Participants

Tony Zhao; Chief Executive Officer and Chairman; Agora Inc

Jingbo Wang; Chief Financial Officer; Agora Inc

Yang Liu; Analyst; Morgan Stanley

Daley Li; Analyst; Bank of America Securities

Presentation

Operator

Good day and thank you for standing by. Welcome to the Agora Inc second quarter 2024 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.
The conciliations between the company's GAAP and non-GAAP results can be found in 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 risk, 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 make on today's call.
With that, let me turn it over to Tony. Hi, Tony.

Tony Zhao

Hi. Thanks, operator. And welcome, everyone, to our earnings call. First, our operating results in the past quarter. Agora revenue were $15.6 million in the second quarter, up 2% year-over-year, mainly driven by business extensions in certain use cases such as live shopping. Shengwang revenue were RMB132 million in the second quarter, up 0.3% year-over-year and 8% quarter-over-quarter, mainly due to usage growth of digital transformation and Internet of Things customers.
I'm glad to see that both Agora and Shengwang delivered year-over-year revenue growth despite a very challenging market environment. This success is due to our relentless innovation in driving new use cases and enhancing the quality and value of our products in existing use cases.
Now, moving on to our business products and technology updates for this quarter. Let's first talk about Agora. Recently, our real-time speech-to-text product transitioned from beta to general availability. As I mentioned in our previous earnings call, this product enables customers to transcribe the audio of each user in the channel. Text can be distributed as live caption to all channel participants to enhance accessibility and user experience.
Throughout the development and beta testing stage, we have improved the performance of our product to accommodate up to three simultaneous speakers and added support for all major languages and dialects. Additionally, our product is integrated with large language models, allowing customers to receive automatically generated summaries of meetings or events and gain insights at the end of each session.
For example, HelloTalk, a leading language learning platform with more than 50 million users, has been one of our customers to first adopt our real-time speech-to-text product. With the integration of our product and a large language model, HelloTalk can now provide their users advanced capabilities, including live language analysis, live translation, language proficiency assessment, creating contextual and personalized learning experiences.
Additionally, I'm happy to announce the launch of Agora's new website. At Agora, we believe all our customers are developers at heart. Recognizing the innovative spirit of our new website boosts an intuitive interface, enhanced navigation, and a more modern design to create a cool and sleek user experience. It also offers a wealth of resources tailored to both developers and key business decision makers.
Next, let's turn to Shengwang. We are excited to announce our recent partnership with Unity China to integrate our in-game voice calling capabilities in Unity China's UOS engine. This collaboration allows game developers to seamlessly add multi-player voice channels into their games. It is especially appealing to small game studios and intervention developers who often lack the skill set and resources to address all technical challenges on their own.
In addition, our proprietary advanced features such as 3D spatial audio, AI noise suppression, and echo cancellation are available to developers, enabling them to create immersive experiences for players. In this quarter, we have also facilitated wider application of AI in our customers' use cases.
For example, we helped XiaoTianCai to add real-time transcription for video calling in their latest flagship smartwatch. Previously, when users conducted video calls on a smartwatch in a noisy environment, it was often difficult to hear the other party clearly. Moving the wrist and watch closer to the ear would make it impossible to see video on the screen, therefore forcing users to make a hard choice between audio and video.
Now, with our cloud AI real-time transcription capabilities, users can enjoy video calls with captions on their smartwatch, significantly enhancing their user experience. Last September, we became the first company to offer a real-time voice SDK that enables conversation with generative AI models.
Since then, we have facilitated our customers to launch conversational AI applications in various use cases, such as AI campaigning, productivity assistant, language tutor, and customer service. Although these applications are still in their early stage, we have already seen promising user adoption and engagement trend.
Looking forward, we are committed to staying at the forefront of technology advancement to enable developers to innovate at a faster pace and build the conversational AI application of tomorrow. This year marks the 10th anniversary of our iconic real-time engagement or RTE conference.
This coming October, we will host our RTE conference in Beijing, focusing on the intersection of AI and RTE technologies and the exciting possibilities that lie ahead. Experts and practitioners from both the AI and RTE community will gather to share their vision and efforts to create revolutionary technologies, products, and applications.
There will also be forums focusing on more traditional verticals, such as digital transformation, entertainment, education, and Internet of Things. We welcome you all to attend the conference and experience firsthand the vibrant spirit of the industry. Before concluding my prepared remarks, I want to thank both Agora and Shengwang teams for their hard work and commitment during the challenging period. Let's stay focused on creating long-term customer value and strengthen our leading market position.
With that, let me turn things over to Jingbo, who will review our financial results.

Jingbo Wang

Thank you, Tony. Hello, everyone. Let me start by first reviewing financial results for the second quarter of 2024, and then I will discuss outlook for the third quarter. Total revenues were $34.2 million in the second quarter, an increase of 3.6% quarter-over-quarter, and an increase of 0.5% year-over-year. We have finally overcome the impact of the pandemic, the macroeconomic turmoil, and regulatory changes, and returned to a year-over-year revenue growth for the first time since 2021.
Agora revenues were $15.6 million in the second quarter, a decrease of 1.3% quarter-over-quarter, and an increase of 2% year-over-year. The quarter-over-quarter decrease was primarily due to reduced usage from customers in emerging markets. The year-over-year increase was primarily due to business expansion and usage growth in certain verticals, such as live shopping.
Show on revenues were RMB131.9 million in the second quarter, an increase of 7.6% quarter-over-quarter, and an increase of 0.3% year-over-year. Increase were primarily due to increasing revenues from certain verticals, such as internet of things. Dollar-based net extension rate is 92% for Agora and 79% for Shengwang, excluding revenues from discontinued business.
Moving on to cost expenses, for my following comments, I will focus on non-GAAP adjusted financial measures, which exclude share-based compensation expenses, acquisition related expenses, compensation 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 right.
Adjusted gross margin for the second quarter was 63.4%, which was 3.8% lower than Q2 last year and 0.2% higher than Q1 this year. The year-over-year decrease was mainly due to changing pandemics. The quarter-over-quarter increase was mainly due to improving utilization rate of infrastructure.
Adjusted R&D expenses decreased 6.6% year-over-year to $15.5 million in Q2, mainly due to continuous cost improvement measures. Adjusted R&D expenses represented 45.4% of total revenues in the quarter compared to 48.8% in Q2 last year. Adjusted sales and marketing expenses were $5.9 million in Q2, decreased to 16.9% year-over-year.
Sales and marketing expenses represented 17.3% of total revenues in the quarter compared to 20.9% in Q2 last year. Adjusted G&A expenses were $6.6 million in Q2, slightly increased 6.5% year-over-year, primarily due to increase of expected credit loss. G&A expenses represented 19.1% of total revenues in the quarter compared to 18.2% in Q2 last year.
Overall, adjusted operating expenses were 6.1% lower than the same period last year, thanks to a defective cost control. Adjusted operating expenses were 2.2% higher than Q1 this year. The sequential increase was mainly because we decided to replace certain share-based compensation with cash compensation for employees in order to reduce dilution for our shareholders when shares are trading at below cash value.
Adjusted EBITDA was net $6 million, translating to a 17.6% adjusted EBITDA loss margin for the quarter compared to 19.5% in Q2 last year. Non-GAAP net loss was $6 million in Q2, translating to a 17.5% net loss margin for this quarter, lower than the net loss margin of 19.4% in Q2 last year.
Now turning to cash flow. Operating cash flow was negative $7.6 million in Q2 compared to negative $5.3 million last year. Free cash flow was negative $7.9 million compared to negative $5.6 million last year.
Moving on to balance sheet, we ended Q2 with $371 million in cash, cash equivalents, bank deposits, and financial products issued by banks, or $4.03 per ADS. Net cash offload in the quarter was mainly due to free cash flow of negative $7.9 million and repurchase of $2.3 million.
Now turning to guidance, for the third quarter of 2024, we currently expect total revenues to be between $31.5 million and $33.5 million. This forecast reflects enough sale of certain products with unsatisfactory profitability. Such products generated approximately $2.4 million of revenue in the third quarter of 2023, and $3.3 million of revenue in the second quarter of 2024.
The average cost margin of such products was below 10%. So we expect enough sale of such products will lead to a meaningful increase in our gross margin and a positive impact on bottom line in the third quarter. This outlook also reflects our current and preliminary views on the market and operating conditions which are subject to change.
In closing, returning to year-over-year growth is an inspiring turning point under a challenging operating environment. We are excited about emerging use cases, especially the intersection between real-time engagement and conversational AI. And we remain confident about our long-term growth potential.
Thank you to both the Agora and Shengwang teams for your hard work and contribution during this period. Thank you everyone for attending the call today. Operator, let's open it up for questions

Question and Answer Session

Operator

(Operator Instructions) Yang Liu, Morgan Stanley.

Yang Liu

Good morning. Thanks for the opportunity to ask questions. I have two questions here. The first is regarding the business outlook. As Jingbo just mentioned that you faced some of the low-margin business. Could you please elaborate more about the reason behind that, related to the competition or the outlook of that business?
You mentioned that that business has a quite low growth margin and I'm not sure whether that business OP margin or net margin is also very bad or what is the potential impact to the bottom line. And the second question is based on the company's pipeline, what is your expectation of the future of emerging applications or use cases for RTE or whatever AI-related application? If you see any potential booming of the RTE usage, could you please share more about that? Thank you.

Jingbo Wang

Thank you. I'll take the first question. So, yes, RTE is already in the sale of certain products in this quarter. And these products we mentioned a few years back, these were more [XTDM] based technology. And given how competitive the market is, these products have pretty low cost margin in the low single-digit range. And there are also related other expenses.
So, actually, on a net operating margin basis, it's close to even slightly negative. And as we know, we have been very focused on improving the overall operating efficiency and drive business towards sustained profitable growth. And that's why we believe this business is not generating profit.
And we don't see that market turning around very quickly in the near term. And that's why we decided to basically terminate the sale of such products. That doesn't mean we will exit the entire kind of this medium-latency live streaming market.
We are doing other innovative products, not based on the traditional XTDM technology, but more based on the RTC-related technology. So, we continue to be competing in the market, but we will be more focused on innovation rather than offering more traditional and legacy products.

Tony Zhao

I'll take the general AI side of the question. We have been actively talking to leading large language modal companies globally with very positive feedback in general. The importance of multimodal capabilities and a highly reliable low-latency transmission network is well recognized by all players.
We are working closely with many of them to develop multimodal products and solutions. Some of our consumer applications have already -- some of there consumer applications integrated with our SDK. Meanwhile, we have also worked together in engaging with the AI developer community.
If you look at Hugg & Fizz, there are almost 500,000 different models. We have been working with them to engage with developer communities on that to bring the models into real use cases. We have also partnered with companies like SmallShot for the toy startup program to help developers to innovate. Please stay tuned for more announcements in our RT conference in October.

Yang Liu

Thank you.

Operator

(Operator Instructions) Daley Li, Bank of America Securities.

Daley Li

Hi, management. Thanks for taking my question. I have two questions here. Number one is about the revenue by segment. It seems that Shengwang Revenue is getting a stronger recovery in Q2 compared to Agora. What are the key drivers and how do we see the trend in Q3 for the domestic market and the international one?
The second question is about our work-even target as we have been trying to control the expenses and also kill down the low margin business. Do we have an update about the work-even target in the following quarters or sometime? Thank you.

Tony Zhao

In terms of the Q3 demand for US and international markets, we see growth momentum in live shopping and IoT verticals, particularly in the developer market. Since we become the first company to offer real-time voice SDK that enables a conversation with generative AI models, competitors have also followed us and provide similar products. We believe this will be the new battlefield of RT.
With our recent launch of our conversational AI framework, we will gain significant competitive edge to engage with AI developers and serve their applications. In the China market, we see growth potential in IoT customers. Also, some strong demand for conversational AI applications. Competitive landscape largely unchanged during the past quarter. Competitive pressure stabilized.

Jingbo Wang

Okay. I'll take the second question. From what we see right now, demand for our core products remain pretty robust. We do expect sequential revenue growth in Q3 compared to Q2 and hopefully Q4 compared to Q3 as well. The growth margin of our core products remain very healthy. So you will see a pretty nice uptick in the growth margin in Q3 and Q4.
As I mentioned, the combination of the low-margin products will not impact the bottom line. In terms of the OpEx, we'll continue to manage OpEx very cautiously, and we do not expect OpEx to be higher than Q2 in the coming quarters. If anything, we might try to further improve efficiency.
So at this point, I cannot promise exact timing of the gap break-even given there are still a lot of moving parts, but we are committed to achieving profitable and sustainable growth. So if we think about business, right, in this quarter, we return to year-over-year growth after a lot of the macro challenges, the pandemic, the macroeconomic environment in both China and in the US, getting all these rate hikes and funding environment changes and all the regulations.
So now we have finally come back to revenue growth, and we believe this is the turning point, and core business will continue to grow from this point on. And as we maintain our cost-based planning and drive efficiency, I believe it's just a matter of time before we achieve that goal, that break-even, and continue to grow from there. And in any case, we expect to achieve such a break-even on a GAAP basis and on a continued basis in 2025.
Well, thank you, Tony and Jingbo. Thank you.

Operator

Thank you. And as there are no further questions, I want to thank everybody for attending the company's call today. As a reminder, the recording of 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 email the company. Thank you, everyone.