Agora S.A. (AGO) Earnings Call Transcript & Summary

Hello, everyone. Good morning, and good evening. Welcome to Morgan Stanley Life After COVID Thematic Conference. My name is Yang Liu, China's software analyst at Morgan Stanley. In this session, I'm more than happier to have Ms. Fionna Chen, IR Director of Agora to give us a presentation of her company. Agora is a leading real-time engagement platform as a service company. Before I hand over to Fionna for the presentation, let me read the disclaimer first. This webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employee only. This webcast is not for the member of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. For the interest of time, without further delay, let me pass over to Fionna.

Thank you, Yang. Thank you, everyone, for coming to our session today and tonight. So this presentation, we're going to go through some of the basics about Agora platform. What do we do? What are the functions that our platform provides? And also with some recent quarters, financials and updates. However, our earnings release will be next week. So we are not going to have any Q&A sessions after the presentation. But please do feel free to dial-in into our earnings release call. The details will be on our IR website. So let's go straight into the presentation. All right. About Agora, we provide developers video APIs for real-time engagement so that they can easily embed realtime video engagement functionality into their software applications without the need to develop the whole technology stack or build the underlying infrastructure themselves. Historically, users will need to install a dedicated app to use video engagement such as Skype, FaceTime or Zoom. However, in more and more use cases, users are looking for contactual realtime video engagement that is directly embedded in the application they're already using, whatever that be for education, dating or gaming purposes, enabling richer contacts and a more seamless and immersive user experience with no need to switching between apps. This is exactly what we do. And the Agora platform provides developers simple, flexible and powerful application programming interfaces, or APIs, to embed real-time video engagement experiences into any application. Our technology makes developers' work more efficient and effective, helping them bring new apps to market and deliver a better end-user experience, resulting in secure user relationships. Traditionally, it takes a team of multiple developers several months to build real-time video function -- engagement functionalities with high upfront infrastructure costs and without a guarantee on quality and compatibility. With Agora platforms, you just need one or two developers, or most cases, only one week of coding and testing. No server to be deployed or any infrastructure to be built. And you can get global coverage with stable quality, a wide range of functionalities and broad compatibility across platforms. This is why tens of thousands of developers around the globe have chosen Agora. Since our inception in 2014, we have enabled use cases across different industries. For example, in social, we helped dating and matchmaking apps to add in-app video chat and helped music apps to enable people to sing karaoke together online. In entertainment, we enabled interactive live streaming where users can interact with performers, and performers can battle with each other through real-time video. In education, we enabled classes across continents and in interactive large classrooms with thousands of students in one class. Every day, many U.S. and Philippino teachers teach English to Chinese students through our technology. In gaming, we enabled a social deduction game to be played online for the first time. Food delivery companies use our in-app voice to call customers when food arrives. In financial services, we enable video banking and video car insurance claims. In IoT, we power smart watches for children so they can call their parents through video when they get lost or have an emergency. And the list just goes on and on. The key components of our platform are our Software Defined Real-Time Network, or SD-RTN, and our Software Development Kit, or SDK. On top of the SD-RTN and SDK, we offer developers products such as real-time video, real-time voice, real-time messaging, real-time recording and many other use case specific products. All these products can be accessed through simple APIs and are fully programmable. The next page illustrates how our platform works. On the 2 sides of the page, you can see that our SDK runs on end users' devices and handles the capture preprocessing, encoding, last-mile transmission, decoding, postprocessing and a playback of video and audio signals. In the middle, you can see that all the real-time data transmission across the internet backbone is handled by the SD-RTN. It is a virtual network overlaid on top of the public internet, running over more than 200 data centers worldwide. It works like a traffic navigator within the internet. Each data center constantly probes the network conditions around it. Based on this information, the SD-RTN use data packets to avoid a congestion and minimize latency. The SD-RTN is widely distributed and highly reliable, and it provides the standout and a fundamental quality of service for our video engagement sessions. Our first competitive strength is our superior technology. The most important reason why developers choose Agora is our quality of experience. This is because real-time engagement is often mission-critical to them. Essentially, we're selling quality assurance, not just software features. Our massive user base is what really helps us to improve the quality because no simulation can reflect the actual situation. As the early mover in the market, we have more customers, more users, which brings us more data, more feedback and more technical challenges. As we work through these challenges, our quality improves, which attracts even more customers and users. We believe that this represents a significant competitive advantage. Our second strength is better and professional products, which comes from our singular focus on RTE. By being focused, we can prioritize our entire platform for minimizing latency, which is extremely difficult for a full-service cloud provider, given a centralized backbone and the competing needs of nonreal-time products. By being focused, we are able to go deeper and offer much more comprehensive real-time APIs, more control and more visibility features and, therefore, be more developer friendly. By being an independent platform, we are also attractive to developers who want to avoid conflicts of interest. Our third strength is a vibrant ecosystem. We have cultivated a large and engaged developer community with more than 210,000 applications that have registered on our platform since our inception through June 2020. We have also attracted many partners to offer additional features on our platform, such as content moderation, voice recognition and so on. And we enjoy a flywheel effect here. The more developers we serve, the more feedback we get from them, which can help us make our platform better. A better platform attracts more partners to bring in more features, which, in turn, attracts more developers. We are focused on building developer community enthusiasm and innovation. We have designed our platform so that it is easy to adopt and enable self service, ensuring a flexible, low-touch experience for developers. We offer 10,000 free minutes per app per month so that developers can experiment with our platform. We have a transparent pay-as-you-go pricing model so that we can grow with our developers as they grow and scale their offerings. For large customers, we deploy our own engineers to help them integrate and customize our products, creating differentiated user experience for them. As you can see, this business model is very efficient and scalable, and it has allowed us to deliver very strong financial results in the second quarter. We have a straightforward usage-based revenue model. Each developers get 10,000 minutes for free every month, and once they go beyond that, we charge them by the minute, and then they become our customers. Obviously, voice, video and high-definition video will have different unit prices. We also offer tiered volume discounts to large customers and they are billed monthly. Next, we're going to go through the recent quarter's financials. During the second quarter, we continued to experience significant global usage and revenue growth. We continue to see expansion of our platform as we ended second quarter at 1,486 active customers, with greater than $100 of revenue during the preceding 12 months, up by -- which is up by 86% year-over-year. Working with our developers around the world, we have seen many innovative and promising use cases emerging across various verticals. For example, we recently announced our partnership with Scener, which is a watch party platform that enables anyone to connect and interact over video chat while watching streaming content together. Users can host either public or private cowatching sessions, where content is synchronized with participants with real-time video chat, which is powered by Agora, Scener has seen 100x growth since March because of the novel shared experience that it creates to bring people together in the same virtual theater at the comfort of their own home. Another example is co-listening service launched by a leading online music entertainment platform. After creating a public or private virtual room, the host becomes a DJ and chooses what music to play. On top of the original high-definition soundtrack streaming to all members in a virtual room overlays a real-time voice engagement layer that is powered by Agora. It brings users the intimate experience of listening to music and sharing your thoughts together with friends without any compromise on music quality. Online exam or test proctoring also emerged in this quarter as a promising use case. Here, candidates are monitored online during the test duration through a real-time video connection, and the teachers can get access to the screen of the candidates, which is both powered by our technology. This kind of online proctoring and remote invigilation is expanding at a fast pace in both education and corporate training. Those are just 3 out of hundreds contactual real-time engagement use cases that are impossible to achieve without the Agora platform. Our total revenue grew by 128% year-over-year to $33.9 million in the second quarter of 2020. And this was due to both organic growth and the spike in usage, which was caused by COVID-19. On a sequential basis, compared with the first quarter, we continued to see usage at a heightened level with strong sequential growth in the U.S. and the rest of the world as social distancing and travel restrictions remain in place. On the other hand, China gradually came back to normal, which led to lower usage compared to the peak levels we saw in February and March, but still much higher than the pre-COVID usage levels. We still believe that COVID has changed people's long-term behavior towards video engagement and even beyond that. For this reason, we see the increased usage during this quarter as a promising indicator of our longer-term growth opportunity, which is not just a blip on the radar. Our trailing 12-month constant currency dollar-based net expansion rate was 183%, again, partially due to COVID-19 as the situation stabilizes. Hopefully, we expect our expansion rate will likely come at to levels similar to what we saw in 2018 and 2019. Next, our non-GAAP gross margin for the second quarter was 66.6%, which was 2.8% lower than the second quarter last year, primarily due to our international expansion to regions with higher infrastructure costs such as South Asia and South America. Because we currently use one standard pricing for all regions, our gross margin in these regions with higher cost is significantly lower than our overall gross margin. We plan to address this issue by further optimizing our cost in these regions and gradually shifting towards region-specific pricing. Our non-GAAP R&D expenses were $10.5 million in second quarter, up by 114% year-over-year as we continued to build our R&D team. R&D expenses represented 31.1% of total revenue in the quarter, slightly lower than 33% in Q2 last year. Looking forward, we will continue to focus our investment on R&D to drive product innovation and strengthen our technology leadership. Non-GAAP sales and marketing expenses were $5.5 million in Q2, up by 22% year-over-year, mainly attributable to team expansion and increased advertising expenses. Sales and marketing expenses represented 16.2% of total revenue in the quarter compared to 30.4% in Q2 last year. The significant 14% drop clearly demonstrates the efficiency and scalability of our developer-centric, go-to-market model. Our non-GAAP G&A expenses were $2.6 million in second quarter, up by 108% year-over-year, mainly due to team expansion and professional service fees related to the IPO. G&A expenses represented 7.6% of total revenues in the quarter compared to 8.3% in Q2 last year. Non-GAAP operating income was $4.7 million, translating to a 13.9% non-GAAP operating margin for the quarter. This compares to a net loss margin of 2.2% in Q2 last year. Adjusted EBITDA was $5.7 million in Q2 with a 16.9% margin compared to a 0.7% margin in the second quarter last year. Next, we were turning to cash flow. Our operating cash flow was positive $7.5 million in second quarter, up from negative $4.9 million last year. Free cash flow was positive $.6 million, up from negative $6.6 million last year. Moving to the balance sheet. We ended second quarter with $641 million in cash and cash equivalents, up from $152 million at the end of first quarter. The increase was primarily due to net proceeds from our IPO and the concurrent private placement as well as our positive free cash flow. Thank you for your time today. This concludes our presentation.

Thank you, Fionna, for the great presentation. And thanks everyone for participation. I think Agora will release earnings next week, and we look forward to see more details for the updated performance in the quarter. And everyone, thank you, and bye-bye. Have a good day.

Thank you.