Q1 2023 Agora Inc. Earnings Call
Thank you for standing by. Welcome to the Agora Inc. first quarter 2023 Financial Results Conference call. At this time, all participants are in the listen-only mode. After the speakers' presentation, there will be question and answer sessions.
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I'd like to hand the conference over to the IR Director, Ms. Fiona Chen. Please go ahead, ma'am.
Thank you, operator. Good morning and evening, everyone. Thank you for joining us for Agora Inc.'s first quarter 2023 earnings conference call. Our earnings results press release, presentation, and an explanatory note on certain reporting and disclosure adjustments.
SEC file links and a replay of today's call can be found on our IO website at investor.agora.io. Joining me today are Tony Zhao, founder, chairman and CEO . Jim Bo Wong, our CFO . Reconciliations between our GAAP and non-GAAP results can be found in our earnings...
may differ materially. These forward-looking statements are subject to risks, uncertainty, assumptions, and other factors that could affect our financial results and the performance of our business, and which we discuss in detail in more filings with SEC, including today's earnings.
press release and the risk factors and other information contained in the final perspective relating to our initial public offering. Agora Inc. remains no obligation to update any forward-looking statements we may make on today's call. With that, let me turn it over to Toni.
and other information contained in the final prospectus relating to our initial public offering. Agora Inc. remains 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.
Thanks, Fiona. Welcome everyone to our earnings call.
Before diving into our operational results for the quarter, I would first like to make a few remarks regarding recent changes in the organizational structure of our company.
Since our inception nine years ago, we have mostly operated under the Aurora brand globally. To better meet the requirements of our customers and compete more effectively in the unique market we serve, we will now operate two independent,
under the same holding company. Our Agora division will focus on our business in the US and international markets. And our Shenlong division will focus on our business in the China market.
Agora and Shengwan will each be run by a local management team and adopt local standards and best practice.
We have appointed Stanley Wei as Chief Operating Officer of Agora and Robin Liu as Chief Operating Officer of Shengwan.
We believe this strategic reorganization will allow us to optimally focus our resources on the specific needs and priorities of each business. Agora will focus on acceleration of growth and on gaining market share in the US and international markets.
leveraging our leading technology and comprehensive product offerings.
Shengwan will focus on enhancing our quality of experience advantage and improving the ease of production of our products.
further strengthening our competitive position in the China market.
By empowering the local management team of each division, we will be able to respond more quickly to the needs of our customers, and become more agile as new opportunities emerge.
From this quarter onwards, we will report our revenue and operating metrics separately for Agora and Sheng Wang to help investors better understand the dynamics and our operational results in each of these markets.
Our revenue for the first quarter was $15.1 million for Agora, up 10% year-over-year, and $21.3 million for Shoung'an, down 14% year-over-year.
Agora's revenue growth was primarily due to business extension and usage growth in US international markets.
Xiong Wang's decrease in revenue was primarily due to the appreciation of US dollar, our disposal of e-smoth customer engagement cloud business, and decrease in usage from K-12 academic tutoring customers.
After adjusting for these factors, Sheng Wang's revenue would have increased by 3 percent compared to the same quarter last year. As of the end of this quarter, we have nearly 1,500 active customers for Agora.
and nearly 4,000 for Xiong Wang, an increase of 31% and 2%, respectively.
compared to one year ago. Now moving on to our product and technology updates.
First, starting with Agora, the flexible classroom of our local ACaaS solution designed for building scalable and customizable online classroom has continued to gain momentum in the US and global market as the demand for online learning continues to grow.
Recently, the Flexible Classroom was named a finalist by 2023 the ITAC award in the eLearning Planted Flip-Flip Solution or Remote Solution category.
Previously, we mentioned our partnership with FGC to accelerate the adoption of real-time engagement in VR applications.
In HTC's wide ecosystem, developers use our video SDK to power real-time collaboration between end users within virtual environments.
Recently, we were recognized as a Webby Award Honorary under the category of Metalworks, Immersive and Virtual Best Real-Time Experience for how our technology is used in HTC's wide SyncVR ecosystem. To further increase the value of our premium
This integration with Agora Analytics enables customers to push analytics data covering usage, quality, and performance directly to the DDoS platform for analysis and virtualization.
and visualization. Moving on to Xiong'an, we recently upgraded our real-time quality product. When this solution was first launched in 2021, it could accommodate two users singing together at the same time. If a third user wanted to join,
one of the two current users would have to give up the microphone.
This limitation
It was mainly due to the technology challenges at the time of mixing multiple real-time soundtracks in a highly synchronous manner and delivers output to all users with low latency.
with our latest warning.
Up to eight users can now sing together, which unlocks a wide range of new features for our customers' applications. For example, all users in the virtual karaoke room can now participate in a singing battle or take random turns singing part of songs together.
In part by our upgraded product, our customers can now replicate in-person quality experience within their application.
Next, I would like to discuss the combination of generative AI and real-time engagement and the enormous opportunity this combination holds for the future. Since the end of last year, the world has been changing.
has been captivated by the latest advances in large language models and generative AI. People widely believe that generative AI, despite being in its early stage, will drive significant...
Paradigm shifts in many industries.
And real-time engagement is no exception.
Generative AI can empower customers to dramatically enhance any user experience in their applications or create new use cases that were previously impossible.
Let's look at some examples.
The event of powerful large language model has significantly improved the performance of Chappels in TAX format.
as can be seen in the growing popularity of CATGPT and AI-powered search engines.
However, this is only in the beginning, as AI models continue to evolve and gain more powerful multimodal capabilities.
They will become more adept at processing voice and video feeds and generating response in real-time. Using IoT hardware as input-output devices, people will have an all-powerful human-like AI body that can provide information.
carry on tasks or engage in casual chats, all through voice and video.
Education is another industry where people have strong hopes that generative AI can help revolutionize experiences.
By analyzing student data, AI core tutors can generate personalized learning plans and deliver learning content in an interactive manner.
with everything tailored to best match a student's learning progress.
pattern, and real-time feedback.
In addition, AI tutoring can also provide affordable and tailored education opportunities to those who previously did not have access to a quality education.
There is also huge potential for generative AI to disrupt the social entertainment and gaming industry.
A virtual matchmaker can do the job of making initial introduction and facilitating conversations just as well as a real person in the dating application.
if you need to leave an interactive session for a short while.
or being disrupted by network connection, your digital train can take over and continue the conversation.
When you come back, a summary can be immediately available for you to catch up.
For online social gaming, it will become almost impossible to tell if your teammates or opponents are real players or AI-controlled non-player characters.
Looking at the examples above and many others.
We see something in common.
Generated AI can significantly expand the scope and opportunity of real-time engagement.
Previously, real-time engagement largely took place among groups of people.
With the help of large language model, RTE can now occur among people, digital trends of people.
fully virtual AI based characters.
opening the door to a much broader range of possible use cases.
In addition, with greatly enhanced user experience, RT will become more intelligent, immersive, and enjoyable.
This trend will likely increase the overall usage of real-time engagement solutions.
multiple times and bring more business opportunities.
We have been working closely with our customers to create pilot applications in certain verticals, and we will continue to monitor the latest developments in the future.
while assisting our customers in utilizing generative AI in their real-time engagement use cases.
Before concluding my prepared remarks, I want to thank both Agora and Sheng Wang team for their hard work during this transitional period.
I believe this strategic reorganization will sharpen our identity and strengthen our position in both the global and China markets.
And most importantly, allow us to serve developers and customers in a more agile and efficient way.
With that, let me turn things over to Jingbo, who will review our financial results.
Thank you, Tomiko. Hello, everyone. Let me start by first discussing certain reporting and disclosure adjustments of financial results. Now I will review financial results for the quarter and the second quarter of 2023.
Following our recent reorganization, Agor Inc. is now the holding company of two independent businesses.
Agora and Shengguo, which will operate under their own unique brands and distinct legal entities and will be run by separate local management teams.
Beginning from the first quarter of 2023, we will report revenues separately for Agora and Shengguo based on the legal entities with which customers enter into contracts.
This differs from a previous practice, which was to separately report revenues for China and US and international based on geographies of usage.
For example, certain Chinese customers offer the applications that primarily target end-users outside China.
Such revenues were previously included under US and international. We now include such revenues under Xiong Wang to reflect a thumbs up of contractual relationships.
For the same reason, we will report a number of active customers and all their based natural retention rates, or DB and RR separately for a gore and shun one.
A definition of active customer remains unchanged.
The calculation methodology of rotation width is same as expansion width, which is the term we previously used.
As almost all revenues generated from Agora customers are denominated in US dollar and almost all revenues generated from Shouwan customers are denominated in RMB, we calculate DB and LR in US dollar for Agora.
and EMB for Shengguo instead of converting everything into US dollars.
Revenues for eSmoth's chat API business will also be included in calculating active customers and retention rate for eSmoth's business.
A detailed explanatory note including a recast historical results reflecting these adjustments.
can be found on the Immersive Relations website.
Moving on to our financial results for Q1.
Agora revenues were $15.1 million in the first quarter of 2023.
an increase of 10.2% over a year, and a decrease of 4.4% quarter over quarter.
The year-over-year increase was primarily due to business expansion and user's growth.
A quarter of a quarter decrease was primarily due to challenging macroeconomic environment.
As we mentioned in previous earnings calls.
As we mentioned in previous earnings calls, the interest rate hikes.
Worldwide inflationary pressure and tightening of inter-capital funding starting from the second half of last year, has negatively impacted some of our customers' business and financial conditions.
pressure and tightening of inter-capital funding starting from the second half of last year and actively impacted some of our customers' business and financial conditions and their ability to raise funding.
which led to reduced usage of our products and increased pricing sensitivity. Show on revenues or.
$21.3 million in the first quarter of 2023, a decrease of 14.5% year-over-year, and a decrease of 12.5%.
3% quarter over quarter. The year over year decrease was primarily due to disposal of eSmile's customer engagement cloud business.
It is decreasing in usage from K-12 academic tutoring sector following regulatory change.
and the depreciation of RMB against US dollar.
If we exclude these factors, revenue denominated in RMB would have increased 2.7% year over year.
A quarter-over-quarter decrease was primarily due to the disposal of customer engagement in the top business.
Lower usage during Chinese New Year holiday for Internet customers.
and longer than expected sales cycle for traditional enterprise customers.
Dollar based manifestation rate for GOROT is 130%.
dollar-based net retention rate for Xiong Wang is 92%, excluding revenues from the K-12 for the MCT and W Mats
Moving on to cost expenses.
For my following comments, I will focus on non-GAAP results, which exclude share-based compensation expenses, acquisition related expenses, financing related expenses.
amortization expenses of acquiring tangible assets.
income tax related to acquired and tenable assets.
income tax related to acquired and tenable assets, and impairment of goodwill.
Non-gap gross margin was first closure was 63.3% which was 0.3% higher than Q1 2022.
mainly due to the disposal of customer engagement cloud business, which had lower growth margin.
As we mentioned in our previous earnings calls, we restructured and reduced our global workforce in Q4 2022.
As we mentioned in our previous earnings clause, we restructured and reduced our global workforce in Q4 2022. As a result, we reduced our global workforce in Q4 2022.
Non-cap R&D expenses were 17.4 million into one, a decrease of 31.2% year over year.
Non-graphe R&D expenses represented 47.8% of total revenue in the quarter compared to 65.6% in Q1 last year.
Non-gap sales of marked getting expenses were 8.5 million each year, a decrease of 26.3% year over year.
So the marketing expenses represented 23.4% of total revenues in the quarter.
compared to 30% in Q1 last year. Non-cap GNA expenses were $6.9 million in Q1, a decrease of 7% year over year.
GNA expenses represented 18.8% of total revenues in the quarter compared to 19.1% in Q1 last year.
Non-gap operating loss was 9.2 minutes, translating to a 25.4% non-gap operating loss margin for the quarter compared to an operating loss margin of 49% in Q1 last year.
Adjust to EBITDA was next 6.4 minutes, translating to a 17.7% adjusted EBITDA loss margin was the gentle wind- Cris orientation sampling of purchase
Adjusted EBITDA was next at 6.4 minutes, translating to a 17.7% adjusted EBITDA loss margin was quarter, significantly lower than E.
Lost Mario, 42.6% in Q1 last year.
Investment loss was 4.4 million into one.
primarily due to the fair value change in equity investments of 2.9 million, credit loss in debt investments of 1.2 million.
fair value change in equity investments of 2.9 million, credit loss in debt investments of 1.2 million, as well as disposal loss.
of 0.3 million.
Now turning to cash flow.
Operating cash flow was negative 8.9 million in Q1 compared to negative 15.9 million last year.
The free cash flow was negative 9.1 million compared to negative 17 million.
Moving on to balance sheet, we ended Q1 with 416.5 million in cash, cash equivalents, bank deposits and financial products issued by banks.
Net cash flow, net cash outflow in the quarter was mainly due to free cash flow of negative 9.1 minutes, share repurchase of 19.4 minutes and cash paid in relation to headquarters project of 5.1 minutes.
During Q1, we repurchased approximately 21.6 million of class A ordinary shares, equivalent to 5.4 million ADS.
for $19.5 million representing 10% of our 200 million.
Share with purchase program.
As of the end of Q1, we are in aggregate. We purchased approximately 57.4 million of our Class A ordinary shares.
equivalent to 14.4 many ideas.
for $61.3 million.
representing 31% all share repurchase program.
Now turning to Kaidas.
Recently, we saw increased uncertainties in macroeconomic conditions.
such as foreign exchange rate, inflation and interest rates.
which may have, quite as I expected.
impact our customers' business and in turn add more uncertainty to our revenues.
Therefore, starting this quarter, we will be providing quarterly revenue guidance instead of a four-year guidance.
For the second quarter of 2023, we currently expect total revenues to be in the range of $34 million and $37 million.
This forecast reflects our current and preliminary views on the market and operational conditions.
reflects our current and preliminary views on the market and operational conditions which are subject to change.
In closing...
I want to express my deepest appreciation to both Agora and Shonan teams for your hard work during this challenging period and to our investors for your trust in our vision and our team.
Thank you everyone for attending the call today. Let's open it up for questions.
Thank you. As a reminder to ask a question, please press star 1 1 on your telephone and right for your name to be announced.
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Please stand by while we compile the Q&A roster. Once again, let's dial 1-1 for questions.
Our first question comes from the line of Yang Liu from Morgan Stanley . Please go ahead, Yang. Thank you and goodbye, everyone.
Thanks for the opportunity to ask questions. Two questions from my side. The first one is about the outlook. The number implies a large fetish of slide sequential decline in second quarter. Could management share more about the impact of the
outlook for Shengguo and Agora differently for the second quarter. Do you see further diverging of the growth trend or similar trend in the next few quarters for the two entities? Do you see further diverging of the growth trend or similar trend in the next few quarters for the two entities?
My second question is regarding the AI impact to the company. Tony mentioned a lot in terms of the product and the customer demand or use case driven by the new AI-GC technology. I'm wondering if there is any potential cost saving room.
from the new technology. Thank you. All right, I'll talk about, discuss the demand from both markets. Actually one fire.
we can fully push on the customer into three segments.
One is domestic digital native and another is domestic digital transformation and going overseas customers.
on different native customers recently demand remain soft.
primarily due to macroeconomic challenges and regulation.
However, on this segment, as I mentioned earlier, we also see large opportunities on generative AI-powered use cases that would take some time. On digital transformation side, recently we saw longer sales cycle, but there is clearly a lot of demand.
from traditional enterprises. We expect this segment to generate sustained growth for us.
On going overseas to customers, the overall growth momentum has been strong. On the agora side, we see overall positive demand momentum in the more developed market.
overseas customers, the overall growth momentum has been strong. On a grower side, we see overall positive demand momentum in more developed markets, especially on the following verticals.
Live streaming e-commerce. Creator and friends economy. Sports live streaming. Future of work.
live streaming e-commerce, creator and friends economy, sports live streaming, future of work. Welcome to our emerging market.
We see pressure on our customers due to macroeconomic challenges and market competition, such as in South Asia and Southeast Asia.
That's from the outlook of the demand slide.
And generative AI side, we actually have invested in this area for quite some time to help improve the audio quality. And as I mentioned, large language model can actually help create...
more use cases in many verticals. But if your question is around reduced cost, I don't think it's going to hugely help us to reduce cost. But in terms of disrupting many of these models and make these models in education.
AI-powered tutors can be much cheaper than a real tutor. Or virtual celebrity or singer can also be much cheaper. Or virtual matchmaker, the same sense. Or even in social space, as you can see a popular tutors who saw
busy talking to people in one social platform can be also an AI-powered person to reduce the platform's cost to maintain and pay a real person who's active on that platform. I think on those it can hugely disrupt their business.
Thank you.
Thank you.
Our next question comes from the line of Daley Lee from Bank of America Securities. Please ask your question Daley.
Hi, thanks for taking my question. I have one question regarding our international, the Agora business. For this quarter, it's been delivered quite solid growth. What's the pay grabbers for all the growth?
For example, regarding the volume and ASP and also the outlook for the volume and ASP going forward. Thank you.
the volume and ASP and also the outlook for the volume and ASP going forward. Thank you.
Pause software and
As we explained in previous earnings calls, so the market in China and the market in the US and international markets are at different stage of development in terms of adopting the RT technology. So China market is comparatively more mature. So in past items, I would like to reflect the
18-24 months we certainly see US market catching up quite rapidly. For example, the live streaming e-commerce use case that was already popular in China two years ago and probably even earlier. That has really just taken off in the past 12-18 months in the US.
So that's the stronger cost momentum on the agora side and looking forward as Tony just explained in China we do see more kind of macro challenges, the overall macro economic environment and also regulation.
In terms of the more traditional customers in China we also see more budget constraints. So looking at the next few quarters there are also more optimistic in terms of demand for the across side.
Thank you, Jim Bozo.
Thank you, Jim Bozo.
Thank you. Our next question comes from the line of Ethan Zhang from Nomura. Please ask your question, Ethan.
Hi, thank you management for taking my question. This is Bing Duang from Nomura. I have one question regarding the China market. As we noted that there are a few changes in the competition landscape such as Ali clouds.
sho business in China, such as the, the ASP and margins, and also about our future market to share in China. Thank you.
First of all, the public cloud price adjustment recently does not really relate to us and giving pressures to us. However, in China, as I mentioned earlier, the overall competition has remained strong for a long time and the demand is actually...
especially for domestic native part is actually soft. With this situation, we do practically enhance our competitive edge. And sometimes we reduce our pricing on certain areas to increase.
competitive pressure and try to gain more market share.
for major public cloud previously, also rolling out similar service in RTE sector. Honestly, there's no one being left. Everyone already released some similar product already.
However, over the course of past two, three years, many of them have mostly exited the business. They either stopped really selling that product.
or some already started a partnership with us and valuable overproduct on their offerings.
already started a partnership with us and the Valuable Hour product on their offerings. Thank you Tonito!
Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone.
To ask a question, please press star 1 1.
I am showing no further questions. I will now turn the conference back to Fiona for closing remarks.
Thank you, operator. Thank you, everybody, for joining our call today. Again, if there are any further questions, feel free to contact us. And also, the presentation and the remarks of this call will be posted on our website. Thank you, everybody. Thank you. And thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.
Thank you, bye bye.