Ladies and gentlemen, thank you for standing by, and welcome to Agora Inc. 3Q 2020 Financial Results. [Operator Instructions] I must advise you that this conference is being recorded. I would now like to hand the conference over to your speaker, Ms. Fionna Chen. Thank you. Please go ahead.

Thank you, operator. Good evening, and good morning, everyone. My name is Fionna. I am the Investor Relations Director at Agora. Thank you for joining Agora's Third Quarter 2020 Earnings Conference Call. Joining me today are Tony Zhao, Founder, Chairman and CEO; and Jingbo Wang, CFO. Our earnings results press release and a slide deck can be found on our IR website at investor.agora.io. 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, including guidance. 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. We will discuss them in details in our filings with the SEC, including today's earnings press release and risk factors and other information contained in the final prospectus relating to our initial public offering. Agora assumes no obligation to update any forward-looking statements we may make on today's call. With that, let me turn it over to Tony.

Thank you, Fionna, and welcome to our -- hello? Do you hear me?

Yes.

All right. Thank you, Fionna, and welcome, everyone, to our earnings call. This is the first quarter in 2020 that was impact-free from the COVID situation in China as COVID-19 gradually fade off between late May and early June. But even without the short-term demand caused by COVID in China, we still delivered another quarter of outstanding results with revenue of USD 30.8 million for the third quarter, an increase of 81% year-over-year. Our number of registered applications reached more than 240,000 at end of September, adding nearly 10,000 per month in Q3. Our number of active users reached more than 1,800, up 95% year-over-year. Outside of China, we continue to see strong demand for our real-time voice and video products in both mature use cases such as entertainment and gaming and emerging use cases such as education and virtual demand. We also made solid progresses in our products, brand and ecosystem in this quarter. In particular, I'm proud of our marketing and design team who created an amazing experience at our RTE2020 Virtual Conference with more than 8,000 registered attendees, and tens of thousands of unregistered viewers, 170 guest speakers and over 100 companies all over the world participated. We also had our first RTE start-up challenge with more than 130 start-ups joining the competition. More than 75% of these start-ups are already founded, and 50 of them were selected to join our start-up program, where they will receive premium platform usage credit and dedicated technical support. At Agora, we constantly support start-ups at early stage to cultivate innovation and accelerate the emergence of new use cases for RTE technology. At RTE2020, the discussions will focus not only with exists -- not only with what exists today but how to reimagine model simulation or innovative RTE application and build…

Thank you, Tony. Hello, everyone. Let me start by first reviewing financial results for the Q3, and then I will discuss our outlook for the full year. Total revenues grew 81% year-over-year to just over $30.8 million in the third quarter of 2020, which is mainly due to increase in volume for both our video and voice products. At the end of September, we have powered more than 400 billion minutes of real-time engagements per month on average [ user ]. As you probably already know, the COVID-19 pandemic has been well contained in China by late May, after which most of our activities and travel gradually returned to normal. As a result, I would say the users in Q3 had almost no direct impact from COVID in China. That being said, revenues in Q3 was still significantly higher than the same period last year, reflecting the increasing penetration of contextual real-time engagement in all activities and the long-term retainership. The usage in Europe and rest of Europe, on the other hand, was still at heightened levels with both our market expansion efforts and the prolonged impact of COVID-19. Demand from use cases such as education, virtual events and entertainment continued to grow rapidly. Our trailing 12 months constant currency dollar-based net expansion rate was 188% at the end of September. This number has been positively impacted by the stack of the usage this year due to COVID-19. Fortunately, the situation has stabilized in China, and hopefully, the other regions as well in the near future. Afterwards, we expect our expansion rate will likely come back to levels similar to what we saw in 2018 and 2019. Now turning to cost, expense and margin. Please note that the usage of our products and timing of our hiring and marketing initiatives…

[Operator Instructions] And our first question comes from the line of Yang Liu from Morgan Stanley.

3 questions from my side. The first one is could management update us in terms of the progress of penetrating online education customers in terms of their big class use cases with big potential there? And previously, management mentioned that some big customers doing testing. Could you please update us to progress? The second question is related with competition. We saw some fundraising movement from your peers in the capital market, private capital market. Could you please update us if you have any more intensified competition when pitching customers or penetrating customers? And the third question is related with the gross margin outlook. As Jingbo mentioned that while Chinese telco raised their price, do you see any risk of the other 2 will also raise the price in the future? And what will be the gross margin trend in the next few quarters?

Okay. I'll talk about the progresses on use cases, especially for the larger classroom experience. It's true that we are actively working with customers on, what we call, super small class use cases because this is one step further in enhancing the user -- student and teacher experience in large classroom use cases. The use case is like this, students can take a course with hundreds or thousands or even tens of thousands of other students in one same classroom so that there could be a lead teacher teach them together. But during the classroom experience, maybe added 10 to 15 students will be -- form small groups of 4 to 6 in each market, and they can work on assignment and discuss with each other or even like a formal competition within your small group to compete on who is going to, say, win on answering certain questions. And then come back to -- after that, come back to the large classroom session. So this new format combines the efficiency of large classes and interactivity of smaller classes and the -- like the competition could launch within the small classrooms will further enhance the students' attention or focus in the content being teach -- being taught in that classroom session, which can significantly improve the learning experience and outcomes. And there are some other interesting use cases like virtual workplace and also in gaming and social use case as well. So we -- outside of education, we are also working on some other interesting use cases as well. Now about the competition, it's true that I think this year, maybe due to both COVID-caused demand and of course, our build in the public market, so there are more companies sitting at the space, and there are [ readings ]…

Look, I'll take the third question on margin. So as to the telco raising the price, we do not expect that to happen with the other 2 telcos given, one, that the price this quarter, fortunately, has the lowest price among the 3. And the effort was really to close the patent gap. And after the adjustment, because it's more similar than the 3 in telcos, so we cannot expect any short-term changes. As to the general trend on gross margin, as I mentioned earlier, it was affected by both international expansion and also income and cost. It may look slightly longer term, as we can enhance our gross margin in 3 ways: number one, through our innovation, to create more innovative products and features. So that's always the best way to create more value for customers and getting a higher margins. And that's why we cut the marketing and R&D very heavily. And secondly, XLA will be a great way to help us charge different prices based on different levels of -- quality difference or use cases where the highest possible quality needed will be able to achieve higher gross margins over time. And lastly, we'll continue to reduce our bandwidth and server costs, smooth recommendation and better use of resources. So we are actually long-term optimistic about gross margin. In the near term, because all these efforts will take time to be reflected in the accounts, so we do expect gross margin to remain under pressure but unlikely to decline significantly from what we saw in Q3.

[Operator Instructions] And our next question comes from the line of Emerson Chan from Bank of America.

I have 3 questions. My first question is regarding the RTE adoption and engine barrier. What RTE use cases you found the most challenging to serve in terms of technology? And how should we look at the technological barrier of RTE in the future? Is it going to be higher, let's say, due to more advanced use case emerging or the engine barriers of RTE is actually taking lower? Secondly, our revenue in Q3 grew 80% year-on-year, and we maintain our full year guidance, meaning Q4 revenue to be up about 40% at this point. So can you give us more color on the reason behind potential slowdown in Q4 and what we have seen so far in Q4? My last question is regarding the COVID impact. I just want to get a rough sense of how much COVID did contribute? So revenue growth in Q3, I suppose it should be coming from overseas market. So how much percentage of revenue in Q3 will be coming from the overseas?

Sure. I'll take the RTE question. Actually, in general, I think, RTE puts us many challenges in almost all use cases. We actually think there are many challenge in the 3 pillars I was talking about in the opening remarks like shared context. How do you support all the different context or enrollment or [indiscernible] use case we'd have to create. And also, any scale interaction from very small ones to very large ones. And lastly, about ubiquity that we need to continue to support all tools and framework. Sometimes, the effort do not really meet all of those framework of tools, but we want to have the flexibility and the availability of the support for that to happen. So when they choose those source or patents to build their RTE use cases, they would consider the ones that have the most support for almost all tools they want -- they might potentially use. And AR/VR is definitely a hard one because the business definitely demands more competition for -- or more -- the more transmission bundles, et cetera. But there is -- even like in a large classroom experience I was just talking about fee needed for tens of thousands concurrent students, and they can break out in a matter of seconds to thousands of small groups and then form meaningful like small group discussion or competition within the group and come back in another second. And we can organize all that in the programmable way, all of those have some talent in how we design the technical infrastructure because you have to imagine that the student and teachers could come from all over the world. And all these different equipment or devices to form the session. But they'll all be there to have the same high-level quality assurance.

Okay. So on the second question about revenue guidance. I would say we are currently not suggesting a quarter-on-quarter slowdown in Q4. As always, we don't want to be aggressive in guiding the markets and we don't feel it's necessary to adjust the year guidance, particularly on the -- with the sudden change in expectation. As for Q4, so far, we are encouraged by what we have seen so far in Q4. And hopefully, we will be able to deliver another strong quarter. And as to the revenue mix and impact from COVID, that's right. In Q3, I would say, there was almost no impact from COVID in China. And outside China, contribution of China was more than 20%, more than 20% in Q3.

Outside of China.

Yes, outside of China.

Yes.

And I wouldn't say the impact was all due to COVID. It's probably -- actually, the majority of that conversion was due to our own market expansion effort there and the smaller -- the small portion there can see the short-term demand from COVID. Can you still hear us? [Technical Difficulty]

Okay. It seems that he disconnected his line. We'll move on to our next question, comes from the line of Rich Valera from Needham.

First, just wanted to clarify the comments on Q4. I apologize, but the line is -- it's a little difficult to hear. But Jingbo, did you say that you did not expect a quarter-over-quarter decline in Q4? Just wanted to make sure I understood what your comments were with respect to the Q4 outlook.

Sure. Obviously, Q4 is still only half this year. So it's too early to say. But perhaps what I wanted to clarify, we are not guiding a Q-on-Q slowdown in Q4.

Okay. That's perfect. And then you've had a couple of quarters of really strong new customer growth, I think probably 2 of the strongest quarters in your history in Q2 and Q3. And I'm wondering if you can talk about when you expect to see them starting to generate revenue and maybe if you've seen any early signs of those added in Q2 starting to generate revenue and just how we should think about those contributing to future revenue growth.

Sure. In general, new customers will take us 3 to 6 months to fully ramp up. And this has been actually same this year. But the difference this year is the fluctuation in the first 6 to -- 3 to 6 months is much, much bigger due to COVID. Imagine an education customer who joined the classroom in January or February, he would suddenly have very high usage plus all the technical difficulties initially. But given the situation back then, we have to go with it, whatever the situation. So we have very high initial usage. But then as China reopened in late May, early June, our usage would fall. And that's why it's a lot harder to tell on the -- what we have seen so far. But generally, we see that the trend is the same. So these customers will continue to generate revenue, but just the short-term pattern or the very heavily [ COVID ].

Understood. And final question for me. In terms of customer concentration, I think last quarter, you didn't actually have any 10% customers, but I believe you had 2 customers that were 9% of revenue. I was wondering if you could comment on who your largest customers this quarter, how big they were and maybe the status of those 2 9% customers from last quarter.

Sure. This quarter, we had one customer slightly above 10%. And then top 10 in total of [ 37% ]. And the 10% customer was the one of the 2 numbers and customers last quarter. The other customer was smaller. As I explained, of the -- or some of the education use cases, especially for public schools, obviously after the opening, they eventually go with the fallback.

[Operator Instructions] There are no further questions at this time. Speakers, you may continue.

Thank you, operator. If there are any -- if any investors or research analysts have any questions, please feel free to reach out to us through our IR e-mail or any -- our IR website. Today's webcast and also the presentation is available on our IR website as well. So thank you, everybody.

Thank you.

Thank you.

And that does conclude the conference for today. Thank you for participating. You may all now disconnect.