Q1 2024 Agora Inc Earnings Call

Participants

Bin Zhao; Chairman of the Board, Chief Executive Officer, Founder; Agora Inc

Jingbo Wang; Chief Financial Officer; Agora Inc

Yang Liu; Analyst; Morgan Stanley

Billie Li; Analyst; Bank of America Securities

Presentation

Operator

Good day, and thank you for standing by, welcome to Agora Inc's first quarter 2024 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 filing, and a replay of today's call can be found on its IR website at investor.agora.io.
Joining me today are Tony Zhao, 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 what the company believes today and actual results may differ materially. These forward-looking statements are subject to risks uncertainties, assumptions and other factors that could affect the company's financial results and performance of its business and which the company discuss in detail in its filing with the SEC.
Including today's earnings press release and the risk factors and other information contained in the final prospectus relating to its initial public offering. Agora Inc, remain no obligations to update any forward-looking statements the company may make on today's call.
With that, let me turn it over to Tony. Hi, Tony.

Bin Zhao

Thanks operator, and welcome, everyone to our earnings call. I will first review our operating results in the past quarter. Agora revenues were $15.8 million in the first quarter, up 3% quarter-over-quarter. This is a great result, considering the macro-economic challenges under the high interest rate environment, and is mainly driven by usage growth from emerging use cases such as live shopping. As of the end of this quarter, Agora had over 1,700 active customers, up 16% compared to one year ago.
Shengwang revenues were RMB122.6 million in the first quarter, down 16% year-over-year, mainly due to challenging macro-economic and regulatory environment, as well as the disposal of the customer engagement cloud in the first quarter of 2023. As of the end of this quarter, Shengwang had over 3,800 of active customers, down 2% compared to one year ago.
Now moving on to our business, product, and the technology updates for this quarter. despite a challenging operating environment, we continued to focus on enhancing the fundamental performance of our products. In both markets, we released new versions of our SDKs that set new standards for stability and performance, demonstrating our strong commitment to creating long-term value for customers.
Let's first talk about Agora. We recently launched our adaptive video optimization technology that can deliver exceptional live video quality and enhance the overall user experience. It leverages our 10 years of real-world experience and expertise accumulated through hundreds of billions of minutes of video usage.
This advanced technology leverages wireless machine learning algorithms to dynamically adjust parameters and optimize performance at every step along the video processing pipeline. From the moment that video is captured through its final rendering and display on the viewers screen. Our technology continues to adapt to changing network conditions and device capabilities.
Our adaptive video optimization technology empowers our customer to differentiate their live video application in three key areas: optimized image quality, unmatched video fluency and ultra-low latency.
For example, KUMU, a social live streaming application, recently adopted our adaptive video optimization technology. Users now experience smooth, high0-quality video without freezing, even on older devices and with slow Internet connection. Since implementing our adaptive video optimization technology, KUMU has seen a 30% increase in session length and overall user engagement.
This quarter, we also made concrete progress in engaging with Twilio customers as Twilio's programmable video product continues its sunset process. Additionally, we saw increased traffic to our websites and developer community, reflecting our growing mindshare amongst developers. I believe this will help us reach a broader spectrum of developers and customers going forward.
Last week, OpenAI launched GPT-4o a true end-to-end multimodal ChatGPT that can directly reason across audio, video, and text in real-time. It confirms our earlier prediction that generative AI models would soon gain the capabilities to interact with human users directly in voice or video format.
We anticipate a paradigm shift in the interaction between human and AI models, which will inspire the next generation of killer apps. As this shift will lead to a substantial increase in the amount of voice and the visual feed transmitted globally in real time, the importance of a low latency and highly reliable transmission network will be higher than ever. This will put us in a unique position to become a critical infrastructure in the AI first future of human computer interaction.
Now let's turn to Shengwang. We are thrilled to announce the launch of our new solution for live sports forecasting. This summer, major sports events such as the European Football Championships and the Paris Olympic Games will attract billions of viewers globally. Our cloud native solution is designed to provide an alternative to traditional satellite studio-based broadcasting.
Compared to traditional solution that rely on satellite and private lines, our solution uses our global network and in-house algorithms to significantly reduce latency and enhance image quality. Apart from the technology -- apart from the technical advantage, our solution also offers cost savings and greater operating flexibility for our customers.
Traditionally, hosts and commentators have to be in the same studio room or in the sports arena to cover a game. This approach incurs significant costs and also limits the number of competitors that can work simultaneously. So most of the time, viewers could only listen to the same commentators.
However, with our cloud broadcasting solution, hosts and commentators can now be anywhere with an internet connection. Our technology ensures that the video and audio feeds of commentators -- co-commentators in the same channel are highly synchronized with the sporting event of broadcasting.
As a result, many athletes, experts, and celebrities can create their own channel to cover the same game, allowing end users to choose their preferred commentators to enjoy the game.
Shengwang has partnered with leading sports forecasting platform in China to bring end users an elevated viewing experience for the upcoming European Football Championship and Paris Olympic Games this summer. I believe this new experience will trigger a major transformation in sport broadcasting, and our powerful, flexible, and cost-effective solution will become widely adopted by additional platforms to power many other live sporting events throughout the year.
In 2024, we'll continue to host our ChaoYinSu program, which strive to facilitate start-ups to explore and build innovative RTE applications. Over the past years, we have cooperated with renowned VC funds, ecosystem partners and industry leaders to build one-stop support to start-ups.
This year, we have all in Moonshot AI, a prominent player in foundation generated AI models, to accelerate development of applications that harness the power of RTE and generated AI. Participating start-ups will have access to Moonshot's latest functionalities and our full portfolio of product offerings as building blocks to bring their ideas to life.
We are excited to see what the innovative start-ups will create. I'll start-ups with the most compelling and groundbreaking applications will be showcased at our upcoming RTE conference in October.
Before concluding my prepared remarks, I want to thank both Agora and Shengwang teams for their hard work and commitment during this challenging period. Let's stay focused to strengthen our technology leadership and increased market share, meanwhile, moving toward sustained profitability in 2024.
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 financial results for the first quarter of 2024 and then I will discuss outlook for the second quarter.
Total revenues were $33 million in the first quarter, a decrease of 8.4% quarter-over-quarter and a decrease of 9.4% year-over-year. Agora revenues were $15.8 million in the first quarter, an increase of 3.3% quarter-over-quarter and, an increase of 4.6% year-over-year. The increase was primarily due to the expansion and usage growth in certain verticals, such as live shopping, as well as business resilience in the US market and other developed markets.
Shengwang revenues for RMB 122.6 million in the first quarter, a decrease of 17% quarter-over-quarter, and a decrease of 16% year-over-year. The quarter-over-quarter decrease was primarily due to seasonality since, Q4 is generally the high season for digital transformation projects and Q4 is generally the low season for social and education customers who tend to have lower usage during the Lunar New Year. The year-over-year decrease was primarily due to slowing demand from internet customers due to regulation and general economic conditions.
Dollar-based net retention rate is 92% for Agora and 78% for Shengwang, excluding revenues from discontinued business.
Moving onto costs 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, depreciation of property and equipment and the amortization of that is right.
Adjusted gross margin for the first quarter was 63.2%, which was 3.9% lower than Q1 last year and 2% lower than Q4 last year. The decrease were mainly due to a change in product mix and lower utilization rate of infrastructure in Q1.
Our adjusted R&D expenses decreased 13.6% year-over-year to $14.6 million in Q1. Adjusted R&D expenses represented 44.2% of total revenues in the first quarter, compared to 46.3% in Q1 last year.
Adjusted sales and marketing expenses were $6.3 million in Q1, decreased 25% year-over-year. Sales and marketing expenses represented 19.2% of total revenue in the quarter compared to 23% in Q1 last year.
Adjusted G&A expenses were $6.5 million in Q1 slightly increased 6.6% year-over-year, primarily due to the increase of expected credit loss. G&A expenses represented 19.6% of total revenues in the quarter compared to 16.8% in Q1 last year.
Adjusted EBITDA was negative $6.1 million, translating to a 18.4% adjusted EBITDA loss margin for the quarter compared to 17.7% in Q1 last year. Non-GAAP net loss was $4.8 million in Q1, translating to a 14.5% net loss margin for the quarter, significantly lower than the net loss margin of 25.1% in Q1 last year.
Now turning to cash flow. Operating cash flow was negative $6.5 million in Q1 compared to negative $8.9 million last year. Free cash flow was negative $7.1 million compared to negative $9.1 million last year.
Moving on the balance sheet. We ended Q1 with $380.8 million in cash, cash equivalents, bank deposits, and financial products issued by banks, or $4.13 per ADS. Net cash inflow in the quarter was mainly due to deposit received in relation to the disposal of a small portion of land for headquarters project of $19.3 million, which was offset in part by free cash flow of negative $7.1 million and share repurchase $3.4 million.
Now turning to guidance for the second quarter of 2024, we currently expect total revenues to be between $34 million and $36 million. This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change.
In closing, we'll continue to focus on enhancing our technology, increasing our market share, and moving toward sustained profitability in 2024. Thank you to both Agora and Shengwang teams your hard work and contribution during this challenging period.
Thank you everyone for attending the call today. Let's open up for questions.

Question and Answer Session

Operator

(Operator Instructions) Yang Liu, Morgan Stanley.

Yang Liu

Thanks, for the opportunity to ask question. Two questions here. The first one is on your customer base. We saw a sequential decline in the first quarter this year, mainly for the Shengwang parts. What is the reason for that? And is customer churn behind us or it will be an ongoing process? Yeah, that's the first question.
The second one is on the outlook as the guidance implies some QonQ improvement on a year on year stabilization of total revenue. What is the driver even mainly helped by the Agora revenue or you are expecting the Shengwang parts can also recover in second quarter? Thank you.

Jingbo Wang

Thank you. I'll take both those questions. So on the customer part, that's right in Q1 Shengwang revenue drop both sequentially and year over year. And the slight decrease in number of customers was actually in line with -- consistent with the decrease in revenue.
Additionally, to provide some color on the overall macro backdrop, the tougher regulatory environment and also the generic macroeconomic environment in China. Means that a lot of the smaller social and entertainment start-ups and apps operating much more difficult environment and therefore, we see more churn due to customers' others revenues and business resident. So moving to our competitors. So we expect that to continue, but obviously, that should become more moderate in the coming quarters, thus on the customer base.
In terms of outlook, we actually expect post Shengwang and Agora to have sequential improvement in Q2 and actually more on the Shengwang side and one more on the Shengwang side. This is as I explained Q1 is generally the low season for social and also education customers. So we normally see some pickup in Q2.
And also for digital transformation customers generally, Q1 is the low season due to the New Year holiday, which means the project execution will be much slower. So we see -- we will see improvements on both Shengwang and Agora in Q2.

Yang Liu

Thank you.

Operator

(Operator Instructions) [Billie Li], Bank of America Securities.

Billie Li

Hi, management. Thanks for taking my question. I have two questions. Firstly, regarding the AI I imagine you mentioned there's more opportunities in this area. So could management give some more color on the AI, the incremental revenue, flexibility in future, in which scenarios we could see more meaningful revenue in the future from the AI?
My second question is about the expenses, the operating expenses. So we notice like a 1Q this year is at least there's some quarter on quarter increase for the operating expenses, especially like R&D. How do we see the trend in the following quarters for the expenses -- operating expenses? Thank you.

Bin Zhao

Okay, on the AI development is definitely more inclined. In the previous earnings calls we actually predicted that human users we will be able to drop it and interact with AI models in voice and video formats. Initially is a tax based but we consider it will happen in voice.
What happens was actually faster than we imagined. For the long term, particularly for all, is ahead of our expectations, thanks to the rapid evolution and the Google arm release of generating AI models. With generating AI models, multimodal capabilities there will be another dimension being added to our RTE activities.
RTE activities will expand from human to human, and human to machine or device to also include human to generating AI models. The scope of route of real time implement will give expand data. In the long run, this will hugely increase the amount of RTE activities and enrich's people's lives.
In the next few years, we'll be able to see many more use cases emerge and mature, such as AI based interactive education, customer service, personal assistant, social and gaming, use cases, voice and video conversations, we will become the new norm of interaction between human users and call agents powered by generating AI models.
As a result, massive amount of real-time voice and video will flow through global internet and latency will become a critical factor. When introducing GPT4o, opening remarks actually mentioned it has an average response time of 320 milliseconds. However, when an overseas users talks with the model wrong trip transmission agency needs to be added on top of a models response business latency.
And the experience cloud and the experience could change from exceptional to and variable. To deliver a low latency, highly reliable and high-quality user experience. Our technology is the right choice for foundation model AI companies and for most companies who build applications on top of generative models.

Jingbo Wang

Thank you, Billie. So I'm tanking the question on the operating expenses. So I think in our last earnings call, we already explained that the low operating expenses was obviously due to a constant two measured by the same time, it was due to -- it was below the normal level due to a reversal of certain accrued expenses that we accrued year-end bonuses and performance bonus every quarter. But however, given the tough operating environment last year, and the final operating loss was below our internal budget.
So the actual realized here and bonus, and performance bonus was lower than the earlier across growth. So there was some reversal in Q4 which caused the equal four, quarterly operating expenses at number we now. And that's why there was some small sequential increase from Q4 to Q1.
So looking for this year, we are still very cautious about the overall operating environment. So we'll continue to manage our expenses very carefully, and we do now expect OpEx in G&A, and including R&D expenses to increase sequentially from Q1 onward. And if anything, we will try to control the overall expenses.
Well, [Billie].

Billie Li

Thank you, Tony. Thank you Jingbo. Thank you.

Operator

Thank you for the questions. (Operator Instructions) There are no further questions. Thank you, everybody, for attending the company's call today. As a reminder, the call recording in the earnings release will be available on the company's website at investor.agora.io. And if there are any questions, please feel free to e-mail the company. Thank you.
That concludes today's conference call. Thank you for your participating. You may now disconnect.