Agora Inc
NASDAQ:API
Earnings Call Analysis
Q4-2023 Analysis
Agora Inc
The company reported a total revenue of $36 million in Q4, marking a modest quarter-over-quarter growth of 2.9%, against a backdrop of a 10.2% year-over-year decline. Agora's revenue remained steady at $15.3 million, paralleling the previous quarter but reflecting a 3.2% decrease from the previous year. Shengwang's revenue saw a 5% boost from the prior quarter, although year-over-year, it faced a 9.6% decline. Notably, the company achieved a non-GAAP net income of $1.4 million in Q4, showcasing a significant recovery from a history of losses.
Active customer growth for Agora and Shengwang stood at 18% and 12% respectively, over the past year, bringing the total to nearly 1,700 and over 4,100. The closure of Twilio's programmable video product presents fresh opportunities for Agora, with the company offering up to two months of free service to entice Twilio's customer base.
The company is focusing on innovations in real-time engagement, artificial intelligence, and AR/VR technologies. They launched a new signaling product, initiated discussions around application of generative AI in industry via webinars, and are optimistic about the capabilities of OpenAI's generative AI and their own Vision Pro's high-resolution video potential.
Agora is expanding its offerings with features like mini-games that overlay video live streaming and virtual sound card technology to enhance user engagement. These initiatives have led to increased user participation and monetization opportunities, demonstrating the company's strategic focus on customer engagement and platform stickiness.
The company has reversed the tide from negative to positive operating cash flow, reaching $3.7 million this quarter. Agora has also embarked on shareholder-friendly actions, repurchasing approximately $104.3 million worth of shares, which is more than half of their $200 million share repurchase program. Additionally, the board has extended the same buyback program for another 12 months.
For the upcoming Q1 of 2024, revenue is expected to range between $32 million and $34 million. The adjusted gross margin maintained a robust figure at 65.2%, marginally higher than the same quarter in the previous year, despite a slight decrease from the preceding quarter. These figures underscore the company's improved operational efficiency and cost optimization strategies.
The adjusted gross margin recorded a 65.2% mark, slightly better year-over-year thanks to product mix changes and optimizations. Moreover, adjusted sales and marketing expenses witnessed a dramatic 40.6% year-over-year decrease, evidencing stringent cost control measures while adjusted R&D and G&A expenses took a dive by 20.5%, further emphasizing operational efficiency.
According to Executives, operational expenses are expected to remain roughly on par with Q4's baseline, without anticipating a significant rise. This reflects the company's intent to continue its disciplined approach to expense management in the coming year.
The company notes significant growth momentum in media, entertainment, and telehealth sectors, particularly in developed markets. Despite facing pricing pressures in emerging markets, they remain optimistic about a resilience observed in the U.S. and other developed regions. The competitive landscape sees a continued consolidation with rivals like Twilio exiting the market, marking potential share gain opportunities for Agora.
Agora is eyeing expansion and revenue growth, buoyed by the resilience in developed markets, the anticipated increase in revenue contribution, and a healthy gross margin. The exit of several competitors from the market, including Twilio, is interpreted as an opportunity for Agora to enhance its market share. Furthermore, with Chinese internet companies heavily focusing on overseas expansion, Agora anticipates a positive trend in digital transformation leading to additional growth avenues.
Agora is positioned for an optimistic 2024 with expectations of moderate revenue growth from its Agora business line, particularly due to market resilience and emerging use cases. Product offerings like Vision Pro are anticipated to unlock attractive new use cases and drive consumer usage, with assurances that operational expenses won't spike significantly from the last quarter's base. The company is confident in its ability to convert Twilio's exiting customer base and capitalize on the market opportunities this presents.
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Good day, and thank you for standing by. Welcome to the Agora Inc. Fourth Quarter and Fiscal Year 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 presentation, 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 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 the performance of its business and which the company discussed in detail in its filings with the SEC, including today's earnings press release and the risk factors and other information contained in the financial prospectus relating to its initial public offering. Agora Inc. remains no obligation 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.
Thanks, operator, and welcome, everyone, to our earnings call. Let me first quickly review our operating results in Q4. Revenue was $15.3 million for Agora, flat compared to last quarter and RMB 148.3 million for Shengwang, an increase of 5% quarter-over-quarter mainly by -- mainly driven by revenue growth from digital transformation customers.
As of the end of 2023, we have close to 1,700 active customers for Agora and more than 4,100 for Shengwang, an increase of 18% and 12%, respectively, compared to 1 year ago.
I'm pleased to announce that we achieved a non-GAAP net income of $1.4 million in Q4 despite a very challenging operating environment, thanks to our effective cost control and relentless drive for revenue growth. Jingbo will discuss in more detail shortly.
Now moving on to our business product and technology update for the quarter. Let's start with Agora. In this quarter, we held a series of webinars to discuss how real-time engagement, which combined with state-of-art technologies in artificial intelligence, and AR/VR can greatly influence or even transform various industry, including live shopping, telehealth and Internet of Things.
For example, in live shopping, we see more and more reputable brands and platforms relying on interactive live streaming to redefine the way consumers make their buying decisions. By creating a personalized social and engaging experience for the audience, a loyal community of repeated buyers will thrive and help drive sales.
The combination of RTE, AI and AR/VR is driving a rapid revolution of IoT use cases. For example, heavy machinery operators can work remotely with an enhanced view and that sees beyond blind spots, enabling them to carry out challenging tasks in a safe and efficient manner. For autonomous drive -- autonomous vehicles or AI-powered robotics, human operators can monitor their operations from remote locations and take over whenever necessary.
These series of webinars was well received and attracted thousands of participants globally. We believe Agora is uniquely positioned to facilitate our innovation in this industry by leveraging our current edge RTE technology and deep understanding of industry-specific use cases.
In this quarter, we also released a brand-new beta version of our signaling product, which provides real-time data synchronization and low-latency event notifications between devices and servers. The new version can now accommodate an unlimited number of users per channel, deliver better synchronization, support storage and manage conflicting message effectively. It enables a wide range of use cases such as real-time bidding in live shopping, virtual gifting in live streaming, player status synchronization in online gaming, live polling in education and remote command of IoT devices.
In December, Twilio announced the upcoming end of life of its programmable video product, which was competing solution with our video calling product. We have pushed a series of blogs covering guidance and best practice for migrating from Twilio to Agora across major operating system and developer platforms. Additionally, we are offering up to 2 months free to customers who switched from Twilio. We believe Agora is the ideal alternative for Twilio's video customers base and expect to enhance our global market share following Twilio's exit.
We are also thrilled to see OpenAI's recent launch of Sora, a powerful AI model that can create realistic and imaginative video clips based on [ task ] instruction. It aligns with our early view that multimodal capabilities of generative AI models will advance rapidly, eventually enabling human users to directly interact with AI models in voice and video format. This technology breakthrough in AI will greatly expand the boundary of real-time engagement and bring about tremendous new possibilities. I believe Agora is well positioned to play a critical role in facilitating massive [ gate ] transmission between AI models and human users.
Moving on to Shengwang. Following the availability of Apple Vision Pro earlier this month, we have enabled many customers to launch applications in the Vision Pro App Store. I personally use Vision Pro, and I believe, it marks an important breakthrough in XR technology. The high video resolution and the see-through of video capability of Vision Pro demand higher-quality video content and opens a possibility for hologram video content consumption and interactions. For example, people will be able to watch a live keynote speech in hologram format on Vision Pro. Our network is well positioned to power such content and interaction.
Over the past few months, mini games that overlay on video live streaming have been gaining popularity among social platforms. For example, a round out of [ noodle ] can serve as icebreaker in a matchmaking room. Live streaming channels can [ import ] team-based mini games where audience can participate by sending voice chat and gifts.
We have partners with leading mini game developers to offer our customers a wide range of mini games that can be easily embedded into their applications. Early data from our customers shows that the mini game integration has result in increased user participation, longer session duration and more monetized opportunities.
In this quarter, we also introduced virtual sound card, an advanced feature that simulates key components of a professional hardware sound card, such as exciter, compressor, equalizer and reverberator to process end users' voice in real time. Users can now easily enhance and modify their voices with only a cellphone without the need to purchase a computer with a professional sound card.
For example, a customer recently add virtual sound card in their online [indiscernible] game rooms. Users can choose from a range of pre-set specifics to make their voices clearer, sweeter, [indiscernible] or more mature. Slightly off-key notes can also be adjusted automatically. This capability makes users more confident to participate, therefore, boosting user engagement and stickiness on our customers' platform.
Before concluding my prepared remarks, I would like to thank both Agora and Shengwang team for their commitment and diligence during this challenging period. We not only delivered consecutive quarter-over-quarter top line growth since the second quarter, but also achieved non-GAAP probability in the fourth quarter. Looking ahead at 2024, we will keep focusing on creating customer value and enhancing our competitive advantage with the goal of expanding our market share globally.
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 fourth quarter of 2023, and then I will discuss outlook for first quarter of 2024. Total revenues were $36 million in the fourth quarter, an increase of 2.9% quarter-over-quarter and a decrease of 10.2% year-on-year.
Agora's revenues were $15.3 million in the fourth quarter, flat compared to last quarter and decreased 3.2% year-over-year. The year-over-year decrease was primarily due to reduced usage from customers in emerging markets due to a challenging macroeconomic environment and tightening financing conditions starting from the second half of 2022.
Shengwang revenues were RMB 148.7 million in the fourth quarter, an increase of 5% quarter-over-quarter and a decrease of 9.6% year-over-year, excluding revenues from the disposed CEC business. The quarter-over-quarter increase was primarily due to an increase in revenues from digital transformation customers or large enterprises. 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 93% for Agora and 82% 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 of goodwill, depreciation of property and equipment and amortization of land use rights.
Adjusted gross margin for the fourth quarter was 65.2%, which was 0.3% higher than Q4 2023 and 1.7% lower than Q3 2023. The year-over-year increase was mainly due to the change in product mix and the implementation of technical and infrastructural optimizations. The quarter-over-quarter decrease was mainly due to an increase in on-premises solution revenue which has a and lower gross margin.
As we continue to implement effective expense controls, our adjusted R&D expenses decreased 18% year-over-year to $13.7 million in Q4. Adjusted R&D expenses represented 38% of total revenues in the quarter compared to 41.6% in Q4 last year.
Adjusted sales and marketing expenses were $6.3 million in Q4, decreased 40.6% year-over-year. Sales and marketing expenses represented 17.5% of total revenue in the quarter compared to 26.4% in Q4 last year.
Adjusted G&A expenses were $5.8 million in Q4, decreased 20.5% year-over-year. G&A expenses represented 16% of total revenues in the quarter compared to 18.2% in Q4 last year.
Adjusted EBITDA was negative $2 million, translating to a 5.6% adjusted EBITDA loss margin fourth quarter, significantly lower than the adjusted EBITDA loss margin of 21.1% in Q4 last year.
Non-GAAP net income was $1.4 million in Q4, translating to a 3.9% net income margin for the quarter compared to a net -- non-GAAP net loss margin of 39.3% in Q4 last year.
As Tony has mentioned, thanks to our effective cost controls and relentless drive for revenue growth, we achieved profitability on a non-GAAP basis for the first time in more than 3 years. This demonstrates the resilience of our business amid a very challenging operating environment as well as our continued discipline and efforts in optimizing our cost structure.
Now turning to cash flow. Operating cash flow was positive $3.7 million in Q4 compared to negative $4.6 million last year. Free cash flow was positive $3.4 million compared to negative $6.1 million last year.
Moving on the balance sheet. We ended Q4 with $371.8 million in cash, cash equivalents and deposits and financial products issued by banks or $4.03 per ADS.
Net cash outflow. Net cash outflow in the quarter was mainly due to share repurchase of $10.1 million, which was offset in part by a free cash flow of $3.6 million.
Since the Board approved our share repurchase program in February 2022 and as of December 31, 2023, we had returned approximately $104.3 million to our shareholders through share repurchases, reducing our share count by roughly 18%. So far, we have completed 52% of a USD 200 million share repurchase program.
We are pleased to announce that our Board has also had another 12-month extension of a $200 million share repurchase program through end of February next year with all other terms unchanged, which is a vote of confidence on financial strength and long-term prospect of the business.
Now turning to guidance. There's a seasonal impact, especially reduced usage in certain regions. During Lunar New Year, for the first quarter of 2024, we currently expect total revenues to be between $32 million and $34 million. This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change.
In closing, we are very proud of our execution and strong financial results during this challenging period. Returning to profitability is a remarkable milestone. Thank you to both Agora and Shengwang teams for hard work and sacrifice in the past quarters. Thank you, everyone, for attending the call today. Let's open it up for questions.
[Operator Instructions] And I show our first question comes from the line of Yang Liu from Morgan Stanley.
First, congratulations on the non-GAAP profit in last quarter 2023. I have three questions here. The first one is, what is the management outlook in terms of the 2024 full year profit? Do you think the profitability in the past quarter will be sustained or even be improved in 2024, especially consider the guidance in first quarter implies some year-on-year revenue decline, whether the positive profit can be maintained? That's the first question.
The second one is we would like to have some update in terms of the domestic Internet companies going abroad, whether Agora can benefit from that in the overseas market. And what is the revenue split between Agora and Shengwang in the coming 2024 full year? Do you think the Agora revenue contribution will continue to drop a little bit or will turn around in terms of the total contribution?
The third question is regarding the partnership with Vision Pro. What will be the revenue model behind this kind of partnership? Will it be based on the consumer time spent? And if not, what will be the revenue model?
I'll take the first question. Yes, the Q1 revenue guidance would imply a year-on-year revenue decrease. And as you know, Q1 is generally the lowest season for the business. If you look at our numbers in the past few years, revenue generally debilitated in Q1 sequentially compared to Q4. That's due to both seasonality.
As I mentioned, in some of the regions where we operate as well as the Chinese New Year is a low season for social apps and for education apparently, so usage will drop during that holiday. And also for digital transformation businesses, a lot of the projects tend to be -- we tend to book those revenues towards the end of the year. So Q1 is also a low season. Compared to last year, obviously, we have the China Internet regulatory changes, [indiscernible] environment in Q2. So last year, Q1 was relatively higher base. So that's on Q1 guidance.
In terms of full year 2024, obviously, there remains a lot of uncertainties around the world, including the macroeconomic environment, [ funding ] environment and so on, so I will give you my estimate. So we expect our revenue to grow on a year-on-year basis starting from Q2.
And our goal is to reach double-digit revenue growth in Q4 year-on-year. And regardless of revenue growth, we do not expect expenses will grow this year compared to the most recent base. So it's going to be a pretty stable cost base with moderate revenue growth. So if you run the numbers, hopefully, we'll be able to get closer to profitability and even improve the profitability towards the second half of the year. But as for Q1, it will be challenging to achieve profitability in Q1 given the revenue [ dip ]. That's the third question.
Yes. About talking China Internet companies going overseas, I think we are in a very strong, unique position to help them because on one side, we do have a strong and very influential customer base in China Internet industry. A lot of them were actively planning going overseas or expanding in global market. While we help them, we can leverage a lot of our existing partnership and customer base knowledge and the market knowledge with our global practice with local customer base and market already. And we have been helping people with all those knowledge and know-hows already, and those are the unique advantage we could have to help them to grow into a bigger global market.
And in terms of revenue split, we don't think it will change very significantly. However, we do -- we are a little bit more optimistic about the Agora business, given especially the resilience we are seeing in the U.S. market and other developed market and also some of the emerging use cases we see there.
And also, Tony mentioned to you the exit. They also give us additional room to grow in those markets, so we expect some moderate increase in terms of the percentage of revenue contribution coming from the Agora business as we move along in 2024.
About the Vision Pro, the revenue model is going to -- similar to what we do, we are still going to be -- enable use case and customers by selling API-based capabilities. Although with increased offerings from our overall product portfolio, we might have a more diverse pricing model with all the different SKUs -- different products we are selling into. But overall, it will tie to consumer usage on Vision Pro.
And in mid-term to long term, we do see the powerful impact where Vision Pro can enable a lot more attractive use case -- new use cases or make some new use cases more viable or more meaningful for consumer or business use cases, where we would be able to support both persona-based social interactions or business collaborations in that platform. So -- and we also anticipate a lot of other XR device. We're catching up -- we play catch up with Vision Pro to make this capability to be available more widely for customers and the consumers.
Can I follow up with one quick question? When Jingbo, mentioned the OpEx will be flattish, do you mean that flattish versus 2023 full year or flattish versus the last quarter in 2023? Because over the past year, the sequential quarterly OpEx has been on a downward trend. So I would like to clarify whether it's a year-on-year or based on first quarter?
The base will be [ first ] quarter. Would probably not be exactly the same. It may fluctuate a little bit, but it will not be significantly higher from the base in Q4.
And I show our next question comes from the line of Harry Zhuang from Bank of America.
I also have three questions. The first one is the demand outlook. Could management share more color on the demand outlook competition landscape and price trend in both overseas and domestic market?
And the second question is, what does [ manage see ] the potential impact on our business from the OpenAI's video generator and so on? And the third question is on the potential market share gain. Management said that after Twilio exit in the market, the company could potentially gain share and how will Agora seize this opportunity? And what is the current acceptance from the customers transitioning from Twilio service to our service?
All right. I'll take those questions. First of all, in terms of the market and competitive landscape we see in U.S. and international markets, we do see strong growth momentum in media and entertainment sector and telehealth verticals. Live shopping, IoT, particularly in developed market, those are the areas that we see a strong growth momentum.
Price-wise, we see more pressure in emerging markets, where it's impacted by macro environment, including the currency exchange rate, et cetera. Price has been healthy and stable in developed markets, U.S. and European market.
Twilio. About Twilio's exit. Our -- what we're seeing in terms of competition, Twilio's exit is only a sign of competitors leaving the market. It's not just Twilio. There are other start-up competitors who are struggling and downsizing of their operations. We expect we will be gaining market share with those changes.
In China market, we see growth potentials in going overseas all the -- especially Internet companies based in China now looking heavily in going overseas by expansion. And although -- also digital transformation is still having a clear trend to grow. And also, on IoT side of the customer base are seeing more actively growth.
Overall usage in both markets, we're actually seeing still growing despite all the regulatory and macro changes, which is the foundation of overall customer value growth and revenue growth.
Price-wise in China market generally drops about 10% over the last few years and often happen in the beginning of the year. This put some pressure to our Q1 result. Together with a seasonality issue, like Chinese New Year activity and change of consumer behavior change, our gross margin -- but our gross margin remains quite healthy.
In terms of competitive landscape, it's largely unchanged in China market during the past quarter. While there are -- we continue to see there are more competitors kind of backing off, which in last quarter, we see another large Internet company reduced their team in this area in Q4. I expect market to continue to consolidate.
And the next question is about the latest OpenAI offering video generation. I think this is only the very early stage of video format generating model, but we can see the huge potential and the possibility lies ahead. Currently, the model is able to generate a short video clips based on text, image or video prompting and can already be used in some of customers' use cases to enhance user experience.
For example, the virtual background of video chat room or live streaming session can be a short video clip generated by AI model as the overall background. It could be either realistic or imaginary to perfectly match the context or topics of the channel. This will create more engaging and immersive experience for audience.
In the future, we believe human user will be able to directly interact with AI models in voice and video format, as we mentioned before. This will make up the crucial -- the critical infrastructure as a massive amount of data will flow between users and AI models in real time.
Maybe to add a little to Twilio's exist, we think -- like I said, it's only merely a part of competitors leaving this market. They're backing off or focusing on their more administrative business. And as I mentioned, we see this happen in both global market and China market, including, let's say, in U.S. market, it's not just Twilio. There are some other smaller competitors are also downsizing or stopped working in this area. The competitive environment with that we see is clearly improving. Of course, Twilio has still a sizable customer base, which we already start to work on to convert them. So this is a clear room for us to grow into.
[Operator Instructions] And I show our next question comes from the line of Bing Duan from Nomura.
Just one follow-up question from me about the Twilio's exit in the programmable video product segment. So can you share more color about the reason behind this? Is this more because of the competition, the fiercer competition or because of the demand is not growing strongly in the U.S. market? And about we offer 2 months free customers switch from Twilio, how do we think that would affect our user growth and top line growth in the next 1 or 2 quarters?
I do think Twilio's exit is mainly because of the fierce of competition in this area because as we repeatedly state, this area is a very tech-savvy sector, where all the offerings requires a lot of investment in technology and product. Some competitors' products only build on top of a web or PC open source projects or a simple, rather lean, layer of technology add-ons, which can only serve a [ fraction ] part of the demand for our RTE use cases which, of course, limited their capability to expand and grow in this area. And especially for a company like Twilio, they might want to be more focused on their mainstream business. We see that's the main reason.
There could be a reason that COVID demand is also fading away. But as I mentioned in earlier statement, we -- while the COVID demand is fading away, we do see there are growth -- very active use cases growth in developed market in global market. So I would rather just put that as another factor in their leaving.
In terms of our offerings, I do think the 2-month free offer for a lot of small, mid-sized customers is a very important reason for them to consider and make them easier to decide to jump on our platform. We do have some other strengths and collaborations or work with rather large customer base, which our team is focusing on to help them to migrate to our platform.
[Operator Instructions] I'm showing no further questions in the queue. This concludes our Q&A session. Thank you, everybody, for attending the 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 are any questions, please feel free to e-mail the company. Thank you, and have a good day.
Thank you. Buh-bye.
Thank you.
Buh-bye.