed how people work, collaborate, and study. I'll mention a few areas where we see enormous growth opportunities. First, the future of work. This would include virtual office platforms, virtual event platforms, online collaboration platforms for creating graphics, documents, music, and so on. In the past year, we added many virtual event customers that hold all kinds of events from trade shows to celebrity team broadcasts through our platform. We also have several collaborative design platforms to enable live discussions between users while working on a design project. We are working with virtual office platforms such as Loop and VirBELA to define how distributed teams will work together in the future. Most recently, we also helped one of the largest companies in the world by market cap to launch an audio live casting platform for the workplace, reflecting the trend that many of the real-time engagement features previously only available in social apps are now coming to professional apps. With this customer, we went through a very rigorous vendor selection process and have proved that our product can meet the requirements of large enterprise customers in the U.S. I believe this will open doors for us in many more enterprise opportunities in the future. Second, regarding education. Recently, we see strong usage growth from education customers in South Asia, the Middle East, Europe, and the U.S., even after reopening. We now power many of the largest education technology unicorns in South Asia. What we see is that they are basically replicating what EDU and TAL successfully did in the past in China, which is to leverage Agora's capabilities to build branded and proprietary apps that offer a better online classroom experience than standard conferencing apps. This market has huge populations, and the penetration of RTE-powered online education is still very low, which means there is huge revenue potential for Agora. Third, metaverse-related use cases. I already discussed metaverse in my opening remarks. We have already powered several leading metaverse platforms in South Korea and Brazil, and we also just announced solutions such as MetaKTV and MetaChat. However, I believe we are only at the beginning of a multiple-year trend that will change how people live their lives online. To summarize, the opportunities for Agora are very clear. It's now up to us to execute well on our strategy and convert these opportunities into business outcomes. Jingbo may add on more financial side.

Jingbo Wang, CFO

Thank you, Tony. Yes, the guidance at the midpoint represents about a 5% year-over-year growth, but I think to understand what the guidance means, we need to break down our business into three parts. First is the non-China business, as Tony just discussed; then it's China K-12 business, and finally the China non-K-12 business. The K-12 business in China last year represented about 25% of total revenues, and we expect to lose almost all of that revenue stream, almost entirely in 2022. So it's not really an apple-to-apple comparison between the $158 million and the guided range for next year. A more apple-to-apple comparison would be the 2022 guidance versus 2021 revenue, excluding K-12 in China. In that case, the guidance implies a healthy growth rate. If we break down the three parts of our business, the China non-K-12 business, we expect to do moderate growth in 2022, driven by verticals such as IoT, traditional enterprises, record digital transformation, and also by new products like Fusion CDN and additional solutions recently released like MetaKTV and MetaChat. Out of China, as Tony mentioned, we are quite confident we will be able to deliver very strong growth.

Yang Liu, Analyst

Thanks a lot.

Operator, Operator

Next question comes from Vincent Yu from Needham & Company. Please go ahead.

Vincent Yu, Analyst

Hi, can you hear me?

Tony Zhao, CEO

Yes.

Vincent Yu, Analyst

Okay. Sure. I have two questions. So the first question is on lower expenses, especially for the marketing expenses. How do we think of viewing the growth of our marketing expenses going forward? Should we expect more and more expenses in this part because of the development in the overseas market? My second question is on the utilization of the cash. In addition to the stock, I would just like to know if we have any ideas or plans to make more investments or acquire some non-China businesses to expand the overseas business development? Thank you.

Jingbo Wang, CFO

Sure. I guess I'll take both questions. So for the first one, I think in the near term, our sales and marketing expenses will increase at a moderate pace in absolute dollar terms as we continue to invest in branding, marketing, developer community, especially in markets like the United States. However, in the medium to long term, we think we'll enjoy a strong operating leverage here. Once we gain that developer mindshare and once our platform is integrated into our customers' apps, it becomes quite sticky, and we won't need as much marketing or sales expense compared with now. So we do think in the longer term, sales and marketing expenses as a percentage of revenue should be at a lower level, especially if you consider the complex and developer-driven nature of our products. On the balance sheet, yes, we do have a pretty strong balance sheet and will continue to invest in our business, especially in markets outside China. We're investing in things like brand marketing, developer community, customer support, product localization, security, and compliance. We expect the size of the team in Silicon Valley, Singapore, and India to grow rapidly here, while the total headcount in China would remain more or less flat. In terms of acquisition, we will not rule out the possibility, but it needs to complement our current product portfolio and product strategy, so there is no guarantee we will be able to find a suitable target.

Vincent Yu, Analyst

Got it. Thank you.

Operator, Operator

Thank you for the questions. We have new questions from Bing Duan at Nomura. Please go ahead.

Bing Duan, Analyst

Hi. Thank you, management. Can you hear me?

Tony Zhao, CEO

Yes.

Bing Duan, Analyst

Thank you. Thank you, management for taking the questions. So I have two questions. One is about the competitive landscape. You've mentioned in the opening remarks that Agora now has over 40% of the market share. So can you give us more details on how you think about the competition in the future? And regarding the demand change in China and overseas markets, do we expect more competitors in this market going forward? And do we see any pricing pressure in the next couple of quarters? My second question is also about the overseas expansion. Can we say that the gross margins and expense profiles will continue to be under pressure in the next couple of quarters because we need to tap into the new opportunity within the overseas market? Thank you.

Tony Zhao, CEO

Yes. Regarding competition, the competitive landscape has remained relatively stable over the past few quarters, and I don't foresee any significant changes in the near future. However, there are more players attempting to enter the RTE market from various perspectives. For instance, Cloudflare is approaching from a CDN live-streaming standpoint, and Dolby is coming in from an audio processing direction. Nonetheless, none of our competitors have been able to match the overall quality of experience and complete feature set of our product portfolio. Consequently, serious developers who truly comprehend RTE technology tend to select Agora. This is supported by recent data, such as App Annie, which indicates that the Agora SDK has been integrated into more unique apps than any other competitors by a substantial margin, across nearly all regions. In 2021, we invested $111 million in R&D, which surpasses the investments of any other competitors in the RTE sector. Moving forward, we will remain the most dedicated company in RTE and continue to allocate the most resources to R&D. We are therefore very confident that Agora will maintain its leadership in this market.

Jingbo Wang, CFO

Sure. Regarding the profit outlook for this year, our focus is on investing, particularly in markets outside of China, which we anticipate will place pressure on our margins in the short term. Many of our expenses, including marketing, R&D, and general administrative costs, do not directly correlate with revenue. With the anticipated decline in revenue from the K-12 sector, we will keep increasing our expenses, which will impact our net margin. However, we believe our strong balance sheet will enable us to navigate this period, and we think it is in the best interest of both the company and our shareholders to invest for the future. Does that address your question?

Fionna Chen, Head of Investor Relations

Sorry about the previous technological problem. We're actually doing this call in two separate locations. Tony is currently in the quarantine hotel coming back to China. So operator, if we experience another outage of this telephone line, please let me know.

Bing Duan, Analyst

No. That's all my questions. Thank you very much.

Operator, Operator

Thank you for your questions. We'll move on to the next questions from the line of Allen Li of J.P. Morgan. Please go ahead.

Allen Li, Analyst

Yeah. Thank you, management for taking my question. I have a follow-up question on the competition and pricing. So I understand that you have a clear edge in technology, but I still want to get a sense of what your pricing strategy is, especially in the overseas market, given that the revenue drivers seem to shift to overseas increasingly. And also I'm wondering what's the revenue price trend in China given all the relatively weak demand due to regulation and macro slowdown? Thank you.

Jingbo Wang, CFO

Okay. Maybe I'll take this question. What we see in the non-China market so far, especially in more developed markets like the United States and Europe, is that, as I quote a sales leader within Agora, no customer chooses Agora because we are cheap. Customers always choose Agora because of our quality and feature set. In this market, because RTE experience is so critical to the success of many applications, users can perceive that difference very clearly. Once you have a hiccup, all participants in that session feel it very clearly. Customers are willing to pay for a higher quality, a more stable service, and better security and privacy protection standards. So I think it's fair to say that in these more developed markets, we don't think pricing is the number one factor in terms of competition. In less developed markets, sometimes we do run into price competition; however, it's still largely in an orderly fashion. People do take pricing into consideration, but it's normal consideration. In China, this market has been around for several years, and what we are seeing is similar to many other types of services, pricing is cut almost every year. The year-on-year change has been in the range of 10% to 15% in the past four to five years, and last year was no different. Our strategy is to try to cut our incremental costs at a similar pace so that we can maintain a relatively stable margin.

Allen Li, Analyst

Okay. Got you. Thank you.

Operator, Operator

Thank you for the questions. There are no further questions at this time. I would like to hand the call back to management for closing remarks.

Fionna Chen, Head of Investor Relations

Well, thank you operator, and thank you everyone for attending today's call. Later on, we will have the transcript of the call to be posted on our website, which is investor.agora.io, along with our earnings filings and the presentation of this call. Well, thank you. Have a great day ahead.

Jingbo Wang, CFO

Thank you.

Tony Zhao, CEO

Thank you.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.