Agora Inc

NASDAQ:API

Q1-2025 Earnings Call

[Operator]

Good day, and thank you for standing by. Welcome to Agora Inc. First Quarter 2025 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.

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 final 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.

And with that, let me turn it over to Tony. Please go ahead, Tony.

[Bin Zhao, executive]

Thanks operator, and welcome, everyone, to our earnings call. I'll first review our operating results from the past quarter. I'm very happy to report our second consecutive quarter of GAAP profitability in Q1, driven by double-digit revenue growth year-over-year on a comparable basis and disciplined cost management. This is a great achievement, and I want to thank Agora and Shengwang teams for their efforts and dedication.

Total revenue in Q1 were $33.3 million, up 12% year-over-year, excluding revenues from certain end of sales low-margin products, with healthy business expansion and net retention rate recovery from both Agora and Shengwang sites.

Our GAAP net profit for the quarter, though still at a modest base, more than doubled from the previous quarter. As you know, Q1 typically marks our seasonal low point with fewer calendar days than reduced online activity during the New Year holiday period. Considering the seasonal trend in our current business momentum, we are confident that we will maintain GAAP profitability for the remainder of the year.

At end of Q1, we had more than 1,800 active customers for Agora and close to 2,000 for Shengwang excluding Easemob, both representing an increase of 5% compared to 1 year ago.

Now let's turn to our business product and the technology updates for the quarter. In March, we announced the general availability of our Conversational AI Engine in China, enabling developers to create interactive voice experience with any large language model. This product has been refined based on extensive customer feedback during the private and public beta phase. Today, this product is still in the public beta stage for the U.S. and global markets, and it already delivers industry-leading performance on latency, noise suppression, interruption handling and network resilience.

Our Conversational AI Engine unlocks innovation across multiple verticals and use cases from virtual components and shopping assistance to customer service and outbound marketing. Particularly, we believe education is where the Conversational AI experience can have a huge impact in boosting student engagement with personalized content and adaptive practice.

Imagine an AI teaching assistant that talks in real time adjusting to each student's needs and providing truly personalized instructions at scale. We are already seeing this vision come to life. Several ad tech customers, such as Dou Shen AI in China, are in the advanced stage of developing AI-powered language tutoring product with our solution.

In Q1, we also launched our Conversational AI device kit, our Turnkey IoT module combining our software, cloud service and high-performance chips from Beken. This device kit enables device manufacturers to add Conversational AI to any IoT devices from toys and robotics to smart speakers. As a Turnkey Solution, it can significantly reduce upfront R&D cost and time to market for device manufacturers. For example, our customer, Robopoet, announced their latest AI companion robot, Fuzzoo, at the Mobile World Congress, powered by our device kit, Fuzzoo listens, senses and response in real time, creating personalized support and even emotional connections with end users.

We are also making exciting progress on our open source initiatives and developers ecosystem. TEN, our sponsored open source project for building real-time Conversational AI agents continues to gain remarkable traction with 6,000 GitHub Stars. It is the fastest-growing project in its category globally. Leading cloud providers, including AWS and Oracle Cloud are providing support for deploying TEN on their infrastructure. Recently, we launched Voice Activities Detection and Turn Detection modules as part of our TEN project, which outperformed our existing Open-Sourced alternatives, further demonstrating our commitment to the community and the Conversational AI ecosystem.

Over the past few months, we have seen a tremendous amount of interest in our Conversational AI products and Open-Sourced projects. Product registrations and inquiries following the product launch have reached record highs. And our developer workshops in Beijing, Tokyo and San Francisco have attracted large passionate audience. Today, many customers are working closely with us in proof of concept development.

Before I wrap up, I want to give special recognition to our incredible teams at Agora and Shengwang. In this fast-moving AI revolution, their dedication and innovative spirit are what allow us to pioneer the future of human AI interruption. Each day, we're not just keeping pace with changes, we are creating it, unlocking new possibilities and shaping a new paradigm. The opportunities ahead are truly exciting, and I cannot wait to share our next chapter of progress with all of you.

With that, let me turn things over to Jingbo, who will review our financial results.

[Jingbo Wang, executive]

Thank you, Tony. Hello, everyone. Let me start by first reviewing financial results for the first quarter of 2025. And then I will discuss outlook for the second quarter.

Total revenues for the first quarter reached $33.3 million, exceeding the high end of our guidance range. On a year-over-year basis and excluding revenues from certain end-of-sale low-margin products, revenue growth accelerated to 12.1%, up from 3.6% in Q4 last year. This demonstrates a clear pickup in our business momentum.

Our core revenues reached $18.6 million in Q1, growing 17.7% year-over-year and 6.9% sequentially. This sustained performance reflects our successful market expansion and growing adoption, particularly in high potential verticals such as live shopping and entertainment where usage continues to grow.

Shengwang revenues reached RMB 105.5 million in Q1. Excluding certain end-of-sale, low-margin products, Shengwang revenues grew 6.7% year-over-year, and declined 13.7% sequentially. The year-over-year growth reflects continued business expansion and adoption in key verticals, such as entertainment and IoT. While the sequential decline is mainly due to normal seasonality, with Q4 historically seen peak demand for digital transformation projects and Q1 experiencing software activity from social and education customers due to holidays. Dollar-based net retention rate is 96% for Agora and 85% for Shengwang, both improved from previous quarters.

Moving on to cost expenses. Gross margin for the first quarter was 68%. If we exclude gross profit from certain end-of-sale products, gross margin of continuing business increased 0.6% year-over-year and 1.4% quarter-over-quarter.

As we mentioned in previous earnings calls, we restructured and reduced our global workforce in November 2024. As a result, operating expenses decreased $6.1 million from $32.6 million in Q2 2024 as a baseline and reached $26.5 million in the first quarter.

R&D expenses were $14 million in Q1, decreased 22.7% year-over-year. R&D expenses represented 42.1% of total revenues in the quarter compared to 54.5% in Q1 last year.

Sales and marketing expenses were $6.2 million in Q1, decreased 8.5% year-over-year. Sales and marketing expenses represented 18.7% of total revenues in the quarter compared to 20.5% in Q1 last year.

G&A expenses were $6.2 million in Q1, decreased 25.6% year-over-year. G&A expenses represented 18.8% of total revenues in the quarter compared to 25.2% in Q1 last year.

Moving on to the bottom line. We delivered net income of $0.4 million in Q1, representing a 1.2% net income margin. This represents a substantial turnaround from the 28.7% net loss margin in Q1 last year and marks our second consecutive quarter of GAAP profitability. With our current business momentum and visibility, we anticipate maintaining profitability throughout 2025.

Now turning to cash flow. Operating cash flow was $17.6 million in Q1 compared to negative $6.5 million last year. The positive cash flow included $17.8 million in interest proceeds from maturity of bank deposits and financial products issued by banks.

Moving on to balance sheet. We ended Q1 with $388 million in cash, cash equivalents, bank deposits and financial products issued by banks. Net cash inflow in the quarter was mainly due to operating cash flow of $17.6 million and release of $3.5 million in restricted cash, which was offset in part by a share repurchase of $1.2 million. Since our Board approved the share repurchase program in February 2022, we have repurchased $116.4 million worth of shares through March 31, 2025. So far in Q2, we have already bought back over $8 million worth of shares. We remain committed to creating shareholder value through this program while preserving the financial flexibility needed to invest in future growth opportunities.

Now turning to guidance. For the second quarter of 2025, we currently expect total revenues to be between $33 million and $35 million compared to $30.9 million in the second quarter of 2024, representing year-over-year growth rate of 6.8% to 13.3%, if revenues from certain end-of-sale, low-margin products are excluded. This all reflects our current and preliminary views on the market and operational conditions, which are subject to change.

In closing, I want to take a moment to recognize the exceptional work of the Agora and Shengwang teams. The dedication and execution have made these outstanding results possible. This quarter, we are proud to have delivered revenue above expectations, achieved consecutive GAAP profitability and maintained a robust financial position.

Thank you all for joining in today's call. We appreciate your ongoing support. Let's open it up for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of David Lee from Bank of America Securities.

[David Lee, analyst]

Thanks, Tony and Jingbo for the introduction, for the results. Firstly, congrats on the strong results in 1Q and the solid guidance. And I have 2 questions here. Number 1 is about the AI demand. And the language model is getting more powerful, we see more human machine interaction. What are the key areas you see more AI application? I think you mentioned like a convenient toys and some edge AI devices as well. So what could be the future growth drivers in the area of AI? That's number one.

Number 2 question is, regarding the breakdown for China and the overseas business, and how do we see the demand trend in future by volume or by the -- and by the ASP trend?

[Bin Zhao, executive]

I'll talk about AI. First off all, AI agent has been the biggest topic among tech communities this year. However, we will focus on the Conversational AI side, which is more directly related to our business. What we see is several key use cases that's mostly active. First is education use cases, especially around language learning and property side, as I just mentioned in the script, in my opening remarks.

And also IoT side, especially a lot of efforts trying to build a conversational toys that can really talk to kids or users with meaningful content. And also, there's clear demand around kind of call center services, where there's outbound coding for marketing or other purpose and also customer service in call-center use cases. Those are the most clear verticals or use cases in our recent engagement with our developers.

[Jingbo Wang, executive]

Thank you, Tony. I'll talk about the demand trend. So in the U.S. and global market, as you can see, the growth rate has now in this quarter, about 18% or close to 20% already. So we have seen growing adoption among -- actually not just our customers. More importantly, we are seeing growing adoption among consumers for live video-based shopping and entertainment apps, especially in North America and Europe. These apps we have seen -- become really dominant in China for some time, but now we are finally seeing them gaining traction in North America and Europe as well. So that's 1 of the most important growth driver in this quarter for us.

And secondly, for Asian customers, we are finally seeing some demand recovery, even including India for education and entertainment use cases. So overall, in U.S. and global market, we see pretty solid demand. And we think there is still a lot of potential for further penetration. And also in terms of the pricing, with the exception of certain Asian markets, overall, the pricing has been quite stable in more developed markets. So in China, also growth rate hasn't come to the level we see in U.S. and global markets, but as you can see, for the Shengwang business in Q1 year-over-year, it also delivered 6.7% year-over-year growth. So overall, the demand is recovering. So on several fronts, the social entertainment fronts, we see that regulation is more stable now. So there's less regulatory impact as we saw last year and the year before. Education demand is also recovering in a quite healthy manner. And IoT and digital transformation, we have been seeing pretty strong demand in the past 2 years. Pricing wise, also still, it's a very competitive market compared to last year and the year before. Pricing pressure is also more moderate in this year. So overall, it looks more -- it looks more positive than in previous years.

[Operator]

Our next question comes from the line of Tian-Li Wang from CICC.

[Unknown Analyst]

This is Wang Tian-Li from CICC. My first question is regarding your overseas e-commerce business. But in the past, we have seen the live shopping and the interactive features becoming increasingly popular in e-commerce, especially in the emerging markets. Could you please provide more details on your current tractions and the strategy enabling overseas e-commerce platforms or the applications?

And my second question focuses on the AI landscape. So could you elaborate on any shifts that you have observed in the downstream demand for AI-powered real-time interaction capabilities.

[Bin Zhao, executive]

So on live commerce use case, we are deep diving into the use case and continue to maximizing the penetration into the space. There's clear demand and we see a lot of value creation potential for us to deliver to our customers. And we are continuing to gain new customers, while the existing customers' volume is still stably growing. One side of the effort is trying to improve the video quality, which will give shoppers online shopping participants better experience in live shopping use case. A lot of the customers actually were local live shopping platform. So there's literally almost no impact by the recent tariff war.

About AI. Now again, we will continue to focus on Conversational AI, which is really directly related to our business. The recent interest in building Conversational AI agent is very clear. And a lot of customers who is in the POC stage of their development is getting close to product launch. Now the key for our growth in terms of service volume or eventually the value created for the customer base is really depending on a product that has already find a product-market fit. And the key to that is all those customers' product actually did a lot of deep dive into the vertical use case and leverage and build a good product by finding out enough know-how in that vertical use case so that the customer experience is smooth and compelling enough. And that process is why a lot of the customers have been working with us for a while, but still -- before it can really achieve product-market fit, it will take some time.

[Operator]

[Operator Instructions] Our next question comes from the line of Bing Duan from Nomura.

[Duan Bing, analyst]

I've 2. First is also about AI. So how do we think about the timing for the massive adoption of the Conversational AI as we think that currently, there are still some pricing premium, right, compared to the non-AI applications. So when do we see this tipping point for the massive adoptions. And I think second question is about the competition landscape in the China and -- how do we think about the pricing trends for the overall business and the impact on the gross margins?

[Bin Zhao, executive]

On the tipping point, I mean, I actually talked about few use cases or verticals that are most active in our work with customers and developers. I want to point out further that even within each and every of those use cases, it's not 1 category of product, let's say, for customer use cases. Each type of our call center service for actually a different industry have different know-how. And so that the product-market fit will happen gradually for each industry's specific customer use cases. So we will achieve product-market fit 1 by 1 down the road really depend on how those products, like I said, finding out all the necessary know-how so to build up a smooth user experience. And the tipping point really relies on the maturity or product-market fit of those specific use cases. And once it's matured and having a market fit, the volume for that specific product will grow significantly. And will naturally expand to all similar product providers in the same sector or in the same use case, which will again, grow our volume. So that's the thing.

However, I do want to mention that the maturity of such product -- it's not decided by us. It's really decided by the -- each and individual vertical use cases for their industry know-how and product designs or even launching approach will decide whether the product is going to be successful or not, and whether the product-market fit is reached or still need more work. So that's the thing. I cannot really give a specific timing for how those products will mature and start to grow potentially. However, what I want to say is, it's not going to be 1 product. And it's not going to be even 10 or 20 products. It's going to be hundreds of different products and gradually reaching the tipping point. That's my view.

[Jingbo Wang, executive]

I'll take the question on the competitive landscape. So you mentioned China. Yes, China has been a very competitive market. In fact, all the major cloud providers have some point competed in this market and pretty hard. But now only 1 of them is still remaining really. The others are just, like, staying here, but with no meaningful market share. So that shows how competitive the market is. But I think in the past few years, the clear trend is consolidation. Now there are less and less -- there have been less and less players to name really just. And as Conversational AI becomes more and more important, we believe the competition will not be just like real-time communication, it will be real-time communication plus Conversational AI. And we have invested heavily on this new area. We cannot say the same for our competitors. So we -- hopefully, that will give us stronger competitive position in the future.

And in terms of margin, yes, the competition is more fierce in China, and market is slightly lower in China compared to the global and the U.S. markets. But whilst we, first of all, we focus on -- we tend to focus on the higher-value use cases, which tend to have higher margins. And secondly, we continue to do a lot of technical optimization on the cost in, and that's why we have been able to maintain a relatively stable gross margin, as you have seen in our earnings. So that continues to be our strategy going forward.

[Operator]

[Operator Instructions] There are no further questions. Thank you, everybody, for attending the company's call today. As a reminder, the recording and 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. And so with that, we conclude the program today. You may now disconnect your lines.