Agora Inc
NASDAQ:API
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Agora Inc
Earnings Call Analysis
Summary
Q3-2023
Amidst a general economic slowdown and evolving regulatory conditions, the company is increasingly emphasizing its digital transformation market, notably within the Shengwang business. They're streamlining operations - R&D and sales expenses shrank by 36.4% and 48.8% year-over-year, respectively. Adjusted EBITDA was a loss of $4.4 million, a significant decline from last year's 40% gross margin, indicating tighter control on operational costs. The free cash flow swung positive to $93.2 million from a negative $9.9 million the previous year, reflecting stronger cash management. The company anticipates Q4 revenues between $35.5 million and $37.5 million, showing cautious optimism while acknowledging market uncertainties.
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Good day, and thank you for standing by. 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 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 the company's belief 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 its performance of its business in which companies discuss in details in its filings and SEC, including today's earnings press release and the risk factors of other information contained in the final prospectus relating to its initial public offering. Agora Inc. remains no obligation to update any forward-looking statements the company may take on today's call.
With that, let me turn it over to Tony. Hi, Tony.
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 at RMB 141 million for Shengwang, an increase of 1.4% 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 1 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 U.S. and other developed market will soon catch up and embrace live shopping as the next big trend.
According to [indiscernible], live shopping could account for 20% of our e-commerce sales by 2026 and the U.S. live shopping market is estimated to be worth $35 billion by 2024. We're also proud to mention that Agora was highlighted as a leading lender 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 [indiscernible] the leading fashion live shopping platform for retailers to introduce a new functionality that allows sellers to invite external participants into their shows simply by sending them a link or QR code. Sellers can easily and professionally host, celebrate -- can easily add professional host celebrities, influencers or VIP customers to join their live shopping session while we do to provide more engaging content and boost conversion.
This quarter, we also partnered with the Sandbox, a leading decentralized gaming virtual work to promote real-time engagement and social interruptions within the meters through voice, video and chat. The Sandbox choose Agora because of our comprehensive product stack, which can seamlessly integrate 3D spatial audio, persistent text chat and interactive live streaming functionalities at scale. As a result, players' ability to connect, collaborate and meaningful communities in the metaverse is significantly enhanced.
Moving on to Shengwang. We recently launched our AITC RPE 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 launched their direct voice conversation between inland users and AI models. However, there is surely a significant delay of 6 to 7 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 2 seconds. This near real-time response is close to the natural pause expected in human-to-human conversations and, therefore, provide a much more engaging and new real experience for users.
Our AITC RT SDK also comes with great flexibility. [indiscernible] can easily create their application with the freedom to choose from a wide range of large language models, speech text engines and synthetic voices to fit their unique use case. A video demo of our AITC RT solution can be found in our earnings presentation with more details on its features and capabilities. Please also feel free to download the demo app 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 the specialist at BMW headquarters in Germany. They had to wait at least 24 hours before the specialist could arrive on site, which could impact manufacturing time line and even cause delays in delivery.
Our solution enables the remote specialist at BMW headquarter to remotely inspect, even the smallest detail 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 hub 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 RT conference for the ninth consecutive year with where we discuss the role artificial intelligence plays in real-time engagements. We have been leveraging AI to enhance the quality of experience in real-time engagement for a long time. We developed the AI power real-time on device noise suppression and actual cancellation [indiscernible] that significantly improve audio quality.
On the video front, our AI-based real-time on-device algorithms, such as super resolution, perceptual video cooling, optic 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 SPK 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 RT. 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 RT 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 are making solid profile to realize our mission of making real-time engagement to business and allowing everyone to interact with anyone anytime and anywhere.
We have also closely followed the development of large language model and generating AI around the world. As mentioned earlier, our AICTE RTE solution enables developers to put AI-powered partners 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 language.
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 1 day surpass today's human to human traffic, and we are uniquely positioned to become the critical infrastructure that enables human 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. Ms. Tak Lico has tendered his voluntary recognition due to personal reasons. Tak 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 Tak for his dedicated service and invaluable advice to our Board.
Ms. Shang Dong, currently our Chief Technology Officer and Chief Scientist has been appointed as a director. I would like to warmly welcome Shang to join our Board. And I'm confident that Shang'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.
Thank you, Tony. Hello, everyone. Let me start by first reviewing financial results for the third quarter, and then I will discuss the outlook for the fourth quarter of 2023. Total revenues were $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.
Our core revenues were $15.3 million in the third quarter, flat compared to last quarter and decreased 8.9% year-over-year. The year-over-year decrease was primarily due to reduced usage and increased pricing sensitivity from customers in emerging markets due to challenging macroeconomic environment and tightening financing conditions, starting from the second half of last year.
So on revenues, we're RMB 141.2 million in the third quarter, an increase of 7.4% quarter-over-quarter and a decrease of 9.2% year-over-year, excluding revenues from the disposed CIC business. The quarter-over-quarter increase was primarily due to an increase in revenues from digital transformation customers or large enterprises. This is an area where we are seeing strong revenue growth in the past 2 years. Going forward, we believe digital transformation market will become an 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 rotation rate is 98% for Agora and 89% for Shengwang, excluding revenues from discontinued business.
Moving on to cost and expenses. For my following comments, I will focus on non-GAAP adjusted financial measures, which excludes share-based compensation expenses, acquisition-related expenses, financing-related expenses, amortization expenses of acquired intangible assets, income tax related to acquired intangible assets, impairment and goodwill, depreciation of property and equipment and amortization of land use right.
Adjusted gross margin for the third quarter was 66.9%, 3.3% higher than Q3 2022, mainly due to the change in product mix and the implementation of technical and the infrastructure optimization.
As mentioned in previous earnings calls, we've restructured and reduced our global workforce in Q4 last year, and we have continued to implement effective expense controls. As a result, adjusted R&D expenses were $15.7 million in Q3, decreased 36.4% year-over-year. Adjusted R&D expenses represented 44.8% of total revenues in the quarter compared to 60.2% in Q3 last year. Adjusted sales and marketing expenses were $6.6 million, decreased 48.8% year-over-year.
Sales and marketing expenses represented 18.9% of total revenue in the quarter. compared to 31.5% in Q3 last year. Adjusted G&A expenses were $6.2 million in Q3, decreased 15.1% year-over-year. G&A expenses represented 17.6% of total revenues in the quarter compared to 17.7% in Q2 last year.
Adjusted EBITDA was negative $4.4 million, translating to a 12.7% adjusted EBITDA loss margin in fourth quarter, significantly lower than the gross 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 of investments in certain private companies of $6.3 million.
Non-GAAP net loss, excluding investment loss was $2.2 million 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 by 19.4% and in Q2 this year. Now turning to cash flow. Operating cash flow was $3 million in Q3 compared to negative $8.8 million last year. Free cash flow was $93.2 million compared to negative $9.9 million last year.
Moving on to the 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 on negative $3.2 million and share repurchase of $12.5 million.
Thanks the Board of food, our share repurchase program in February 2022 and as of September 30, 2023, we have returned approximately $94.3 million to shareholders to 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 $94.3 million ADS outstanding, reflecting a 16% reduction in total shares outstanding compared to January 31, 2022, before the share repurchase program started. So far, we have completed 47% and of a $200 million share repurchase program, which will expire as in February 2024, and we intend to continue to undertake its 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 view on the market and operational conditions, which are subject to change.
In closing, we are very proud of our execution in this quarter, especially [ this connected ] improvement in profitability. We'll stick to our strategy and be laser focused on driving revenues and improving efficiency. For the long run, as Tony just mentioned, we are excited to see emerging IT use cases, and we are well prepared to help developers combine the power of generative AI and real-time engagement.
Thank you to both Agora and Shengwang teams for their hard work and to our investors for your trust. Thank you, everyone, for attending the call today. Operator, let's open it up for questions.
[Operator Instructions] First is from Tom Tang from Morgan Stanley.
I have questions just on from [indiscernible]. So I have 2 questions. So first 1 is regarding the 2024 outlook for -- and what it have a breakdown between Agora and Shengwang business? And the second question is regarding the position intake in both China and overseas.
Sure. The status for both Shengwang and Agora for our growth side, I think the growth of global market overall and 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 real-time audit video is basically web conferencing. The U.S. market, people are not that get used or familiar with all other use cases like co-working, experience, et cetera.
Now after pandemic, although in some of the use cases, the 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 watch 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. In China market, a lot of macro and regulatory headwinds, as you probably already know, but usage on our platform continue to grow. Our market share in new adoptions also increased nearly 20% this year. And our digital transformation business serving large enterprise also grew 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 market share.
And on the question about the demand and the pricing for growers market, our number of customers continue to grow at about 25%, as I mentioned earlier. Also, we see some more users start to emerge into growth mode such as live shopping. And I also mentioned the consumer behavior change actually give us hope that there will be more growth potential in both use cases and volume.
Overall, the challenging environment is still there. And those in the near term still impact the operation, but a lot of potentials in the medium- to long-term time frame. Pricing-wise, more pressure in emerging markets but price has been healthy and stable in developed market.
In China, overall, demand stable -- 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 digital transformation is also more attractive in this market.
Next, we have Daley Li from BofA Securities.
Manon question about the AI. You mentioned there's more application scenarios for the like AI systems, AI teams et cetera. And when do you think the AI can really have more meaningful revenue contribution of our business or in which application do you think which have -- could have much potential to drive our business growth in the future?
Yes, you're right. As I also talked about, there are many potentials in all sorts of use cases like AI companies, AI game players, et cetera. However, as I also mentioned, we rolled out this AITCRP/SDK module in the last few months. We do have a domestic view of those potentials, just 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 models. That's a long-term future.
However, the development is still undergoing. I think there's a lot of since the [indiscernible] for large language model to be able to really act as a human-like personas like the AI company or player in certain games. That's where we work hard with a lot of our customers and partners together to try to bring it to realize, and I don't want to overestimate in near term of such growth. This is really like in the state that we and our customers and partners trying to validate and break through into each and every use case in the next few quarters.
[Operator Instructions] 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 e-mail the company. Thank you, and have a great day.
Thank you.