Agora, Inc. (API) Q1 2022 Earnings Call Transcript

Agora, Inc. (API -1.24%)
Q1 2022 Earnings Call
May 23, 2022, 9:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone. Thank you for standing by. Welcome to Agora, Inc. first quarter 2022 financial results conference call.

At this time, all participants are in the listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference call is being recorded. [Operator instructions].

I'd now like to hand the call over to your first speaker today, Ms. Fionna Chen. Thank you. Please go ahead.

Fionna Chen -- Head of Investor Relations

Thank you, operator. Good morning, everyone, and thank you for joining us for Agora's first quarter 2022 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 will make forward-looking statements about our future financial performance and other future events interim. 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 public offering.

Agora 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.

Tony Zhao -- Founder, Chairman, and Chief Executive Officer

Hey. Thanks, Fionna, and welcome, everyone, to our earnings call. As many of you may have known, one of our global headquarters, Shanghai, was hit by an outbreak of omicron in March. The city has been in lockdown for nearly two months now and has just started the process of resuming offline business activities.

During this time, our teams in Shanghai have been working remotely, and there has been no interruption of our business operations, our research and development efforts. Here, I would like to express my sincere gratitude and care to all of our team members impacted by COVID. Before going through our performance in Q1, let's take a look at our leading market position and recognition by independent market observers. According to a recent industry report from CIC, Agora continued to be the undisputed leader in the global real-time engagement platform as a service market with more than twice market share than our nearest competitor both in terms of revenue and number of minutes delivered in 2021.

As of March 2022, we maintained our No. 1 market share in RTE SDK installation globally. In regions like the North America, Southeast Asia, and Middle East, our SDK installation market share is dominant compared to other RTE or public cloud service provider. For example, if we look at the top 10 social dating apps globally, all of them have RTE features embedded and half of them are powered by Agora.

And if we further look at different regions, we power five out of the top 10 social dating apps in North America and seven out of the top 10 in China. Also in this quarter, Agora was selected as a finalist for Fast Company's World Changing Ideas 2022. Every year, Fast Company chooses businesses and organizations driving change in the world. This year, in the workplace category, Fast Company selected Agora as a finalist to recognize our innovations in connecting virtual worlds of the metaverse to the physical one.

None of this would be possible without our team's strong commitment to driving technology and product innovations, and our customers' trust and confidence in us. Next, let's move to our business update in Q1. Our revenue for the first quarter was $38.6 million, 4% year over year. During this quarter, 34,000 solid new applications rejected on our platform.

At end of March, our number of active customers exceeded 2,700, adding nearly 400 compared to one year ago. Our results in this quarter were impacted by the drop in demand from K-12 academic tutoring customers in China due to regulation. On the other hand, we continue to see strong growth momentum in markets such as Middle East, Southeast Asia, and Europe, which not only offset most of the fall from K-12 use case but further diversified our revenue mix and enhanced our business resilience. More importantly, we are excited to see solid evidence of a long-lasting shift in people's mindset and behavior as they continue to move their lives online and spend more time in virtual engagement sessions.

Even in countries where lives have largely returned to pre-pandemic norms, we believe this is an irreversible trend across all regions and verticals, which will bring tremendous market opportunities for us. Next, I will walk you through some important updates on our use case solutions and technology and product advancements during this quarter. In our last earnings call, we talked about our Meta Chat, Meta Live, and Meta TV solutions that enable developers to easily create immersive and entertaining voice chat, live streaming, and karaoke experience within 3D virtual space. Recently, we launched Meta Interactive Game to further strengthen our metaverse product offerings.

Through partnership with game developers, we bring lightweight product games to video and voice chat room or live streaming sessions, which add another dimension of fun and engagement to the users. In addition to radio and voice engagement, our customers can seamlessly embedded such game -- can seamlessly embed such games in their social and entertainment applications to enhance user experience and engagement. Moving to another vertical, which -- moving to another vertical where we see many new use cases that strive to make the world a better place, the Internet of Things or IoT. We recently launched a turnkey software solution for IP cameras such as video doorbell or smart speakers.

Our solutions parse critical functions of the device including real-time monitoring, two-way video calling, remote control, and recording, leveraging our knowledge and expertise in RTE devices with our solution can establish video session in just one or two seconds with very low latency. Our module is efficient in power usage and its contact enough to fit on almost any small and low-cost devices. Another interesting use case in the IoT space is NuEyes, a leading augmented relating smart glass that allows user hand-free access to the visualization of real-time information, including 3D modules, designs, and data whether being used for an unground utility safety check or on the construction side of skyscrapers, workers can leverage our video APIs to safely transmit visual information to make informed decisions quickly. Our local -- and local platform continued to gain traction among developers globally.

For example, Study.com, a leading online education platform, is using our local solution app builder to accelerate its digital transformation. Study.com has traditionally been an on-demand offline course for home, but will soon enable live children as a part of their offerings in the app builder. On the technology front, we launched our proprietary AI-powered noise suppression algorithm in this quarter. Traditional loyal suppression algorithm works fine on general occasions, but sometimes fails to catch unique noises in specific use cases, such as the sound of breathing and [Inaudible] when singing a song.

Our AI-powered algorithm can deal with over 100 types of background noises, which gives developers the flexibility to build the best noise suppression for very specific use cases. In addition, our algorithm is designed to be compact and efficient and, therefore, performs very well on web browsers. Lastly, our team, I'm glad to announce that Mr. Roger Hale, former chief security officer at personal data privacy and protection company, BigID, has joined Agora in the same role.

Roger will work with our executive team to navigate compliance and security and determined risk management and security best practices for the organization. We will also serve -- he will also serve as a process owner of all business of our assurance activities related to the availability, integrity, and confidentiality of customers, business partners, employees, and this business information. Security and compliance have never been more critical than they are today, with an impressive track record and many years of experience and expertise, we are very excited to welcome Roger to the team. In addition to the hiring of Roger, we're also growing our executive team through internal promotion, including chief strategy officer, chief revenue officer, and chief experience officer.

These moves are aimed at streamlining our global go-to-market efforts and further enhancing our deeper experience. I'm confident that our expanded executive team will continue to drive innovation at Agora and help create a world where real-time engagement is ubiquitous. With that, let me turn things over to Jingbo, who will review our financial results.

Jingbo Wang -- Chief Financial Officer

Thank you, Tony. Hello, everyone. Let me start by first reviewing financial results for the Q1, and then I will discuss our outlook for the fiscal year 2022. Total revenues were $38.6 million in the first quarter of 2022, a decrease of $1.6 million or 4.1% year over year.

Our revenue growth in this quarter was negatively impacted by the new regulation on K-12 at [Inaudible] sector in China. Our revenues from K-12 academic tutoring sector in China were approximately $40 million in the fiscal year of 2021. Our revenues from the sector were approximately $1.3 million in the first quarter of 2022, a decrease of approximately $10 million from the same quarter last year. On the other hand, our growth momentum in other geographies and sectors remained strong during the quarter.

In particular, revenue from U.S. and other markets outside China grew almost 50% year over year and 16% quarter over quarter to $16.4 million in Q1, representing 42.5% of total revenues. As we continue to expand globally, our revenue base also became more balanced and resilient in this quarter. Revenue contribution from top 10 customers were 22%, compared to 35% in the same quarter last year.

Our trailing 12 months' constant-currency, dollar-based [Inaudible] expansion rate is 95% in the quarter, excluding this month. The expansion rate was also negatively impacted by the K-12 sector and especially in other sectors and geographies remain very healthy. Moving on to costs and expenses. For my following comments, I will focus on non-GAAP results, which exclude share-based compensation expenses, acquisition-related expenses, amortization expenses of acquired intangible assets, and income tax related to acquired intangible assets.

Non-GAAP gross margin, fourth quarter was 63%, 4.6% higher than Q1 last year. As we mentioned in previous earnings calls, the increase was mainly driven by technical and infrastructure optimization we have been implementing since the beginning of 2021. Non-GAAP R&D expenses were $25.3 million in Q1, up 45.3% year over year as we continue to hire talented employees and strengthen our R&D. Non-GAAP R&D expenses were 65.6% of total revenues in the quarter compared to 43.3% in Q1 last year.

With the enormous opportunities are technology presents globally, we will continue to invest heavily in R&D to strengthen our technology leadership and empower emerging use cases. In the near term, our plan is to keep R&D expenses at a relatively stable level in dollar terms and focus on resources on IRI projects to maximize long-term impact. Non-GAAP sales and marketing expenses were $11.6 million, up 34.5% year over year, mainly attributable to team expansion and increased advertising and event expenses as we continue to step up our go-to-market efforts globally. Sales and marketing expenses represented 30% of total revenues in the quarter compared to 18.6% in Q1 last year.

Non-GAAP G&A expenses were $7.4 million in June, up 64.7% year over year, mainly due to team expansion and expected credit loss provisions. G&A expenses represented 19.1% of total revenue in the quarter compared to 11.1% in Q1 last year. Non-GAAP operating loss was $18.9 million translating to a 49% non-GAAP operating loss margin fourth quarter compared to an operating loss margin of 13.9% in Q1 last year. Turning to cash flow.

Operating cash flow was negative $15.9 million in Q1 compared to a negative $2.7 million last year. Free cash flow was negative $17 million compared with negative $8 million last year. Moving on to balance sheet. We ended Q1 with $718 million in cash, cash equivalents, and certain investments, compared to $755 million at the end of Q4 last year.

Net cash also in the quarter was mainly due to free cash flow of negative $17 million, cash [Inaudible] long-term investments of $13.9 million and share repurchase of $7.6 million. Now turning to guidance. COVID-19 is still an unprecedented variable to our business model where historical experience may not apply. Our guidance on full year revenues reflect various assumptions that are subject to change based on uncertainties related to the impact of the COVID-19 pandemic.

With that, for the full year 2022 we maintain our previous guidance, the total revenues for the full year, I expect it to be in the range of $176 million to $178 million. Now turning to the update on the status under Holding Foreign Company's Accountable Act, or the HFCAA. On May 4th, 2022, the FCC provisionally named Agora as the commission identified issuer under the HFCAA, following our filing of annual report on Form 20-F for the fiscal year ended December 31st, 2021. We understand that the FCC made such identification pursuant to the HFCAA and its implementation issued around it.

And this indicates that the SEC determines that Agora auditor who's working paper cannot be expected or investigated completely by PCAOB to issue the auditing or our financial statements included in the 2021 Form 20-F. In accordance was the HFCAA, the SEC determined that Agora file audit report is by registered public common firm that has not been subject to inspection for the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit a growth share or ADS from being traded on a national securities exchange or in over the calendar '20 markets in the U.S. We will continue to monitor market developments actively explore passport solutions to protect interest of stakeholders and strive to maintain our listing status only NASDAQ. In closing, we delivered a strong first quarter performance in this challenging year.

We had excited and very confident of our long-term prospects of our global business. Thank you to the entire Agora team for your hard work and everyone attending the call today, and hope you're healthy and safe. Let's open it up for questions. 

Questions & Answers:

Operator

Thank you. [Operator instructions] We have a question from the line of Yang Liu from Morgan Stanley. Please go ahead.

Yang Liu -- Morgan Stanley -- Analyst

Thank you. I have three questions. The first one, for the management, this year, what is the revenue growth outlook for the three business lines that is overseas business, the China K-12, and also China [Inaudible] in the next few quarters? Is it fair to say that first quarter this year should be the last quarter to see negative impact from the education regulation? And also, we are curious about the outlook for the China non-K-12 business as well. That is the first one.

The second one is on the gross margin because we see that a 62.4% gross margin in first quarter is quite good, considering losing some education-related volume. Do you think this number will be relatively sustainable in future? Or there will be some fluctuation either on the downside or upside on gross margin, especially given the overseas parties growing very rapidly? And the third question is regarding the renminbi depreciation recency. I know the company's revenue have both China part and the non-China part and also the cost and opex also have China and non-China part, what is the overall impact of the FX to the future P&L? Could management share a little bit on that? Thank you. 

Jingbo Wang -- Chief Financial Officer

Thank you. I guess this one is for me. So, on the first question regarding service [Inaudible] involved. So, if you look at the last 12 months, so basically, roughly speaking, China K-12 was like down 90% in Q1 versus Q1 last year, and non-K-12 business in China was up 15% and U.S.

or international markets was up about 50%. So that's the loss on loan. So, I guess you are right that hopefully, this will be the bottom for the K-12 impact in China. We still have some revenue in that sector, about $1.3 million in the quarter, but that's much less significant now.

And if we look forward in the next 12 months, we'd expect something similar, say, around 50% growth in the U.S. and other international markets and around 15.8% growth in China. Obviously, there are a lot of macro uncertainties both in China and also in the U.S. So the numbers are obviously subset a lot of assumptions, that would be the current expectation.

The second question on gross margin, so actually, we think the technical optimization has been very effective. There was some net impact from the loss of the K-12 model, which cater with reduction in utilization rate of infrastructure, but that was compensated by a very efficient cost optimization. And as K-12 is largely growing now, we don't expect this impact to continue in the future. So actually, we are expecting [Inaudible] to remain relatively stable in the remainder of the year compared to Q1.

Obviously, there will still be some period-to-period fluctuation. But we don't expect it to be very significant. The third question on RMB depreciation. It's completely right that impact on both top line and the bottom line.

So roughly speaking, RMB has depreciated by about 5% in Q2 so far compared to Q1. On the revenue side, about 60% of our revenue is currently denominated in RMB. So assuming the FX rates stayed where it is today, and will have a net stock of about 3% of revenue in Q2. And cost expenses will be effectively a similar fashion.

The net-net impact on the bottom line will be much less significant.

Yang Liu -- Morgan Stanley -- Analyst

Thank you. That's very helpful.

Operator

Thank you for the questions. [Operator instructions] Our next question comes from the line of Bing Duan from Nomura. Please go ahead.

Bing Duan -- Nomura -- Analyst

Thank you, management, for letting me ask the question. So, my first question is about the impact from the COVID-19 and the lockdown in China since March. And how do you think about the impact to the demand and the volume growth in different verticals, whether it's good or bad, whether it's positive or negative impact? My second question is about the competition. So I'm glad to see that we still maintain a global leading position in the global RTE market.

But do you see that the -- going forward, the competition in China will intensify, especially for the large Internet or tech companies, may ramp up their product launch or their other strategies in this market, in this RTE market? The last question is about the stock repurchase plan. I see we have completed 4% of the total $200 million program in 1Q. So can we -- so just want to get your thoughts on how we are going to proceed with the stock repurchase plan in the next couple of months, will we accelerate the repurchase in 2Q and 3Q? Thank you.

Tony Zhao -- Founder, Chairman, and Chief Executive Officer

All right. I'll take the first two. One is on the COVID and lockdown in China. I think the recent lockdown in Shanghai and other cities has been -- has a small positive impact on our revenue, mostly from education sector.

The reason why it's only a small impact is twofold. First, this time, only a few cities were affected, not an entire country compared to 2020. Second, K-12 after-school touring is strong. So, the number of incremental online classes is also much smaller than 2020.

In the near term, the overall macro environment in China is very challenging. We see that general business activities are slowing down, which will affect our customers and their end users. There is also some debate on regulation of social and entertainment apps, and it's unclear how it will play out. In summary, we are very bullish about the long-term perspective of RTE.

But there is a lot of macro uncertainties in the near term. We're watching closely and we'll adjust our strategy and operations if needed. And second, about the competition, there hasn't been too much change in strategy from our main competitors, such as Twilio in the U.S. and Tencent in China.

On the RTE side, we are not seeing any big difference from operations. We have a lot of completion already in China markets, especially but we did notice that some competitors is making efforts in the low-latency live streaming area. This proves that our earlier prediction that a lot streaming services will turn to low latency technology. This prediction is actually correct.

The industry is embracing it. We think this is an important market with huge potential, and our technology is actually well positioned to capture opportunities in this market. But we did see a few start-ups also raising more funds in this industry. trying to build similar offerings, mostly on the local side.

Overall, I think this is a good thing for the industry with more choices for customers and more ideas to drive the industry forward Together, we will create more vibrant market and accelerate the adoption of IT technology in general. With growing competition, we also see that some companies win out of business. Overall, competitive landscape remains largely the same. We're still the clear leader in this space in terms of technology performance and completeness of features. 

Jingbo Wang -- Chief Financial Officer

OK. I'll take the third question on the stock repurchase. Yes, we purchased about $8 million versus the shares in Q1 and repurchases continued in Q2. However, we do not anticipate that we will accelerate the per given the whatever in the past one and a half months, the lockdown and the general economic uncertainties in China and also the U.S.

macroeconomic environment possible recession. So, we will be more prudent in terms of the stock repurchase. So that's all I have to share at this point.

Bing Duan -- Nomura -- Analyst

Thank you. That's very clear. Thank you.

Operator

Thank you for the questions. [Operator instructions] We have a follow-up questions from Yang Liu of Morgan Stanley. Please go ahead.

Yang Liu -- Morgan Stanley -- Analyst

Yeah. I have a quick follow-up in terms of the overall demand in overseas markets because we see that several major countries are moving back to normal after the COVID semi lockdown, whatever. And I just want to have an update whether this will impact overseas demand? And what is the current observation from those key markets like U.S. or Middle East and ASEAN markets? Thank you.

Tony Zhao -- Founder, Chairman, and Chief Executive Officer

Yeah. Sure. Life in most countries have returned to normal. This does have a negative impact on the demand for our services for certain use cases.

For example, usage from online events industry is now lower than one year ago during the peak of the pandemic. However, if you look at our numbers, our revenue growth in U.S. and other international markets actually accelerated in Q1. That's because there is a much stronger shift in people's [Inaudible] and behavior here.

During the past two years, people have learned that interactive video engagement can be useful on many occasions outside of video conference. Now a lot of businesses signed out ways to leveraging real-time video engagement to conduct their business online, enhance user experience or increase efficiency. For example, we saw strong usage growth from education customers in Southeast Asia, Middle East, and Europe, even after the reopening. Because live video class is a very effective and low-cost way of teaching.

We now [Inaudible] of the largest education technology unicorns in South Asia. These markets have huge population and the penetration of RTE powered online education is still very low, which means there is huge revenue potential for Agora. Another exciting example is media. We finally see that the media industry is starting to embrace RTE technology.

Recently, our technology was used to broadcast live sports games to thousands of audience with low latency and highly synchronized viewing experience. We believe this is a large and almost untapped market for us. The last example I want to mention is interactive e-commerce. One of our customers in the U.S.

is leveraging our technology to enable video social buying where users can discuss and buy things as a group through video. This offers a very different and more engaging experience compared to traditional online shopping based on broadening catalogs. To summarize, I think the pandemic has accelerated the adoption of RTE technology across industries. Today, the penetration of RTE is still very low, and there is definitely a long way to go for us.

Yang Liu -- Morgan Stanley -- Analyst

Thank you.

Operator

Thank you for the questions. [Operator instructions] We have a follow-up questions from Bing Juan from Nomura. Please go ahead.

Bing Duan -- Nomura -- Analyst

Thank you, management. I have two follow-up questions. One is about the regulations on the social entertainment sector in China. Do we -- currently, do we see any like potential tightening policies that may affect the demand in this sector? For example, the short video sector.

And second one is about our margin's growth trend. So I heard that management commented that the GP margin may remain largely stable in the next couple of quarters. Just wonder what would be the trend for R&D and sales and marketing expense in the next couple of quarters? Do we expect to add more headcount in the next few quarters? Thank you. 

Tony Zhao -- Founder, Chairman, and Chief Executive Officer

Yeah, there are notable in the past one, two years, many regulation actions. And as I mentioned just now, there is also some different direction sort of the debate on regulations of social and entertainment apps. For example, there are reissue of game titles and there are ways about stabilizing the overall policy in those areas, but also certain restrictions might roll out for gifting. So there are still many changes in this space.

And I think as we mentioned earlier, it's a little unclear how it will finally play out. And we are working closely with our customers and related bodies to find out what would be the best for us to help customers and developers.

Jingbo Wang -- Chief Financial Officer

The second question on margin. So, yes, as I said, we expect margin to remain relatively stable. In terms of R&D and sales and marketing, we will improve the R&D efficiency and focus on [Inaudible] project, IRR project. So we will also control the headcount we do not expect R&D head count to further increase.

What I mean in dollar terms, we want to keep expenses were stable, honestly, in percentage terms, that will depend on revenue growth. sales marketing sales and marketing, we do not plan to expand in China. However, we do have plans to further expand our go-to-market efforts of the China can explain that there we still see a lot of opportunities in many markets and many verticals. So there, we will continue to invest.

So, in the near term, we'll see sales and marketing tenders continue to increase. But we will be more cautious about the efficiency and it investment and we intend to immediate next month quarter that might have some pressure on the bottom line. What we do plan to improve the onto the overall operating margin toward the end of the year.

Bing Duan -- Nomura -- Analyst

Thank you very much.

Operator

Thank you for the question. [Operator instructions] At this time, there are no further questions. I'd like to hand the call back to the management for closing.

Fionna Chen -- Head of Investor Relations

Thank you, operator. Thank you, everyone, for attending today's call. The replay and the presentation of this call are already posted on our website and the prepared remarks will be posted later after this call. Thank you again.

If there is anything, please feel free to reach out to us. Thank you.

Tony Zhao -- Founder, Chairman, and Chief Executive Officer

Thank you.

Jingbo Wang -- Chief Financial Officer

Thank you.

Operator

[Operator signoff]

Duration: 45 minutes

Call participants:

Fionna Chen -- Head of Investor Relations

Tony Zhao -- Founder, Chairman, and Chief Executive Officer

Jingbo Wang -- Chief Financial Officer

Yang Liu -- Morgan Stanley -- Analyst

Bing Duan -- Nomura -- Analyst

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