Good day and thank you for standing by. Welcome to Agora, Inc. Fourth Quarter 2021 Financial Results Conference Call. [Operator Instructions]. I would now like to hand the call over to your first speaker today, Ms. Fionna Chen. Thank you. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us for Agora's fourth quarter and full year 2021 earnings conference call. Our earnings results press release, SEC filings, and a replay of today's call can be found on our IR website at investor.agora.io. Joining me today are Tony Zhao, Founder, Chairman and CEO; and Jingbo Wang, our CFO. Reconciliations between our GAAP and non-GAAP results can be found in our earnings press release. During this call, we will make forward-looking statements about our future financial performance and other future events and trends. These statements are only predictions that are based on what we believe today and actual results may differ materially. These forward-looking statements are subject to risks, uncertainties, assumptions, and other factors that could affect our financial results and performance of our business and which we discuss in detail in our filings with SEC, including today's earnings press release and the risk factors and other information contained in the final prospectus, relating to our initial public offering. Agora remains no obligation to update any forward-looking statements we may have on today's call. With that, let me turn over to Tony. Hi, Tony?

Yes. Thank you, Fionna, and welcome everyone to our earnings call. 2021 was a year of great opportunities and challenges for Agora. I am extremely proud to see how hard our team worked together across the board, and of course, every vertical to drive Agora forward. It is exciting to see how much we have accomplished and how much innovation we have fostered with our real-time engagement platform. I am proud to say, that as of the end of 2021, the Agora SDK were installed globally in more applications than any other real-time video or voice SDK by a very large margin, according to data.ai, previously known as App Annie. Our technology and product innovation are what distinguish as a pioneer and the leader in real-time engagement. Today, we are powering the new norm of engagement and the emotional human connection, both virtually and in real-life. Now let's shift to our earnings; we delivered another quarter of strong result. Our revenue for the first quarter was $40.4 million, up 21% year-over-year. At the end of December, we had more than 400,000 registered apps on our platform, and our number of active customers reached nearly 2,700, adding nearly 600 year-over-year. For the full year of 2021, we powered more than 600 billion minutes of real-time engagement in total and our revenue was $168 million, which represents an increase of 26% from 2020. If we look at our key markets, revenue from United States and APAC excluding China, recorded the strongest growth in this quarter. We are now powering many leading metaverse platforms in South Korea, many leading online education companies in South Asia, and many highly innovative interactive e-commerce, audio live cast, and virtual event platforms in the U.S. In China, our market leadership was clearly demonstrated by our recent IDC…

Thank you, Tony. Hello, everyone. Let me start by first reviewing financial results for Q4 and then I will discuss our outlook for the fiscal year of 2022. Total revenues grew 21% year-over-year to $40.4 million in the fourth quarter of 2021. Total revenues for the fiscal year of 2021 were $168 million, which represented a 26% year-over-year growth and exceeded the high end of our guidance range by $3 million. Number of active customers reached more than 2,600, excluding growth for Easemob, up 27% year-over-year. The growth in revenue and active customers was mainly driven by continued adoption of our technology by worldwide developers, as well as emergence and growth of new use cases. As we mentioned in previous earnings calls, our revenue growth in the quarter was negatively impacted by the new regulation on K-12 academic tutoring sector in China. We expect such impact to continue and hopefully bottom out in the first quarter of 2022. Our trailing 12-month constant currency dollar-based net expansion rate is 104% excluding Easemob at the end of 2021. We also calculated adjusted expansion rate, to exclude the impact from COVID-19 in the first half of 2020, and the adjusted expansion rate would be 124%. Moving on to costs and expenses. For my following comments, I will focus on non-GAAP results, which exclude share-based compensation expenses, acquisition-related expenses, amortization expenses of acquired intangible assets, and income tax related to acquired intangible assets. Non-GAAP gross margin for the fourth quarter was 64%, which was 3.5% higher than Q4 2020. As we mentioned in previous earnings calls, the increase was mainly driven by technical and infrastructure optimizations we have been implementing since the beginning of 2021. Non-GAAP R&D expenses were $23.5 million in Q4, up 80.2% year-over-year, as we continue to hire talented employees and…

[Operator Instructions]. First question comes from the line on Yang Liu from Morgan Stanley.

Thanks for the opportunity. I have two questions on -- regarding to the overseas business opportunities. The first one is, how do management think about the growing opportunities? With current guidance range, what is the growth for the overseas market and contribution -- or full year revenue contribution in 2022 for overseas market? And the second question is, could management update us in term of the overseas market gross margin profile in 4Q and 2022 outlook? Thank you.

Sure. I will talk about the first part, outlook on overseas opportunities. I'm actually very excited about opportunities for us, in like North America, Europe and APAC excluding China. Many countries in these regions have largely reopened their economies, but we continue to see strong usage numbers. It is clear to me that, the pandemic has permanently changed how people work, collaborate and study. I'll mention a few areas where we see enormous growth opportunities. First, future of work. This would include virtual office platforms, virtual event platforms, online collaboration platforms for creating graphics, documents, and music and so on. In the past year, we added many virtual event customers, that hold all kinds of events from trade shows to celebrity team casts through our platform. We also have several collaborative design platform, to enable live discussions between users, while working on a design project. We are working with virtual office platforms, such as Loop and VirBELA to define how distributed teams will work together in the future. Most recently, we also helped one of the largest company in the world by market cap to launch an audio live cast platform for the workplace, reflecting that the trend of a lot of the real-time engagement features previously only available in social apps, are now coming to professional apps. With this customer, we went through a very rigorous vendor selection process and have proven -- and have proved, that our product can meet the requirements of large enterprise customers in the U.S. I believe, this will open door for us in many more enterprise opportunities in the future. Second, around education. Recently, we see strong usage growth from education customers in South Asia, Middle East, Europe, and U.S., even after the reopening. We now power many of the largest education technology unicorns in South Asia. What we see is that, they are basically replicating what EDU and the TAL did successfully in the past in China, which is leverage Agora's capabilities to build branded and proprietary apps that offer better online classroom experience than standard conferencing apps. This market has huge -- these markets have huge population and the penetration of RTE empowered online education is still very low, which means there is huge revenue potential for Agora. Third, metaverse related use cases. I already talked a lot about metaverse in my opening remarks. Now we have already powered several leading metaverse platforms in South Korea and Brazil and we will -- and we also just announced solutions such as MetaKTV and MetaChat. However, I believe we are only at the beginning of a multiple year trend that will change how people live their lives online. As I summarize, the opportunities for Agora are very clear. It's now up to us to execute well to on our strategy and convert these opportunities into business outcome. Jingbo may add on more financial side.

Thank you, Tony. So yes, the guidance at the midpoint represent about a 5% year-over-year growth, but I think to understand what it means -- what the guidance means, we need to really break down our business into three parts. First is the non-China business, as Tony just discussed; then it's China K-12 business, and finally the China non-K-12 business. So the K-12 business in China last year represented about 25% of total revenues and we expect to lose almost all of that revenue stream, almost entirely in 2022. So it's not really an apple-to-apple comparison between the $158 million and the guided range for next year. A more apple-to-apple comparison would be, 2022 guidance versus 2021 revenue, excluding K-12 in China. And in that case, the guidance was to imply a healthy growth rate. So if we break down the three parts of our business, the China non-K-12 business, we expect to do moderate growth in 2022, driven by verticals such as IoT, traditional enterprises, record digital transformation, and also by new products like Fusion CDN and [indiscernible] and also a lot of the new solutions recently released like MetaKTV and MetaChat. So that's the sort of the policy in China. Out of China, Tony even talked about this, so we are quite confident we will be able to deliver very strong growth outside China. So in terms of the margins, actually in the latest quarter, the gross margins outside China are almost the same. And as we mentioned before, we expect -- as we continue to expand footprint in different regions and continue to scale our infrastructure, we should get additional cost benefit and in the end, we expect our GP would be actually higher outside China.

Thanks a lot.

Thank you for the questions. [Operator Instructions]. Next question comes from the line of Vincent Yu from Needham & Company. Please go ahead.

Hi, can you hear me?

Yes.

Okay. Sure. I have -- thank you management for taking my question. I have two. So the first question is on lower expenses, especially for the marketing expenses. How we think of viewing -- the growth of our marketing expenses going forward? Should we expect more and more expenses on this part, because of the development in the overseas market? My second question is on the utilization of the cash. And in addition to the stock -- I just would like to know, do we have any idea or plan to make more investments or acquire some non-China business to expand the overseas business development? Thank you.

Sure. I guess I'll take both questions. So the first one, I think in the near term, our sales and marketing expenses will increase at a moderate pace in absolute dollar terms, as we continue to invest in branding, marketing, developer community, especially in markets like the United States. So -- but in the medium to long term, we think we'll enjoy a strong operating leverage here. Once we take that developer mindshare and once our platform is adopted -- integrated into our customers' apps, it becomes quite sticky and we won't need as much marketing or sales expense compared with now. So we do think in the longer term, sales and marketing expenses as a percentage of revenue should be at a lower level, especially if you consider the complex and developer-driven nature of our products. On the balance sheet, yes, we do have a pretty strong balance sheet and will continue to invest in our business, especially in markets outside China. We're investing in things like brand marketing, developer community, customer support, product localization, security and compliance and so on. We expect the size of the team in Silicon Valley, Singapore, India to grow rapidly here, while the total headcount in China would remain more or less flat. We will not -- in terms of acquisition, we will not rule out the possibility, but it needs to complement our current product portfolio and product strategy. So there is no guarantee, we will be able to find a suitable target.

Got it. Thank you.

Thank you for the questions. [Operator Instructions]. We've got new questions from the line of Bing Duan from Nomura. Please go ahead.

Hi. Thank you, management. Can you hear me?

Yes.

Thank you. Thank you management for asking the questions. So I have two questions. One is about the competition landscape. We -- you've mentioned in the opening remarks that the -- Agora now has over 40% of the market share. So can you give us more colors on how do you think about the competition in future? And so for the demand change in China and overseas market, do we expect more competitors in this market -- in the RTE market going forward? And do we see any, like pricing pressure in the next couple of quarters? And my second question is about -- also about the overseas expansion. So can we say that the gross margins and expense profiles will continue to be under pressure in the next couple of quarters, because we do need to tap into the new opportunity within the overseas market? Thank you.

Yes. Let me talk about the competition side. I think the overall competitive landscape wasn't changed much in the past few quarters and I don't expect it to change drastically going forward. With that said, I did see more players trying to enter the RTE market from different angles. For example, Cloudflare from a CDN live-streaming angle, and Dolby from an audio processing angle. However, so far I think none of our competitors can match the overall QOE and complete feature set of our product portfolio. As such, serious developers who really understand RTE technology, tend to choose Agora. This was confirmed, as I mentioned, by the latest data -- for example, the latest App Annie data, which shows that Agora SDK has been integrated into more unique apps than any other competitors by a very large margin, and in almost every geography. In 2021, we actually invested $111 million in R&D, more than any other competitors in the RTE space. In the future, we will continue to be the most [Technical Difficulty]. Hello?

Telephone line problem. Give us a few...

Yeah. Why don't I answer the second question first?

I was cutting off right?

Yes, you are back.

From which part? Sorry, from which part I can continue?

Why don't we just start from the beginning?

Okay. Okay...

After you talked about the App Annie data, you were cut off.

Okay. All right. App Annie data was a latest sort of industry kind of data to prove our market-leading positions, and I was trying to speak that in 2021, we actually invested $111 million on R&D, more than any other competitors in the RTE space. In the future, we will continue to be the most focused the company on RTE and continue to invest the most R&D resources. So we are very confident that Agora will continue to lead this market. And Jingbo?

Yeah, sure. So in terms of the profit outlook for this year, as we mentioned earlier, right, our priority this year is to invest in -- especially in the markets outside China, and we do expect this to cause pressure on the margin in the near term. As you can imagine, a lot of the expenses, the marketing expense, the R&D expense, the G&A expenses, these are not directly correlated with revenue. With the loss of revenue from the K-12 sector in the near term, so as we continue to expand on expenses, so -- as that will cause pressure on the net margin. But with our balance sheet, we do think we will be able to weather through this period and we think it's in the best interest of the company and our shareholders to invest for the future. I don't know if that answered your question?

Sorry about the previous technological problem. We're actually doing this call in two separate locations. Tony is currently in the quarantine hotel, coming back to China. So operator, if we experience another outage of this telephone line, please let me know.

Thank you. Mr. Duan, do you have follow-up questions?

No. That's all my questions. Thank you very much.

Thank you for your question. We'll move on to the next questions from the line of Allen Li of J.P. Morgan. Please go ahead.

Yeah. Thank you management for taking my question. I have a follow-up question on the competition and pricing. So I understand that you have a clear edge in technology, but still want to get a sense on what's your pricing strategy, especially in overseas market, given the revenue drivers seem to shift to overseas increasingly. And also I'm wondering, what's the revenue price trend in China, given all the relatively weak demand due to regulation and macro slowdown? Thank you.

Okay. Maybe I'll take this question. So what we see in the non-China market so far, especially in more developed markets like United States and Europe, is that -- I am quoting a sales leader within Agora. He said, no customer choose Agora because we are cheap. So customer always choose Agora because of our quality, our feature set. And in this market because RTE experience is so critical to the success of many applications and the fact that users can perceive that difference very clearly. Once you have a hiccup, immediately all the participants in that session will feel that very clearly. So actually, [indiscernible] these customers are willing to pay for a higher quality, a more stable service, and better security and privacy protection standards. So we -- I think it's fair to say in these more developed markets, we don't think pricing is the -- kind of the number one factor, in terms of competition. In less developed markets, sometimes we do run into price competition. However, it's still largely in very orderly fashion. People do take into -- take pricing into consideration, but it's normal considerations. In China, as we mentioned before, this market has been around for several years now, and what we are seeing is similar to many other types of services, pricing is -- we have cutoff pricing in terms of discount almost every year. The year-on-year change has been in the range of 10% to 15% in the past four, five years and the last year was no different. Our strategy is try to, at the same time, cut our incremental cost at a similar pace, so that we can maintain a relatively stable margin.

Okay. Got you. Thank you.

Thank you for the questions. [Operator Instructions]. There are no further question at this time. I would like to hand the call back to the management for closing remarks.

Well, thank you operator and thank you everyone for attending today's call. Later on, we will have the transcript of the call to be posted on our website, which is investor.agora.io, also along with our earnings filings and the presentation of this call. Well, thank you. Have a great day ahead.

Thank you.

Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.