Q4 2023 Agora Inc Earnings Call
Participants
Tony Zhao; Founder, Chief Executive Officer & Chairman; Agora Inc
Jingbo Wang; Chief Financial Officer; Agora Inc
Yang Liu; Analyst; Morgan Stanley
Yalin Zhuang; Analyst; Bank of America Corporation
Bing Duan; Analyst; Nomura Holdings, Inc.
Presentation
Operator
Good day, and thank you for standing by, and 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.
Tony Zhao
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 RMB148.3 million for Shengwang, an increase of 5% quarter over quarter, mainly driven by revenue growth from digital transformation customers.
As of the end of 2023, we had close to 700 active customers for Agora and more than four of 4,100 for Shengwang an increase of 18% and 12%, respectively, compared to one 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 our growth. In this quarter, we held a series of webinars to discuss how real-time engagement, which combined with state of art technology in artificial intelligence and AR/VR can greatly influence or even transform various industries, including live shopping, telehealth and internet of things.
For example, in live shopping, we see more and more [retail] brands and platforms relying on interactive live streaming to redefine the way consumers makes their buying decision by creating a personalized social and engaging experience for the audience. A loyal community of repeated buyers will strive 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 wheel, [rapped] fees beyond planned spots, enabling them to carry a tonnage of packs in a safe and efficient manner for autonomous drive --autonomous vehicles or AI powered with robotics.
Human operators can monitor their operations from remote locations and pickle work whenever necessary. This series of webinars was well received and attracted thousands of participants globally. We believe an Agora is uniquely positioned to facilitate our innovations in this industry, by leveraging our cutting 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 of vacation between devices and powers. The new world [cannot] accommodate a limited number of users per channel, deliver better synchronization support storage and manage completing message effectively. It enables a wide range of use cases such as real time beating in live shopping versus gifting in live streaming, player data 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 a competing solution with our video coding product. We have pushed a series of blocks covering guidance and best practice from migrating from Twilio to Agora across major operating system and developer platforms.
Additionally, we are offering up to two months free to customers who switch 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 ethic. We are also thrilled to see Open AI recent launch of [Sora], a powerful AI model that can create realistic and imaginative video clips based on [caps] instruction.
It aligns with our early wheel 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 boundaries of real-time engagement and bring about tremendous new possibilities. I believe Agora is well positioned to play a critical role in facilitating massive data transmission between AI models and human users.
Moving on to Shengwang fully in 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 3D remarks an important breakthrough in [XR] technology.
The high video resolution and the see-through capability of video of vision pro demand, higher quality video content and opens up possibilities for hologram video content consumption and interaction. For example, people will be able to watch 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, many games that only unlocked video live streaming have been gaining popularity among social platforms. For example, a round of noodles can serve as a breaker in a matchmaking room. Live streaming channels ca incorporated team based mini games where audience can participate by funding, [put] it chats then cakes. We have partners with leading mini-game developers to offer our customers a wide range of mini game that can be easily embedded into their application.
Early data from our customers show that mini game, integration has result in increased user participation, longer session duration and more monetized of their need. In this quarter we also introduced virtual soundcard and advanced feature that simulates key components of a professional hardware soundcard, such as the exciter, compressor, equalizer and, reverberator to process and use us voice in real time.
Users can now easily enhance and modify their voices with only our cell phone, without the need to purchase a computer with a professional sound card. For example, a customer recently at virtual some car in their online karaoke rooms, users can choose from a range of preset specific to make their voices clear sweetener, -- sweater, [Gen4] or more mature. Slightly of key nodes also be adjusted automatically. This capability makes user more confident to participate therefore, posting user engagement and stickiness on our customers' platform.
Before concluding my prepared remarks, I would like to thank both of Agora and Shengwang team for their commitment and dividend during this challenging period. We not only delivered consecutive quarter over quarter top line growth since the second quarter, but also achieved non-GAAP profitability 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, we will review our financial results.
Jingbo Wang
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 the 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-over-year. Agora revenues were $15.7 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 challenging macroeconomic environment and tightening financing conditions starting from the second half of 2022.
Shengwang revenues were RMB148.7 million in the fourth quarter, an increase of 5% quarter on quarter and a decrease of 9.6% year over year, excluding revenues from the disposed CEC business. Quarter over quarter increase was primarily due to an increase in revenues from digital transformation customers for large enterprises. Year-over-year decrease was primarily due to slowing demand from Internet customers due to regulation and the general economic conditions. Dollar-based net retention rate is 93% for Agora and 82% for Shengwang, excluding revenues from this discontinued business.
Moving on to costs and expenses, for my following comments, I will focus on non-GAAP adjusted financial measures, which exclude 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, optimization of land use, right.
Adjusted gross margin for fourth quarter was 65.2%, which was 0.3% higher than Q4, 2022 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 increase in on-premises solution revenue, which have a lower gross margin.
As we continue to implement 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 was $6.7 million in Q4, decreased 40.6% year over year. Sales and marketing expenses represented 17.5% of total revenues 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 fourth quarter compared to a 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 three 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 to balance sheet, we ended Q4 with $371.8 million in cash, -- cash equivalents, and deposits and financial products issued by banks $4.03 per ADS.
Net cash flow. Net cash outflow in the quarter was mainly due to share repurchase of $10.1 million which was offset in part by 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 have returned approximately $104.7 million to shareholders through share repurchases, reducing our share count by roughly 18%.
So far, we have completed 52% of our USD200 million share repurchase program. We are pleased to announce that our Board has authorized another 12 months 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 and financial strength and long-term prospects of the business.
Now turning to guidance, due to 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 given this challenging period. They turn into profitability; it has remarkable milestone. Thank you to both a coordination on team for hard work and sacrifice in the past quarters.
Thank you, everyone, for attending the call today. Let's open it up for questions.
Question and Answer Session
Operator
(Operator Instructions) Yang Liu, Morgan Stanley.
Yang Liu
Hi thank you. Thank you for the opportunity to ask questions.
First, congratulations on the non-GAAP profit in last quarter 2023. I have three questions here. The first one is what is management's outlook in term of the 2024 full year profit, do you think the profitability in the past quarter will be sustained or it can be improved in 2024 for 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 where would you 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 our 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 turnaround in term of the total contribution.
As the third question is regarding the partnership with a vision pro. What will be the revenue model behind this kind of a partnership? Will it be based on consumer time spent and if not, what will be the revenue model? Thank you.
Jingbo Wang
Thank you. I'll take your first question. Yes, the Q1 revenue guidance would imply a year-over-year revenue decrease. And as you know, Q1 is generally the lower season for the business. If you look at our numbers in the past few years, revenue generally stable, especially in Q1 sequentially compared to Q4. That's due to both seasonality, as I mentioned, in some operations where we operate lunar 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 are tend to be -- we tend to talk towards the revenues towards the end of the year. So Q1 is also a low season compared to last year. Obviously, we have been turning in a regulatory changes, a pattern of environment in Q2. So last year, Q1 was a [apparently] higher base. So that's our Q1 guidance.
In terms of full year 2024 obviously remains a lot of current uncertainties around the world, including the macro-economic environment from the environment and so on. So I'll give you my best estimate. So we expect our revenue to grow 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 well as a moderate revenue growth. So if you run the numbers, hopefully we'll be able to get closer to profitability and even improve the profitability plus the second half of the year. But as to Q1, to be challenging, to achieve profitability in Q1, given the revenue dip.
Yes, please answer first question.
Tony Zhao
Yes, about hoping 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 up very influential customer base in China Internet industry. A lot of them were actively planning going overseas are expanding in our global market.
While we help them, we can leverage a lot of our existing partnership and customer base knowledge and market knowledge with our global practice with local customer base and market already. And we have been helping people with all those knowledge and the know-how already and those are the unique advantage we could to help them to grow into a bigger global market.
Jingbo Wang
And in terms of revenue split, we don't think it will change very significantly, however we do, what we are looking more optimistic in terms of Agora business given especially the resilience we are seeing in the US market and other developed market and also some of the emerging use cases we see their, and as Tony mentioned earlier, the exit that also give us additional room to grow in those markets. So we expect a moderate increase in terms of the [presentation] from the contribution coming from the acquired businesses as we move along in 2024.
Tony Zhao
About the windfall the revenue model is going to be similar to what we do, we are still going to be enable use cases and customers by selling at retail base capabilities, although with increased offerings from our overall product portfolio, we might have a more diverse pricing model with all the different SKUs, different product we are selling into. But overall, it will tie to consumer usage on various fronts.
And in midterm to long term, we do see the powerful impact were, therefore can enable a lot more attractive use cases, new use cases or make some new use cases more valuable or more meaningful for consumer or business use cases were, we wouldn't be able to support both like persona based social interactions, or business operations in that platform. So we also anticipate a lot of other XR device were catching up with play -- catch-up with the recall. So to make this a capability it to be available, more widely for customers and the consumers.
Yang Liu
Thank you.
Can I follow-up with one quick question. When Jingbo mentioned the OpEx will be flattish. Do mean that's flattish versus 2023 full year or flattish versus last quarter in 2023 because the 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 better of first quarter? Thank you.
Jingbo Wang
The base will be first quarter would probably not be exactly the same. It might fluctuate a bit, but it will not be significantly higher from the backing in Q4.
Yang Liu
Got it. Thank you.
Operator
[Yalin Zhuang], Bank of America.
Yalin Zhuang
Thanks, management for taking my questions. I also have three questions. The first one is on 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 this management see the potential impact of business from the open area -- open AI video generator and so on. And the third question is on the potential market share gain. I imagine I said that the after the Twilio exiting the market the company could potentially (technical difficulty) how the Agora seize the opportunity and what is the current acceptance from the customers transiting from Twilio service to our service? Thank you.
Tony Zhao
All right. I'll take those questions. First of all in terms of the market and competitive landscape we see in US in the international markets, we do see strong growth momentum in media and entertainment sector and telehealth verticals, not shocking IoT, particularly in our developed market. Those are the areas that we see our strong growth momentum.
Pricewise, we see more pressure in emerging market where it's impacted by macro environment, including the currency exchange rate etc. Price has been healthy and stable in developed for the market, US and European market.
About Twilio's asset, however what we're seeing in terms of competition Twilio asset is only for fine of competitors leaving the market is not as clear. There are other start-up competitors who are struggling and downsizing of their operations. We expect we will be gaining market share with those tenders.
In tele markets we see growth potentials in going overseas, all the special internet companies in our base in China now looking heavily in going overseas expansion. And other also digital transformation is still on having a clear trend to grow and, also IoT side of the customer base are seeing more actively growth overall usage in both market, 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 happens in beginning of the year. This puts some pressure to our Q1 results, together with the seasonality issue of like Chinese New Year activity change or customer behavior change, but our gross margin remains quite healthy.
In terms of our competitive landscape is largely unchanged internal 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 reduce their team in this area in Q4. I expect markets to continue to consolidate.
The next question is about the latest open AI offering retail generation. I think this is only the very early stage of video format generation model, but we can see the huge potential and possibility life ahead. Currently the model is able to generate a short video clips based on fax, image or video from prompting and can already be used in some of customers use case to enhance user experience.
For example, the virtual background of a video chat room or livestreaming session can be a short video clip generated by AI model, as overall background, it could be either realistic or imaginary to perfectly match the contact 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 us the crucial, the critical infrastructure as massive amount of data will flow between users and AI models in real time. Maybe to add a little Twilio's assets we think like I said, it's only nearly as fine of competitors leaving this market, their backing off or focusing on their more ministers business and I mentioned, we see this happens in both a global market and China market, including, let's say, US market it's not just Twilio.
There are some other smaller competitors, also downsizing of staff working in this area. The competitive environment with that we see is clearly improving. Of course, Twilio resizable customer base, which we already start to work on to convert them So this is a clear room for us to go into.
Yalin Zhuang
Thank you guys. This is very clear. Thank you.
Operator
(Operator Instructions) Bing Duan, Nomura.
Bing Duan
Yes, hi. Thank you management for the opportunity to ask the question. Just a one follow-up question from me about the Twilio's exit in 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 US market.
And about we offer two months free customers switch from Twilio. How do we think that would affect our user growth and top-line growth in the next one or two quarters? Thank you.
Tony Zhao
I do think our two newest assets are mainly because of a fierce competition in this area because as we rationally update, this area is a very tech-savvy sector where is all offerings requires a lot of investment in technology and product from competitors' products only build on top of what we see open source projects or steam coal, rather clean, a layer of technology add-ons, which can open a store, a friction part of the demand for our RTE use cases, which, of course, limited their ability to expand and grow in this area.
And especially for a company like Twilio’s, they might want to be more focused on their mainstream business. I see that's the main reason, there could be a reason that COVID demand is also fading away. But as I mentioned, the earlier statement we while the COVID demand is fading away, we do see there are a growth -- were active use cases growth, in developer marketing and global market. So I would rather just put that as another factor in their leaving.
In terms of our offerings, I do think the two months free offer for a lot of small, midsized customers is very important to our reason for them to consider and make them easier to decide to jump our Agora platform. We do have some other strengths and cooperations or work with -- rather large customer base, which our teams are focusing on to help them to, to migrate to our platform.
Bing Duan
Thank you very much.
Operator
Thank you. (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.
