Earnings Call Transcript - API Q2 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by. And welcome to Agora, Inc. Second Quarter 2020 Financial Results. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your first speaker today, Fionna Chen. Thank you. Please go ahead.

Fionna Chen, Investor Relations Director

Thank you, Operator. Good evening and good morning, everyone. My name is Fionna Chen, I am the Investor Relations Director at Agora. Thank you for joining Agora’s second quarter 2020 earnings conference call. Joining me today are Tony Zhao, our Founder, Chairman, and CEO; and Jingbo Wang, our CFO. Our earnings results press release and a slide deck can be found on our IR website. Reconciliations between our GAAP and the 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 the performance of our business, 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 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.

Tony Zhao, CEO

Thank you, Fionna. First, I'd like to thank you and welcome all of you for joining us today for our first earnings announcement as a public company. Before walking through our Q2 performance and highlights, please let me spend a few moments describing our business. As more aspects of our lives move online, there is tremendous demand for real-time engagement. Historically, users would need to install a dedicated app to use real engagement such as Skype, FaceTime, or Zoom. However, in more and more cases, users are looking for contextual real-time video engagement that is directly embedded in the applications they are already using, whether that is for education, dating, or gaming purposes. We are focused on building developer community enthusiasm and innovation. The Agora platform provides developers simple, flexible, and powerful application programming interfaces (APIs) to embed real-time video engagement experiences into any application. Ultimately, our mission is to make real-time engagement ubiquitous, allowing everyone to interact with anyone in an app anytime and anywhere. I'm pleased to report that we delivered revenue of $34 million for the second quarter, an increase of 128% year-over-year. This was driven by significant usage growth across geographies and verticals, as the demand for real-time video and voice engagement increased significantly in light of COVID-19. Our active customers reached nearly 1,500 at the end of the second quarter, up 86% year-over-year, and our constant-currency dollar-based net expansion rate was 183% for the trailing 12-month period. Finally, I'd like to thank our 600 plus Agorians around the globe for their exceptional performance in our first quarter as a public company and thank you to our developers and partners for their unwavering trust in us. We will continue to create value for our developers and customers through innovation, and together, I believe we will one day make real-time engagement ubiquitous. Now, let me turn things over to Jingbo.

Jingbo Wang, CFO

Thank you, Tony. Hello, everyone. I hope you all are safe and well. Let me start by first reviewing financial results for Q2 and then I will discuss our outlook for the full year. Total revenues grew 128% year-over-year to $33.9 million in the second quarter of 2020. On a sequential basis compared to the first quarter, we continue to see usage at heightened levels with strong sequential growth in the US and the rest of the world. We believe this is because COVID has changed people's long-term behavior towards video engagement. For this reason, we see the increased usage in this quarter as a promising indicator of a long-term growth opportunity and not just a blip on the radar. Non-GAAP operating income was $4.7 million, translating to a 13.9% non-GAAP operating margin. Looking forward, we will continue to focus on our investment in R&D to drive our innovation and strengthen our technology leadership. Our guidance on full year revenue 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 expect revenue to be in the range of $125 million to $130 million, which would represent approximately 94% to 102% year-over-year growth. Thank you to the entire Agora team and everyone, please stay healthy and safe. Operator, let's open it up for questions.

Operator, Operator

The first question we have is from Emerson Chan at Bank of America. Your line is now open.

Emerson Chan, Analyst

I have three questions. The first question is about the COVID impact. I just wanted to get a rough sense of how much COVID has contributed to the growth in Q2? And what kinds of monthly traffic trend you have been seeing as we move from May, June to July? And secondly, how should we look at our long-term goal in the post-COVID environment? In the second half of this year, we expect revenue to grow at a 54% to 67% year-on-year, which I think there should be limited COVID impact in China. So, do we expect this growth rate to sustain in the next few years? For my last question, which is about the overseas expansion, especially in the US. I'm just curious how we view this opportunity now in the current environment in terms of our full-year guidance and how much overseas rapid growth we embedded in our guidance. Do we assume any impact on the potential restriction in the US in the current political environment? Thank you.

Jingbo Wang, CFO

Thank you, Emerson. I will take the first two questions and maybe Tony can talk about the third one. As I said in China, COVID really eased in April and May. Outside China, however, demand remained pretty much the same in Q2 compared to March. It’s very hard to quantify exactly how much additional usage was caused by COVID-19 but I would say it's probably not more than 20% that was really caused by the COVID-19 situation. We would expect for the quarter of Q3 and Q4 that results shouldn't have too much impact from COVID-19, of course, assuming if the situation continues to stabilize. Regarding the long-term prospect and revenue growth, we do see that long-term demand is definitely there. However, what we cannot control is the emergence of new use cases, which is subject to the developers to eventually build and realize the potential. For the third question on sales, we want to build a global product and serve global developers and customers and that has been our commitment since the beginning of the company. We will continue to focus on serving global developers and customers, and we are seeing that developers and customers are becoming more distributed and diversified.

Yang Liu, Analyst

Thanks for the opportunity to ask questions. Three questions from my side. The first one, could management update us in terms of the demand dynamics from different verticals? I remember that in education, one of the biggest contributors before the IPO, how about the revenue contribution in the second quarter? And how about the growth in emerging use cases like enterprise, communication and telemedicine, etc? The second question is about gross margin outlook. We are happy to see that the company is expanding to new regions, but the high infrastructure cost there is a concern. What is the forecast in the long-term gross margin? The third question is an update on technology performance versus major competitors in different markets, especially given that Agora launched the first industry standard. Do you expect that competitors will be able to catch up in terms of technology performance? Thank you.

Jingbo Wang, CFO

Thank you. So I will take the first two questions. The contribution from education in Q2 was lower compared to Q1, primarily due to the reopening of schools. However, looking forward, we continue to believe that education is the most promising vertical, both because the online education sector is growing very rapidly and traditional public school education is incorporating more video features. Emerging use cases are seeing strong growth, although they currently contribute a small portion of total revenue. Concerning gross margin outlook, the significant infrastructure costs in new regions are pressuring margins. However, we will continue to optimize costs in those areas and gradually move towards region-specific pricing.

Tony Zhao, CEO

For the performance leadership, we also keep rolling out improved audio and video quality releases. One thing I want to highlight is our experience level agreement, which guarantees the experience level we provide. It’s the first of its kind in the industry and will provide visualization of service quality. Competitors still have a way to go to catch up with our capabilities.

Richard Valera, Analyst

A couple of questions from me first. You saw really strong quarter-over-quarter gains in new active customers on the platform in Q2. And I'm wondering what you attribute that to. Did you have any new or different marketing or new business development activities that may have driven that? Or do you think perhaps COVID was a catalyst?

Jingbo Wang, CFO

The increase in the number of active customers was driven by rapid increase in developer registrations. As you can see we added more than 20,000 registrations in Q1 and more than 30,000 in Q2. I think that's an indicator of our growth.

Unidentified Analyst, Analyst

First, could you give a preview of your product roadmap? What kind of new products or features are going to be introduced in the next one year or two? Secondly, your sales and marketing expense ratio improved a lot in the quarter. Given the huge amount of opportunities going forward, how do you think about the balance between investment for the future and productivity improvement?

Tony Zhao, CEO

We have quite a few products under development on our roadmap, focusing on providing additional support for real-time engagement APIs. This will help our developers and customers more efficiently create new use cases. New offerings will also be announced at our RTE 2020 conference.

Jingbo Wang, CFO

It's true that the sales marketing expenses as a percentage of revenue have improved significantly this year. Our developer-focused go-to-market model has proven to be efficient. While we want to invest for the future, the investment will not come solely from having more salespeople.

Tony Zhao, CEO

For customers trying to build their own in-house solution, our focus is to establish ourselves as the professional third-party provider that can showcase our strengths and capabilities on all fronts. We view in-house development as normal practice, but believe that we can provide more effective solutions through our APIs.

Operator, Operator

Thank you. We don't have any further questions at this time. I will now hand the conference back to today's presenters, please continue.

Tony Zhao, CEO

Thank you for joining our conference call. Please stay tuned for our future events and join our RTE 2020 online events.

Jingbo Wang, CFO

Thank you.

Operator, Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may now disconnect.