Q3 2023 Agora Inc Earnings Call

Participants

Tony Zhao; CEO and Chairman; Agora, Inc.

Jingbo Wang; CFO; Agora, Inc.

Tom Tang; Analyst; Morgan Stanley

David Lee; Analyst; BofA Securities, Inc.

Presentation

Operator

Good day, and thank you for standing by, and welcome to Agora Inc. third-quarter 2023 financial results conference call. (Operator Instructions) 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 the IR website at investor.agora.io.
Joining me today are Tony Zhao, our 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 risk, uncertainties, assumptions and other factors that could affect the company's financial results and its performance of its business and which companies discussed in details in its filings and SEC, including today's earnings press release and the risk factors of other information is contained in the final prospectus relating to its initial public offering.
Agora Inc. remained no obligation to update any forward-looking statement the company's may take on today's call. With that, let me turn it over to Tony. Hi, Tony.

Tony Zhao

Thanks, operator, and welcome, everyone to our earnings call. In the third quarter, our revenue was $15.3 million for Agora, flat compared to last quarter. The RMB141 million for Shengwang, an increase of 7.4% quarter-over-quarter. As of the end of this quarter, we have more than 1,600 active customers for Agora and more than 4,000 for Shengwang, an increase of 26% and 6% respectively, compared to one year ago.
Now moving on to our business product and technology updates for the quarter. Let's start with Agora. We recently announced the general availability of video based solution to power live shopping experiences. In recent years, live shopping has disrupted and transformed the entire e-commerce market in China. We believe that the US and other developed markets will soon catch up and embrace live shopping as the next big trend.
According to McKinsey, live shopping could account for 20% of our e-commerce sales by 2026 and the US live shopping market is estimated to be worth $35 billion by 2024. While also proud to mention that our growth was highlighted as a leading vendor in Gartner's recent Market Guide for Live Commerce in Retail.
with Agora, brands, marketplace, and platforms can now seize the live shopping opportunity with ease. For example, we recently helped CommentSold the leading fashion live shopping platform for retailers, to introduce a new functionality that allows sellers to provide external participants into their show simply by sending them a link or QR code.
Sellers can easily add professionally hosts, celebrates, influencers or VIP customers to join their live shopping session via video to provide more engaging content and boost conversion. This quarter, we also partnered with the Sandbox, a leading decentralized gaming virtual world to promote real-time engagement and social interactions within the metaverse through voice, video and chat.
The Sandbox chose Agora because of our comprehensive product stack, which can simulate can seamlessly integrate 3D spatial audio, persistent tax chat, and interactive live-streaming functionalities at scale. As a result, players' ability to connect, collaborate and form meaningful communities in the metaverse is significantly enhanced.
Moving on to Shengwang. We recently launched our AIGC RTE SDK, a real-time engagement solution, connecting human users with large language models. So far, people have largely interact with AI models in text format. Only recently, companies such as OpenAI have beta launch their direct voice conversation between human users and AI models.
However, there is usually a significant delay of six to seven seconds or more to receive a simple voice response. Our solution has been designed to tackle the latency issue so that the users can hear the response within two seconds. This near real-time response is close to the natural pause expected in human-to-human conversations and therefore provide much more engaging and your real experience for users.
Our AIGC RTE SDK also comes with quick flexibility. Developers can easily create their application with the freedom to choose from a wide range of large language models, speech to text engines and synthetic voices to fit their unique use case. A video demo of our AIGC RTE solution can be found in our earnings presentation with more details on its features and capabilities. Please also feel free to download the demo application and try it yourself.
Next, let's move to the real world factories to see how we assist BMW in their digital transformation journey. Historically, we when local engineers needed technical support from a specialist at BMW headquarters in Germany, they have to wait at least 24 hours before the specialist could arrive on site, which could impact manufacturing timeline and even cause delays in delivery.
Our solution enables remote specialist at BMW headquarter to remotely inspect even the smallest detail with HD video and low latency. In addition, when the specialist makes inquiries or provide instructions, local engineers can see exactly where the specialist is marking with the help of AR devices. This solution demonstrates our commitment to becoming a trusted partner of large enterprise for their digital transformation initiatives.
Last month, we held our RTE conference for the ninth consecutive year with where we discuss the role artificial intelligence plays in real-time engagement. We have been leveraging AI to enhance the quality of experience in real-time engagement for a long time. We developed the AI powered real time on device noise suppression and echo cancellation algorithms that significantly improve audio quality.
On the video front, our AI based real time on device algorithms such as super resolution, perceptual video coding, object segmentation, adaptive coding, and video quality assessments enable us to deliver optimal video quality and viewing experience up to 4K resolution. Many of our customers worldwide have integrated our latest SDK with this AI technologies and more are in the process to upgrade.
With our constant pursuit of more efficient AI powered SDK to overcome the limits of device and network infrastructures. We have substantially reduced the barrier to high quality RTE. This means that people around the world, even those without the latest smartphones or access to high-speed internet can now enjoy a wide range of RTE use cases, just like how they have access to basic utilities such as clean water and electricity.
With billions of smartphones and devices powered by our SDK with AI driven capabilities, we're making solid progress to realize our mission of making real-time engagement, ubiquitous and allowing everyone to interact with anyone, anytime, and anywhere. We have also closely followed the development of large language model and generative AI around the world.
As mentioned earlier, our AIGC RTE solution enables developers to put AI powered characters into voice conversation with users. We have been working closely with some customers and expect to see them launch their innovative use cases soon, such as AI companions or personal assistance, social deduction games with AI players, and AI tutors to help users learn foreign languages.
As large language models continue to advance in their ability to process and generate multimodal information, substantial amount of data in video and audio format will need to be transmitted between human users and AI models. The volume of such date of such data will one day surpass today's human to human traffic, and we are uniquely positioned to become the critical infrastructure that enables users and AI models to interact with each other through video and audio.
Before concluding my prepared remarks, I would also like to announce a change in our Board of Directors. Mr. Tuck Lye Koh has tendered his voluntary resignation due to personal reasons. Tuck has been working with us since our inception a decade ago. First as an Investor, then as a Director since 2018. I would like to sincerely thank Tuck for his dedicated service and invaluable advice to our Board.
Mr. Shawn Zhong, currently our Chief Accounting Officer and Chief Scientist has been appointed as a Director. I would like to warmly welcome Shawn to join our Board, and I'm confident that Shawn's insights and expertise will help the Board and the company stay on the forefront of real-time engagement technology and create long-term value to our shareholders.
With that, let me turn things over to Jingbo, who will review our financial results.

Jingbo Wang

Thank you, Tony. Hello everyone. Let me start by first reviewing the financial results for the third quarter and then I will discuss our outlook for the fourth quarter of 2023. Total revenues for $35 million in the third quarter of 2023, an increase of 2.9% quarter over quarter, and a decrease of 14.6% year over year. Agora revenues were $15.3 million in the third quarter, flat compared to last quarter and decreased 8.9% year over year.
he year-over-year decrease was primarily due to reduced usage and increased price sensitivity from customers in emerging markets due to challenging macroeconomic environment and tightening financing conditions starting from the second half of last year.
Strong revenues for RMB41.2 million in the third quarter, an increase of 7.4% quarter over quarter and a decrease from 9.2% year over year excluding revenues from the disposed to CEC business. The quarter-over-quarter increase was primarily due to an increase in revenues from digital transformation customers for large enterprises.
This is an area where we have seen strong revenue growth in the past two years. Going forward, we believe digital transformation market will become increasingly important revenue and profit contributor for the Shengwang business. The year over year decrease was primarily due to slowing general economic conditions and fast-evolving regulations in certain downstream markets.
Dollar based net retention rate is 98% for Agora and 89% for Shengwang excluding revenues from discontinued business. Moving onto cost and expenses. For my following comments, I will focus on non-GAAP adjusted financial measures, which exclude 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 right.
Adjusted gross margin for third quarter was 66.9%, 3.3% higher than Q3 2022, mainly due to the changing product mix and the implementation of technical infrastructure optimizations. As mentioned in previous earnings calls, we restructured and reduced our global workforce in Q4 last year, and we are continuing to implement effective expense controls.
As a result adjusted R&D expenses of $15.7 million in Q3, decreased 36.4% year-over-year. Adjusted R&D expenses represented 44.8% of total revenues in the quarter compare to 60.2% in Q3 last year. Adjusted sales and marketing expenses, $6.6 million in Q3 decreased 48.8% year-over-year. So the marketing expenses represented 18.9% of total revenues in the quarter, compared to 31.5% in Q3 last year.
Adjusted G&A expense was $6.2 million in Q3 decreased 15.1% year-over-year. G&A expenses represented 17.6% of total revenue in the quarter compared to 17.7% in Q3 last year. Adjusted EBITDA was negative $4.4 million, translating to a 12.7% adjusted EBITDA loss margin for the quarter significantly lower than the profit margin of 40% in Q3 last year.
Investment loss was $13.4 million in Q3, mainly due to the fair value change in equity investment of $7 million and loss on investments in certain private companies $6.3 million. Non-GAAP net loss, excluding investment loss was $2.2 million in Q3, translating to a 6.3% net loss margin for the quarter compared to a non-GAAP net loss margin of 42.9% in Q3 last year and 19.4% in Q2 this year.
Now turning to cash flow. Operating cash flow was negative $3 million in Q3 compared to negative $8.8 million last year. Free cash flow was negative $3.2 million, compared to negative $9.9 million last year. Moving onto balance sheet. We ended Q3 with $373.4 million in cash, cash equivalents, bank deposits, and financial products issued by banks.
Net cash outflow in the quarter was mainly due to free cash flow from negative $3.2 million and share repurchase of $12.5 million. Since the Board approved our share repurchase program in February 2022 and as of September 30, 2023, we have returned approximately $94.3 million to shareholders through share repurchase demonstrating the Board's commitment to safeguarding shareholder value and its confidence in the long-term prospects of the company.
As of September 30, 2023, the company had approximately $94.2 million ADS outstanding, reflecting a 16% reduction in total shares outstanding compared with January 31, 2022, before the share repurchase program started. So far, we have completed 47% of our $200 million share repurchase program which will expire at the end of February 2024, and we intend to continue to undertake this meaningful capital return to our shareholders.
Now turning to guidance, for the fourth quarter of 2023. We currently expect total revenues to be between $35.5 million and $37.5 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 in this quarter, especially the significant improvement in profitability. We will stick to our strategy and be laser-focused on driving revenues and improving efficiency. For long run, as Tony has mentioned, we are exciting to see emerging AIGC use cases, and we are well prepared to help developers combined the power of generative AI and real-time engagement.
Thank you to both Agora and Shengwang teams for their hard work and our investors for your trust. Thank you, everyone, for attending the call today. Operator, let's open it up for questions.

Question and Answer Session

Operator

Thank you. As we will now conduct the Q&A session. (Operator Instructions) Tom Tang, Morgan Stanley.

Tom Tang

T chank you for the chance to ask questions or just from Morgan Stanley. So we have two questions. The first one is regarding the 2024 outlook for -- because I have a breakdown between the Agora and Shengwang on the books. And the second question is regarding the competitive landscape in both finance and overseas? Thank you.

Tony Zhao

Sure. The status for both Agora and Shengwang for our growth side, I think, of course, Agora global market overall amount optimistic about demand in midterm to long term, I think one big factor is the pandemic actually really changed consumer behaviors. Before the pandemic, the only scenario where people use our real-time audio video is basically web conferencing in the US market.
People are not that get used familiar with all other use cases like a co-working experience, et cetera. Now after pandemic, although in some of the use cases of volume decreased, but consumers are more adapt to all type of real-time engagement activities online, such as shopping with live conversations and relating with live sessions online or co-working or which party.
I think the overall those consumer behavior change can help us to see a lot of growth in both use cases and volume. Meanwhile the macro environment is still challenging, but it is for all companies operating in this market. As a matter of fact, we actually see some small competitors start to run into financial difficulties. For 2024, our goal is to stabilize our existing business and grow into new regions and new use cases.
Internal market, a lot of macro and regulatory headwinds, as you probably already know, better usage of our platform continuing to grow. Our market share in new adoptions also increased nearly 20% this year, and our digital transformation business serving large enterprise also grow, grow more than 50% this year. For 2024, we expect our digital transformation business to continue to grow and our goal for the internet business is to further gain in market share.
And on the question about the demand and pricing. For Agora's market, our number of customers are continuing to grow at about 25%, as I mentioned earlier. Also, we see some more use cases start to emerge into growth mode such as live shopping and also mentioned, the customer behavior change actually give us a hope that there will be more growth potential in both use cases and the volume.
Overall that a challenging environment still there and those near term still impact the operation, but a lot of potential in the medium to long term on time frame, pricing-wise more pressure in emerging markets, but price has been healthy and stable in developed of the market. In China, overall demand is stable from internet customers with some bright spots such as online karaoke and premium broadcasting streaming products.
We see strong demand from digital transformation side, as I mentioned. Pricing in internet sector generally dropped about 10% each year, but our gross margin remains healthy. Pricing in diesel transformation is also more attractive in this market. Thank you.

Operator

David Li, BOFA Securities.

David Lee

Hi, management. Thanks for taking my question. I've got one question about the AI as you mentioned. There's more application scenarios for the AI like AI assistant, AIGC RTE, and when do you think the AI can already tell more meaningful revenue contribution of our business or which application do you think, which how we could how much potential to drive our business growth in the future? Thank you.

Tony Zhao

Okay. Yes, you're right. I've also talked about there are many potentials in all sorts of use cases and use cases like AI companions, AI game players, et cetera. However -- I also mention we roll out this AIGC RTE SDK module in the last few months, we do have of domestic a wheel of those potentials are interesting in a very basic concept, there's going to be much more real-time audio video traffic among not just humans, but between human and AI models, that's a long-term future.
However the development is still undergoing. I think there's a lot of -- since these would fit out for a large language model to be able to really act as a human like personal assistant like AI companion or player in certain games. That's where we worked with or worked hard with a lot of our customers and partners together and tried to bring it to realize, and I don't want to overestimate in near term of such growth.
This is really like in the States, that we and our customers and partners trying to validate and breakthrough into each and every use case in the last few quarters.

David Lee

Thank you.

Operator

Thank you. (Operator Instructions) Thank you. There are no further questions. Thank you, everybody, for attending this company's call today. As a reminder, the recording in the earnings release will be available on the company's website at investor.agora.io, and if there's any questions, please feel free to email the company. Thank you and have a great day.