Earnings Call Transcript - API Q1 2022

Operator, Operator

Good day, everyone, thank you for standing by. Welcome to Agora, Inc’s. First Quarter 2022 Financial Results Conference Call. At this time, all participants are in the listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference call is being recorded. I would now like to hand the call over to your first speaker today Ms. Fionna Chen. Thank you. Please go ahead.

Fionna Chen, Head of Investor Relations

Thank you, operator. Good morning, everyone, and thank you for joining us for Agora's first quarter 2022 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; Jingbo Wang, 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 within 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 it over to Tony. Hi, Tony.

Tony Zhao, CEO

Thank you, Fionna, and welcome everyone to our earnings call. As many of you may know, our global headquarters in Shanghai was affected by an outbreak of Omicron in March. The city has been in lockdown for almost two months and has just begun to resume offline business activities. During this period, our teams in Shanghai have been working remotely, ensuring our business operations and research and development efforts continued without interruption. I want to express my sincere gratitude to all our team members impacted by COVID. Before discussing our performance in Q1, let's review our leading market position as recognized by independent observers. According to a recent industry report from CIC, Agora remains the clear leader in the global Real-Time Engagement Platform-as-a-Service market, holding more than double the market share of our nearest competitor, both in terms of revenue and the number of minutes delivered in 2021. As of March 2022, we upheld our leading market share in RTE SDK installations globally. In regions such as North America, Southeast Asia, and the Middle East, our SDK installation market share is significantly higher than that of other RTE or public cloud service providers. For instance, all top 10 social dating apps globally incorporate RTE features, and half of them are powered by Agora. In North America, we power five out of the top 10 social dating apps, and in China, we power seven out of the top 10. Additionally, Agora was selected as a Finalist for Fast Company's World Changing Ideas 2022, recognizing our innovations in connecting the virtual worlds of the metaverse to the physical world. None of this would have been possible without our team's strong dedication to technology and product innovation, alongside the trust our customers place in us. Moving on to our business update for Q1, our revenue was $38.6 million, reflecting a 4% increase year-over-year. This quarter, we saw the registration of 34,000 new applications on our platform. By the end of March, our active customer base surpassed 2,700, with nearly 400 additions compared to last year. Our results this quarter were affected by a decline in demand from K-12 academic tutoring customers in China due to regulatory changes. However, we continued to experience strong growth in markets like the Middle East, Southeast Asia, and Europe, which not only compensated for most of the decline in the K-12 segment but also diversified our revenue mix and enhanced our business resilience. Importantly, we see solid evidence of a lasting shift in people's behavior as they increasingly engage online, even in regions where life has mostly returned to normal. We believe this trend is irreversible across all areas and will provide significant market opportunities for us. Next, I'll highlight some key updates regarding our use case solutions and technological advancements. In our last call, we mentioned our MetaChat, MetaLive, and MetaKTV solutions, which enable developers to create immersive voice chat, live streaming, and karaoke experiences within 3D virtual spaces. Recently, we launched Meta Interactive Game to enhance our metaverse offerings, allowing lightweight party games to be integrated into video and voice chat rooms or livestreaming sessions, adding a new layer of engagement for users. Customers can seamlessly incorporate these games into their social and entertainment platforms to boost user experience. In addition, we recently introduced a turnkey software solution for IP cameras such as video doorbells or smart speakers. Our solution supports essential device functions like real-time monitoring, two-way video calling, remote control, and recording. Leveraging our expertise in RTE, our solution can establish video sessions within one to two seconds with minimal latency. It's designed for efficient power usage and compact enough for small, cost-effective devices. Another notable use case in IoT is NuEyes, a leading AR smart glass that offers hands-free access to real-time visual information, including 3D models and data. Whether on construction sites or for utility safety checks, workers can utilize our video APIs to transmit visual information safely. Our low-code and no-code platforms are gaining appeal among developers globally. For example, Study.com, a leading online education platform, is employing our low-code App Builder to accelerate its digital transformation, transitioning from traditional offline courses to live tutoring. Technologically, we launched our AI-powered noise suppression algorithm this quarter. Unlike traditional algorithms that sometimes fail to recognize unique sounds, our AI solution can address over 100 types of background noise, allowing developers to tailor the best noise suppression for specific scenarios. Furthermore, this algorithm is compact and efficient for web browsers. Lastly, I'm pleased to announce that Mr. Roger Hale, former Chief Security Officer at a data privacy company, has joined Agora in the same role. Roger will collaborate with our executive team to manage compliance, security, and risk management best practices for our organization, ensuring the security and confidentiality of our customers and partners. With a robust background and extensive experience, we are excited to welcome Roger to the team. In addition to his hiring, we are expanding our executive team through internal promotions, including new roles for Chief Strategy Officer, Chief Revenue Officer, and Chief Experience Officer, aimed at streamlining our global efforts and further enhancing the developer experience. I am confident that our expanded executive team will continue to drive innovation at Agora and help create a world where real-time engagement is everywhere. Now, I'll turn it over to Jingbo to review our financial results.

Jingbo Wang, CFO

Thank you, Tony. Hello everyone. Let me start by first reviewing financial results for Q1 and then I will discuss our outlook for the fiscal year of 2022. Total revenues were $38.6 million in the first quarter of 2022, a decrease of $1.6 million or 4.1% year-over-year. Our revenue growth in this quarter was negatively impacted by the new regulation on the K-12 academic tutoring sector in China. Our revenues from the K-12 academic tutoring sector in China were approximately $40 million in the fiscal year of 2021. Our revenues from this sector were approximately $1.3 million in the first quarter of 2022, a decrease of approximately $10 million from the same quarter last year. On the other hand, our growth momentum in other geographies and sectors remained strong in this quarter. In particular, revenues from the U.S. and other markets outside China grew almost 50% year-over-year and 16.3% quarter-over-quarter to $16.4 million in Q1, representing 42.5% of total revenues. As we continued to expand globally, our revenue base also became more balanced and resilient. In this quarter, revenue contribution from the top 10 customers was 22%, compared to 35% in the same quarter last year. Our trailing 12-month Constant Currency Dollar-Based Net Expansion Rate is 95% in the quarter, excluding Easemob. The expansion rate was also negatively impacted by the K-12 sector, and the expansion rate in other sectors and geographies remained very healthy. Moving onto 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 quarter was 63%, 4.6% higher than Q1 last year. As we mentioned in previous earnings calls, the increase was mainly driven by technical and infrastructural optimizations we have been implementing since the beginning of 2021. Non-GAAP R&D expenses were $25.3 million in Q1, up 45.3% year-over-year, as we continued to hire talented employees and strengthen our R&D team. Non-GAAP R&D expenses were 65.6% of total revenues in the quarter, compared to 43.3% in Q1 last year. With the enormous opportunities RTE technology presents globally, we will continue to invest heavily in R&D to strengthen our technology leadership and empower emerging use cases. In the near-term, our plan is to keep R&D expenses at a relatively stable level in dollar terms and focus our resources on high ROI projects to maximize long-term impact. Non-GAAP sales and marketing expenses were $11.6 million in Q1, up 54.5% year-over-year, mainly attributable to team expansion and increased advertising and event expenses, as we continued to step up our go-to-market efforts globally. Sales and marketing expenses represented 30% of total revenues in the quarter, compared to 18.6% in Q1 last year. Non-GAAP G&A expenses were $7.4 million in Q1, up 64.7% year-over-year, mainly due to team expansion and expected credit loss provisions. G&A expenses represented 19.1% of total revenues in the quarter, compared to 11.1% in Q1 last year. Non-GAAP operating loss was $18.9 million, translating to a 49% non-GAAP operating loss margin for the quarter, compared to an operating loss margin of 13.9% in Q1 last year. Turning to cash flow, operating cash flow was negative $15.9 million in Q1, compared to negative $2.7 million last year. Free cash flow was negative $17 million, compared to negative $8 million last year. Moving onto the balance sheet. We ended Q1 with $718 million in cash, cash equivalents, and short-term investments, compared to $755 million at the end of Q4 last year. Net cash outflow in the quarter was mainly due to free cash flow of negative $17 million, cash paid for long-term investments of $13.9 million, and share repurchase of $7.6 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. With that, for the full-year 2022, we maintain our previous guidance that total revenues for the full-year are expected to be in the range of $176 million to $178 million. Now turning to the update on the status under the Holding Foreign Companies Accountable Act, or the HFCAA. On May 4th, 2022, the SEC provisionally named Agora as a Commission-Identified Issuer under the HFCAA, following our filing of the annual report on Form 20-F for the fiscal year ended December 31st, 2021. We understand that the SEC made such identification pursuant to the HFCAA and its implementation rules issued thereunder, and this indicates that the SEC determines that Agora used an auditor whose working paper cannot be inspected or investigated completely by the PCAOB to issue the audit opinion for our financial statements included in the 2021 Form 20-F. In accordance with the HFCAA, if the SEC determines that Agora filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit Agora’s shares or ADSs from being traded on a national securities exchange or in the over-the-counter trading market in the U.S. We will continue to monitor market developments, actively explore possible solutions to protect the interest of stakeholders and strive to maintain our listing status on the Nasdaq. In closing, we delivered a strong first quarter performance in this challenging year. We are excited and very confident about the long-term prospect of our global business. Thank you to the entire Agora team for your hard work and everyone attending the call today, and hope you are healthy and safe. Let's open it up for questions.

Operator, Operator

Thank you. We have a question from the line of Yang Liu from Morgan Stanley. Please go ahead.

Yang Liu, Analyst

Hi, thank you. I have three questions, the first one could management this year, what is the revenue growth outlook for these three business lines that are overseas business, the China K-12, and also China non-K-12 in the next few quarters? Is it fair to say that first quarter this year should be the last quarter to see negative impacts from the education regulation? And also we are curious about the outlook for the China non-K-12 business as well? That is the first one. The second one is on the gross margin because we see that 62.4% gross margin in the first quarter is quite good, considering losing some education-related volume. Do you think this number will be relatively sustainable in the future or there'll be some fluctuation, either on the downside or upside on gross margin, especially given the overseas parties growing very rapidly? And the third question is regarding the renminbi depreciation recently, I know the company's revenue has both China parts and non-China parts and also the cost and OpEx also have China and non-China parts, what is the overall impact of the FX on the future P&L, could management share a little bit on that? Thank you.

Jingbo Wang, CFO

Thank you. I guess this is all for me, so on the first question regarding service involved. So if you look at the last 12 months, so basically roughly speaking China K-12 was down 90% in Q1 versus Q1 last year. And non-K-12 business in China was up about 15%. And you asked about international markets, which was up about 50%, so that's in the last 12 months. So I guess you’re right that hopefully this will be the bottom for the K-12 impact in China. We still have some revenues in that sector about 1 point remaining dollars in the quarter, so that's much less significant now. And if we look forward in the next 12 months, we would expect something similar say around 50% growth in U.S. and other international markets and around 15%, 20% growth in China; obviously there are other macro uncertainties both internally and also in the U.S. So these numbers are obviously subject to a lot of assumptions, but that will be the current expectation. On the second question on gross margin. So, actually we think the technical organization is acting very effectively. There was some net impact from the loss of the K-12 model, which we call the reduction in utilization rate of infrastructure, but that was compensated by a very efficient cost optimization. And as K-12 is largely growing now, we don't expect this impact to continue in the future. So actually, we are expecting the GP margin to remain relatively stable in the remainder of the year. Obviously, there will still be some period-to-period fluctuations, but we don't expect it to be very significant. So the third question on the depreciation; you're completely right that it has impacted top line and the bottom line a couple in the past month. So roughly speaking, RMB has depreciated by about 5% in Q2 so far compared to Q1. On the revenue side, about 60% of our revenue is currently denominated in RMB. So assuming the FX rates stayed where it is today, it will have a negative effect of about 3% of revenue in Q2. And costs and expenses will be affected in a similar fashion. The net-net impact on the bottom line will be much less significant.

Yang Liu, Analyst

Thank you. That's very helpful.

Operator, Operator

Thank you for the questions. Our next question comes from the line of Bing Duan from Nomura. Please go ahead.

Bing Duan, Analyst

Thank you, management, for allowing me to ask questions. My first question pertains to the effects of COVID-19 and the lockdown in China since March. How do you view the impact on demand and volume growth across various sectors, whether it has been positive or negative? My second question concerns competition. I'm pleased to see that we maintain a leading position in the global RTE market. However, do you anticipate that competition in China will become more intense, particularly from large internet or tech companies that may increase their product launches or strategies in this market? Finally, regarding the stock repurchase plan, I noticed we completed 4% of the total $200 million program in Q1. Can you share your thoughts on how we will move forward with the stock repurchase plan in the upcoming months? Will we increase the repurchase activity in Q2 and Q3? Thank you.

Tony Zhao, CEO

All right. I'll take the first two. One is on the COVID and lockdown in China. I think the recent lockdown in Shanghai and other cities has had a small positive impact on our revenue, mostly from the education sector. The reason why it's only a small impact is two-fold. First, this time, only a few cities were affected, not the entire country compared to 2020. Second, K-12 after-school tutoring is strong. So, the number of incremental online classes is also much smaller than 2020. In the near term, the overall macro environment in China is very challenging. We see that general business activities are slowing down, which will affect our customers and their end users. There is also some debate on regulation of social and entertainment apps, and it's unclear how it will play out. In summary, we are very bullish about the long-term perspective of RTE. But there is a lot of macro uncertainties in the near term. We're watching closely and we'll adjust our strategy and operations if needed. And second, about the competition, there hasn't been too much change in strategy from our main competitors, such as Twilio in the U.S. and Tencent in China. On the RTE side, we are not seeing any big difference from operations. We have a lot of competition already in China markets, especially, but we did notice that some competitors are making efforts in the low-latency live streaming area. This proves that our earlier prediction that a lot of streaming services will turn to low latency technology was correct. The industry is embracing it. We think this is an important market with huge potential, and our technology is actually well-positioned to capture opportunities in this market. But we did see a few start-ups raising more funds in this industry trying to build similar offerings, mostly on the local side. Overall, I think this is a good thing for the industry with more choices for customers and more ideas to drive the industry forward. Together, we will create a more vibrant market and accelerate the adoption of IT technology in general. With growing competition, we also see that some companies win out of business. Overall, the competitive landscape remains largely the same. We're still the clear leader in this space in terms of technology, performance, and the completeness of features.

Jingbo Wang, CFO

I'll address the third question about the stock repurchase. We acquired approximately $8 million in shares during the first quarter, and repurchases continued into the second quarter. However, we want to clarify that we do not expect to increase our purchasing due to uncertainties over the past 1.5 months, including the lockdown and general economic uncertainties in China, as well as the potential recession in the U.S. Therefore, we will approach stock repurchases with more caution. That's all I have to share for now.

Bing Duan, Analyst

Thank you. That’s very clear. Thank you.

Operator, Operator

Thank you for the questions. We have a follow-up question from Yang Liu of Morgan Stanley. Please go ahead.

Yang Liu, Analyst

Yes, thanks for the opportunity to ask a question again. I have a quick follow-up in terms of the overall demand in overseas markets, because we see that several major countries are moving back to normal after the COVID semi-lockdown. I just want to have an update on whether this will impact overseas demand. What is the current observation from those key markets like the U.S., Middle East, and ASEAN markets? Thank you.

Tony Zhao, CEO

Yes, sure. Life in most countries has returned to normal; this does have a negative impact on the demand for our services for certain use cases. For example, usage from the online events industry is now lower than one year ago during the peak of the pandemic. However, if you look at our numbers, our revenue growth in the U.S. and other international markets actually accelerated in Q1, and that's because there is a much stronger shift in people's mindset and behavior here. During the past two years, people have learned that interactive video engagement can be used for many occasions outside of video conference. Now a lot of businesses are finding ways to leverage real-time video engagement to conduct their business online, enhance user experience, or increase efficiency. For example, we saw strong usage growth from education customers in Southeast Asia, the Middle East, and Europe, even after the reopening, because live video classes are a very effective and low-cost way of teaching. We now power many of the largest education technology unicorns in South Asia. These markets have huge populations, and the penetration of RTE powered online education is still very low, which means there is huge revenue potential for Agora. Another exciting example is in media. We finally see that the media industry is starting to embrace RTE technology. Recently our technology was used to broadcast live sports games to thousands of audiences with low latency and a highly synchronized viewing experience. We believe this is a large and almost untapped market for us. The last example I want to mention is interactive e-commerce. One of our customers in the U.S. is leveraging our technology to enable video social buying, where users can discuss and buy things as a group through video. This offers a lot of different and more engaging experiences, compared to traditional online shopping based on browsing catalogs. To summarize, I think the pandemic has accelerated the adoption of our RTE technology across industries. Today, the penetration of RTE is still very low, and there is definitely a long way to go for us.

Yang Liu, Analyst

Yes. Thank you.

Operator, Operator

Thank you for the questions. We have a follow-up question from Bing Duan from Nomura. Please go ahead.

Bing Duan, Analyst

Thank you, management. I have two follow-up questions. One is about the regulations on the social entertainment sector in China. Currently, do we see any potential tightening policies that may affect the demand in this sector? For example, the short video sector. And the second one is about our margin growth trend. So I heard that management commented that the GP margin may remain largely stable in the next couple of quarters. Just wondering what would be the trend for R&D and sales and marketing expenses in the next couple of quarters? Do we expect to add more headcount in the next few quarters? Thank you.

Tony Zhao, CEO

Yes, there have been notable changes in the past one to two years, and as I mentioned just now, there are also different directions and debates on regulations of social and entertainment apps. For example, there has been the re-issuance of game titles, and discussions about stabilizing the overall policy in those areas. But also certain restrictions might roll out for gifting. So there are still many changes in this space. I think as we mentioned earlier, it's a little unclear how it will finally play out. We are working closely with our customers and related bodies to find out what would be best for us to help customers and developers.

Jingbo Wang, CFO

The second question on margins. As I said, we expect the GP margin to remain relatively stable. In terms of R&D and sales and marketing, we will improve R&D efficiency and focus on high ROI projects. So we will also control headcount. We do not expect R&D headcount to further increase. In dollar terms, we want to keep the R&D expenses relatively stable; honestly, in percentage terms, it will depend on revenue growth. In terms of sales and marketing, we do not plan to expand in China. However, we do have plans to further expand our go-to-market efforts outside of China. As Tony explained, we still see a lot of opportunities in many markets and many verticals, so there we will continue to invest. In the near term, we will see sales and marketing tenders continue to increase, but we’ll be more cautious about efficiency and return on investment, and we expect to have some pressure on the bottom line in the next one or two quarters, but we continue to improve overall operating margin towards the end of the year.

Bing Duan, Analyst

Thank you very much.

Operator, Operator

Thank you for the question. At this time there are no further questions. I'd like to hand the call back to the management for closing.

Fionna Chen, Head of Investor Relations

Thank you, operator. Thank you, everyone for attending today’s call, and the replay and the presentation of this call are already posted on our website, and the prepared remarks will be posted later after this call. Thank you again, and if there is anything, please feel free to reach out to us. Thank you.

Tony Zhao, CEO

Thank you.

Jingbo Wang, CFO

Thank you.

Operator, Operator

That does conclude today's conference call. Thank you for participating; you may now disconnect your lines.