Earnings Call: Q2 2021

Aug 9, 2021

Good day and thank you for standing by and welcome to the Agora Incorporated Second Quarter 2021 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'd like to hand the conference over to your first speaker today, Ms. Fiona Chen. Thank you. Please go ahead. Thank you, operator. Good morning, everyone, and thank you for joining us for Agora's Q2 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 Jingbo Wang, CFO. Reconciliations between our GAAP and non GAAP results can be found in our earnings press release. During this call, we won't 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 Agara 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. Thanks, Tatiana, and welcome, everyone, to our earnings call. Time flies. Agora has been a public company for 1 year now. Before walking through our Q2 performance and highlights, Please let me spend a few moments looking back on Agora's accomplishments over the last year. We have reached the milestone of powering 50,000,000,000 minutes of video and audio engagements each month, And we have expanded our product portfolio to include interactive whiteboard, instant messaging, flexible classroom and many others. More importantly, together with developers on our platform, we are changing the way people work, Study and how they play and live their lives. Let's start with work. According to a study from Gartner, 82% of the business leaders plan to let employees Continue to work remotely at least some of the time, while 47 plan to allow employees To do so permanently, this means more than enterprise must embrace technologies that enable employees to stay productive From anywhere, anytime. In the past year, virtual office, collaboration tours and virtual events Among the most rapidly growing use cases on our platform, how we play has also evolved. We're seeing a strong convergence of video games and live streaming, where the virtual world and real world are combined Movies and TV shows are no longer restricted to the living room. You're just as likely to watch our program with your friends across the country as with your family in the living room. Developers are using Agora from the most Cairo applications to the most highly Related and mission critical use cases. Today, our technology is used by doctors and the licensed therapeutics And low latency network, patients and doctors can talk about any sensitive topics anywhere, anytime. We are extremely proud that our customers continue to put their trust and confidence Now let's shift to our Q2 performance. I'm pleased to report that our revenue for the Q2 were $42,000,000 up 25% year over year. At the end of June, we had more than 330,000 adjusted apps on our platform. Our number of active customers reached 2,400, Adding 65% year over year 65% year over year. Let's take a moment Now to discuss the recent regulations in China that will impact K-twelve academic tutoring service. This new policy requires such services in China to be non profit and not to be provided on weekends or public holidays, Among other things, we anticipate the new regulation will have a negative impact on our revenue From the China K-twelve tutoring sector in the near term, it does not, however, change our long term vision Our business fundamentals. K-twelve academic tutoring is just one of the many use cases of our technology. In fact, online education is here to stay and will grow in the long term. Our commitment So the global education industry remains unchanged. Agora is dedicated to continue to provide technology That enables online learning and make quality education more accessible. To manage the short term implication, we will be making some adjustments. In China, We will shift our resource previously focused on K-twelve academic tutoring towards the public school education system And non traditional academics such as music, art, computer programming and adult education, We will also continue to strengthen our go to market efforts in the U. S, European and Asia Pacific, Where we are seeing tremendous growth momentum and more diversity in demand. Next, I want to highlight our advancements in our product, Technology and the use cases in Q2. In this quarter, we launched Agora App Builder, which allows developers create their own video chat and streaming apps with customizable functionalities and UI without any coding required. Since launch, we have seen very strong adoption from both developers and the creators with no technical background. Their positive feedback motivates us to make continued efforts in the low code and no code direction. To make it even easier for creators to connect with audience, engage with customers and drive more business outcomes. On the technology front, we recently announced AgoraSueur, our proprietary audio codec Using artificial intelligence to optimize quality of experience under poor network conditions Compared with traditional audio codecs, Agora Silver achieved superior quality at extremely low bitrates. Even compared with leading AI based audio products such as Google Lira, Agora Silver Enjoy lower competition computational complexity and more robust noise suppression. With Agora Sewer, we will be able to offer developers and end users an immersive experience under challenging network conditions. It is the perfect example of our commitment to cutting edge innovation at Agora. We also made solid progress on enabling innovative new use cases using our technology. We partnered with Mibu, a leading music and digital content platform To develop a one stop solution for online karaoke, the solution includes both technology enabling people to sing songs together remotely and usage based copyright solution for the soundtrack. We believe social singing will become a key feature in many social apps, just like live streaming did in the past few years. In gaming, we teamed up with HP to power real time engagement for HP Omen gaming PCs. Our voice, video, messaging and interactive live streaming capabilities are preinstalled on our Omen PCs, which allow gamers to engage during gameplay and turns game into watch parties, enabling players and viewers to share the excitement. We also work with a leading e commerce platform in Southeast Asia To introduce interactive shopping to their vast user base, in the app, the merchandise is demonstrated by a host Through live streaming, the audience can place orders and interact with the host through real time video or voice chat. Sales conversions have increased significantly as a result of the interactive experience. Now I want to talk about our developer community. Just about this time last year, we announced our new Global startup program designed to support all early stage startups no matter where they are and who they are. Now we have over 200 startups from 6 continents and 24 countries participating in our program. And we have seen so many innovative ideas that will profoundly change our lifestyle. As our developer base continue to grow rapidly globally, We have been working on our own internal diversity and inclusion programs. I'm proud to see that our employees Now support 24 different languages. I also want to take this opportunity to invite you to join me at RTE Showcase we will showcase exciting announcements, feature many amazing industry leaders And unique RT innovations that are changing our lifestyles all over the world. The U. S. Time zone live event will be on September 1, 2, and the China time zone event will be on October 22nd 23rd followed by October 24th as well as the Programmer Festival. I look forward to seeing you there. Lastly, I would like to thank our developers, Customers and partners for their trust in us. I also want to say thank you to all Agora's for their hard work and dedication to our customers' success. We will continue to invest in enabling meaningful human connections and creating more real time engagement possibilities. Now let me turn things over to Jingbo, who will review our financial results. Thank you, Tony. Hello, everyone. Let me start by first reviewing financial results for Q2, And then I will discuss our outlook for the full year. Total revenues grew 25% year over year And 5% quarter over quarter to 42,300,000 in the Q2 of 2021. Number of active customers reached more than 2,400, excluding those 4 is small, up 65% year over year. The growth in revenue and active customer was mainly driven by Continued adoption of our technology by developers and the emergence and growth of new use cases. We reached more than 330,000 registered apps at the end of June, excluding those for eSMOP, adding over 10,000 per month in the quarter. Additionally, e small contributed Over 3,000,000 are top line. As we continue as we mentioned in previous earning calls, In order to help investors better understand our organic growth, excluding the impact from one off events, Such as the complete lockdown in China in the first half of twenty twenty due to COVID-nineteen, We calculated adjusted total revenues for these periods. When comparing to adjusted total revenues in Q2 last year, Our total revenues grew 57% year over year in this quarter. Our trailing 12 months Constant currency dollar based net expansion rate is 110%, excluding eSMOD. If we use adjusted total revenues, the adjusted expansion rate would be 140%. Moving on to costs and expenses. For my following comments, I will focus on non GAAP results, which exclude Share based compensation expense, acquisition related expenses, amortization expense of acquired intangible assets and income tax Related to acquired intangible assets, non GAAP gross margin for the 2nd quarter Was 61.5%, which was 5.3% lower than Q2 last year and 3.1% higher than Q1 this year. The quarter over quarter increase was mainly driven by technical optimizations And the advancement we have been implementing since the beginning of this year. The year over year decrease It was mainly due to the continuous growth in new international markets that we are expanding into, Where infrastructure costs are higher, non GAAP R and D expenses We're 20,800,000 in Q2, up 113% year over year as we continue to hire talented employees And strengthen our R and D team, as well as the consolidation of eSmart's R and D team. Non GAAP R and D expenses were 49.2 percent of total revenues in the quarter compared to 28.8% In Q2 last year, again, our strategy is to focus on long term growth opportunities and innovation Instead of maximizing short term profitability, we have been investing significant resources in our R and D capabilities In order to further strengthen our technology leadership, provide a more diverse product portfolio and empower emerging use cases Non GAAP sales and marketing expenses were 9,300,000 in Q2, Up 72% year over year, mainly attributable to team expansion And increased advertising and event expenses. Sales and marketing expenses represented 22% of total revenues In the quarter compared to 16% in Q2 last year, non GAAP G and A expenses were RMB5.6 million in Q2, up 140% year over year, mainly due to team expansion and professional service fees. G and A expense represented 13.3 percent of total revenues in the quarter compared to 6.9% in Q2 last year. Non GAAP operating loss was RMB 9,400,000, translating to a 22.3% Non GAAP operating loss margin, 4th quarter compared to operating loss margin of 13.9% in Q1 this year And net operating income margin was 17.4% in Q2 last year. Turning to cash flow. Operating cash flow was negative $8,300,000 in Q2 compared to positive $7,500,000 last year. Free cash flow was negative $11,500,000 compared to positive $3,600,000 last year. Moving on to balance sheet. We ended Q2 with $827,000,000 in cash, Cash equivalents and short term investments compared to RMB877,000,000 at the end of Q1. In net cash outflow in the quarter was mainly due to negative operating cash flow, Capital expenditure and the consideration paid for a smart acquisition and long term investments. Now turning to guidance. COVID-nineteen is still an unprecedented variable Our business model, where historical experience may not apply, our guidance on full year revenues reflect Various functions that are subject to change based on the uncertainties related to the impact of the COVID-nineteen pandemic. In addition, as Tony mentioned earlier, we expect that the new regulation on K-twelve academic tutoring sector We'll have a negative impact on our revenue in the near term. With that, for the full year 2021, We have adjusted our previous guidance and now expect total revenues for the full year to be in the range of 159,000,000 to 261,000,000. In closing, we are proud of the strong performance in Q2 and continue to be confident about the long term prospects of our business. We'll continue to implement Our technical optimization and to further reduce infrastructure cost, Invest in innovation and R and D capability and support our developers and customers around the world. Thank you to the entire authority and everyone attending the call today and hope you are healthy and safe. Operator, let's open it up for questions. Thank you. We'll now begin the question and answer session. Our first telephone question is from the line of Yanwen Lu from Morgan Stanley. Please ask your question, Yan. Thanks for the opportunity to ask questions. Two questions from my side. The first one It's about overseas revenue. Can management share what is the contribution in second quarter from the overseas market? And what is the growth driver in the overseas markets, especially which have the key regions that contribute growth And what is the key use cases that drive the volume growth? That's the first question. And the second one is The gross margin, we see a pretty good Q on Q gross margin turnaround. I guess, Jingbo mentioned several times that the Optimization on the infrastructure side contributed to that. Could you please share about the future outlook? And Is this trend sustainable going into the second half, especially given part of the K-twelve related revenue will be gone due to the regulation issue? Is this infrastructure level optimization can continue to help on the margin? Thank you. Sure. So I'll take the first part of the first question. So revenue from U. S. And Rest of world market in the quarter contributed about 27% of total revenues. That's similar to the ratio in Q1. However, I want to highlight that in this quarter, we fully consolidated the results from Isoomop Ann, where the revenue is 100% in China, so if we exclude this mark, the actual ratio Revenue from the U. S. And Western world actually continue to increase. And Tony can talk about the revenue drivers. Right. So we are actually, as always, very excited about the opportunity from U. S. And the rest of the world market. I think 2 days ago, dating was 2 years ago, dating was, by then, our largest use case by revenue In U. S. Reservoir market, today, we have many more use cases, many of which emerged in the past 18 months, And we have a much more balanced revenue mix now. Our fast growing use cases can be roughly grouped And there are 3 things. The first one is what we call future of work. Obviously, the pandemic Have permanently changed how people work, collaborate and study. We now have several large virtual event customers They hold all kinds of events from Twitch shows to celebrity gym class through our platform. I'm more happy to see that they enjoy the benefit of our Qoe advantage brought by our services. Recently, there's also a leading collaborative design platform brought our voice chat feature to its users so that they can have a live discussion while working on design projects. We are working with also Some virtual office platforms such as Loop and Verbella to define how distributed teams will work together in the future. We recently also powered a global education giant, no those originate from China market, To teach foreign languages to adults and children around the world. And the list goes on and on. I think that the future of work is definitely not just one size fits all video conferencing. With Agora, We can have video, voice and all the workflow tools deeply integrated, creating a more immersive and effective remote working experience. And the second theme is future of media. In the past decade, We have all witnessed the transformation from TV and radio station to Netflix and I think the next phase of involvement of media is real time interactivity. Audio live cast, for example, has created a brand new and more engaging experience compared with traditional podcast. We now have several large customers who are working with us To either launch a standalone live cast app or introduce live cast to their existing apps. Another important direction is interactive TV. Currently, we are designing with several interactive TV provider To bring audience interactivity to game shows similar to Who Wants to be a Millionaire. Here, the audience can answer questions in real time on their mobile phone and even have the chance of jumping on stage To participate in the show itself, we are also working with sports betting companies to offer real time betting alongside video live streaming of Here, the key to make sure the video latency is both very low and uniform across all users So that they all have a fair chance to at winning the bets. And the first thing is future of tech. We see a clear trend of convergence Of game and live streaming. More and more games are adding live streaming functions so that players can interact and share their game experience with others. On the other hand, Live streaming platform are adding gaming features to live streaming sessions to boost interactivity between the host and audience. In fact, I think the convergence of game and live streaming is an important step towards creating a new metaverse. Our technology is perfectly positioned to help developers make this happen. In short, I think you can see our future growth through those three lines. And there's a question about gross margin, right? So in terms of gross margin, yes. So this sequential Improvement in GP margin was mainly reflects our efforts in optimizing the technical architecture And also bandwidth utilization rates. And this is a continuous effort. So we do believe we will be able to make additional savings in the future gradually. However, there are several factors at play. You mentioned the education policy change. It's true that The change will likely reduce traffic coming from the sector, especially during weekend and summer and winter vacations. Typically, this type of reduction in traffic from one sector would cause pressure on the GP margin, It will reduce bandwidth utilization rate. But in this case, it's actually less more complex. If the education traffic is more concentrated during weekdays and other traffic like social and gaming It's more concentrated on weekends. Actually, the utilization rate might potentially even improve. So if we take all these factors into consideration, we actually expect that we are working Thank you. Our next telephone question is from Emerson Chan from Bother Securities. Please ask your question, Emerson. Hi, thank you, management. I have few questions. Firstly, for our new guidance, What revenue assumption will you have given on both academic and non academic tutorials in the second half? And how much revenue impact on education we have already seen in the Q2? And secondly, just want to get some color The growth rate for non education vertical in China in the second quarter and what were the key growth drivers behind As we may see tight regulation on media content, do we think our non education setting in China will slow down in the future? And my last question is regarding our active customer, where we see net cash flow down Q on Q in Q2. So just wonder what are the key reasons behind whether it was due to the education Recommendation, non education vertical or anything else. Thank you. Sure. I guess the first two questions are kind of related. So maybe I will start by Sharing more information on the education situation. So in Q2, K-twelve academic tutoring contributed about 25% of total revenues. The actual revenue we saw in Q2 was already below our initial estimate before the policy Since the education companies already started to cut their advertising spending and their school extension and students sign ups, So there was already some impact in Q2. However, we expect to see further impact in Q3 Because some local governments have already started to enforce a new policy in August. And we expect the most impact will be seen in Q4. At the time, I guess, most local governments will really enforce all the policies. And by end of Q4, I guess, we will see kind of the new norm and what people might see A new base, a new clean base. But at this point, it's really hard to estimate what that new base will be given Uncertainties around the interpretation and enforcement of the policy. So when we give the guidance, we Try to make a balanced estimate. Obviously, there are a lot of uncertainty involved. Ex K-twelve education in China, we do not expect a slowdown. Actually, We see quite a few exciting opportunities. For example, Tony mentioned the social theme on karaoke. We actually are working with several customers Adding this feature into their apps. And we do believe this live streaming, like Woolworth It's going to be both opportunity for standalone apps and also opportunity to become kind of a By default, standard feature in many, many social apps. So in China, I think the broader theme is As the penetration of mobile Internet is already very high, there's not much room for user growth. However, the penetration Of real time engagement within apps still has a lot of room to grow. For example, a user might spend 60 minutes on Momo per day, And most of the minutes are used for one way content consumption and only 1 or 2 minutes are used for User interaction through video or voice. So here this penetration is really driven by New ways of interaction, social thing is one way. And there are Other possibilities like the convergence of game and live streaming. So we do think We do not expect any slowdown for the other sectors. On the active customers, actually we think the growth in this quarter is still pretty healthy. I think we added about 1, 20 active customers quarter on quarter. And because we define active customers Based on the LTM last 12 months, you might see a sharper growth Right. Several quarters back earlier and that's because that's during the peak of the pandemic. Obviously, there were more emergency use cases and emergency sign ups. And I actually do think the recent Thank you. Our next telephone question comes from the line of Vincent Yu from Needham and Company. Please ask your question, Vincent. Thank you, management. I have two questions, also like a quite about regulation. The first one is in terms of live streaming. We do See, there's discussions like a potential more regulations on live streaming side. And what's our view Towards that, yes. And what's the worst scenario we think it could be? The second question is actually also about education. But in the policy, it says the government's encouraging Public school to provide platform or free classes online to interact with the students. So do we think we can take some action on that front? Thank you. Okay. So on live streaming side, we are actually not aware of new regulations coming out on live streaming. But in fact, the regulatory environment in China has been more strict for social and live streaming apps For quite some time, from I think few years ago, which is actually a good thing as it makes the whole industry healthier. Now if you are actually talking about some activities or voice on gaming, There might be some regulation on gaming for primary school students, some public discussions, but we don't expect this To have a significant impact on our revenue, we don't have a bigger base on that. And another question around You have a second part of the question? Yes. The same question is about like on the regulation part that you mentioned encourage the local schools or the public Schools to provide online courses to students are free, but I think would that could we gain some Government contracts on that part or we don't see it yet? Yes. That's the direction to go, Not just us, but a lot of education institutions or companies are also looking at those directions. As I think we Mention briefly, including public education, adult education and some Non academic tutoring services like music and art and even on overseas going overseas market for some Chinese Education companies are all the directions they're trying to go. And I might want to mention that it's, as said, non profit education, Not necessarily free education. There's many such practice in the industry in the past already. We will definitely Participating in those trends, and we are working actively with several partners, many partners on such experiments as well. Okay. Thank you. And our next telephone question is from Bing Dwan from Nomura. Please ask your question, Bing. Hi. Thank you, management, for I also have two questions. So first, about the net dollar retention rate. So this quarter, it has been moderated to around 110. So could you elaborate more on the reasons behind that? And how do you The second question is about our you talk about Our some new emerging use cases, for example, the e shopping live streaming use cases cooperated with E commerce company in Southeast Asia. So I just wonder how do you see the trend How do you see the trend of the volume and the revenue growth in the future in this Clients are in a broader sense for the e commerce sector in overseas market. Thank you. Sure. So in terms of the expansion rate, so we define expansion rate based On the LTM, so it's the so we look at the active customers in the previous LTM. So 24 months ago to 13 months ago, we focus on the same cohort of customers, see compare their revenue from that period Was the revenue in the most recent 12 months? And if you think about this Calculation for this quarter, the most recent 12 months would be July last year to June this year And the previous 12 months would be July 19 to June 20. And so the 24 to 13 month period would include a peak of the pandemic in China during total lockdown, Where the revenue base was abnormally high, included a lot of the one off revenue contribution. And most recent 12 months It's actually more normal or clean base. And that's why the direct comparison would lead to a Low expansion rate, and we actually don't think the expansion rate is Very meaningful and that's why we also provided the adjusted expansion rate where we removed the one off revenue from the previous 24 to 13 months period. And if we remove that, the expansion rate would be 140%, which is More meaningful. And we do expect if we go into next quarter, if we follow the same calculation, The unadjusted expansion rate will remain at a lower level and the adjusted expansion rate will be more meaningful. And on the second question on e commerce, actually, what we talk about is kind of interactive E commerce, last term e commerce is already quite prominent in China. The trend really started about 1 Year ago, 1 year 1 year and a year and a half ago, outside China, it's less Probably, we do think it's definitely going to be the direction the future direction. And We are working with several customers, but as many things, it takes time for user Behavior user habit to change and evolve. So that will take time. And also, The other opportunity there is right now with several customers, They use our technology for the interactive part when the audience want to jump on stage and interact with the host, They still use traditional CDN technology for the live streaming part. So the whole live streaming broadcast to hundreds of users. Last part is due to CDA. But now what we are trying to do is, we want We want to persuade customers to use our technology for the entire experience, so for Interactive part and also the audience part, we have seen some early success there. If that can become the new standard, Their revenue potential is much more significant. Again, obviously, we have more audience than host. And then the participating audience, that's kind of the opportunity we are seeing in the future. Thank you very much. Our next telephone question is from John Wang from Macquarie. Please ask your question, John. Hi. Thank you, management, for giving me a chance to ask questions. So firstly, we have seen Chinese government is becoming more and more stringent On data securities, and what will we expect as the worst scenarios? And do we have any There are contingency plans for that. And secondly, also on the Dinar, Can you give us more colors on the Dinar in the next couple of quarters? Any colors on differences between the China and non China clients and on different vertical clients? Thanks. Okay. About the regulation from China government, I think a lot of the policy or regulation seems to be like rolling out all of a sudden. But some if you look into the direction, have certain Chris, back to their long term discussions around how they're going Manage those areas of services. And it's not just about education. It could be also like housing and medical services. But I think a lot of those is still at the direction of trying to create a healthier Economic environment overall, and it's not really against any new technology kind of Being leveraged to create a more accessible or better services in all industries We are actually in that direction. For example, on education side, on one side, the commercial Academic tutoring service is right now being heavily regulated. But before that, you can see Even on government policy side, they are promoting the so called 3 class initiative We're trying to leverage online education technologies or tours to make sure the good teacher or good Kind of Ulya teachers' contents can be shared across the country. So we think Overall, the regulation would not heavily just reduce or limit our future growth. But Near term, it will impact which customer or which kind of use case Would it be more healthier for our growth? And on data security, actually, We don't think that will have a significant impact on us. We have been very, very careful when it comes to user data. We have always had a policy what we call minimal data collection. So we intentionally do not try to Collect any more data than the absolutely necessary. When we work with a customer, we work with an app. When the app asks us to connect to all its users, after the users are anonymous, we don't know who they are. All we see is their IP address, which is required for us to make the connection and nothing else. So we don't collect data and we actually we have spent a lot of time and resources working with Consultants to enhance our overall data security and privacy practice. In fact, we are fully GDPR compliant. We have many other certifications, if you look at our website, which is necessary for us to operate in Europe and U. S. So if we you compare us with many other companies in China, we are probably the most advanced in terms of data Jotin, data protection. So actually, if anything, I think that's going to be a good thing for us as we are already Very advanced and compliant. So on DBNER, as I mentioned, Actually, we do not adjust the one off revenue Back in Q1, Q2 last year, in the next few quarters, you will continue to see Rest of the low level of dB AER and that's really caused by that spike. But if you just Remove that one off revenue contribution, you will see more We have always guided something around 130% as kind of the normal DBAER for this business. And in terms of China versus U. S. Versus the world and verticals, Obviously, in the past 18 months, the U. S. Reservoir business has been particularly strong. So the numbers there would look stronger. Great. Thanks. Panamir, there's no further questions at this time. I'd like to hand the call back to Speakers for closing remarks, please go ahead. Thank you, operator, and thank you everyone for attending this meeting today. Again, our presentation the copy of presentation and also our the remarks of This call will be uploaded on our IR website. So please feel free if you need that and feel free Thank you all. You may all disconnect. Have a great day. Goodbye. Bye.