Thank you all for standing by, and welcome to the Agora Inc. Third Quarter 2021 Financial Results. At this time, all participants are in a listen-only mode. [Operator Instructions]. I'd now like to hand the conference over to your first speaker, Ms. Fionna Chen. Thank you. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us for Agora's third quarter 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; 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 will discuss in detail in our filings with the 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 make on today's call. With that, let me turn it over to Tony. Tony, please.

Thanks, Fionna, and welcome, everyone, to our earnings call. In the past 2 months, we hosted our RTE2021 conference in both the US and China, which attracted thousands of developers, product managers, entrepreneurs and investors worldwide. At the conference, we announced the advance of real-time engagement use cases, which covers over 20 industries and more than 200 use cases in entertainment, social, IoT, education, finance, health care, enterprise collaboration and even smart cities. We also released important new products such as Fusion CDN live streaming, which I will talk about later. Now about our Q3 performance, we delivered another quarter with outstanding results. I'm pleased to report that our revenues for the third quarter were $45 million, up 46% year-over-year. At the end of September, we had more than 372,000 rejected apps on our platform. Our number of active customers reached more than 2,500, adding over 700 year-over-year. Next, I want to highlight our advancements on product and use cases in Q3. On the product side, we released two important new products this quarter. First, we recently unveiled full-path accelerator or FPA, our global end-to-end network acceleration product. Unlike traditional network accelerators that mainly improve backbone transmission from one region to another, FPA takes the entire transmission path into consideration, including backbone and last mile, and optimizes the speed and the reliability of transmission in a holistic fashion. FPA is based on our proprietary software-defined real-time network and can accelerate any kind of data, not just video or audio, and for any application, whether it's gaming, e-commerce, collaboration or metaverse. With just a few lines of code, developers can integrate FPA into their application and let all their users enjoy a smooth and responsive experience no matter where they are. Second, we announced our Fusion CDN live streaming product at…

Thank you, Tony. Hello, everyone. Let me start by reviewing financial results for Q3, and then I will discuss our outlook for the full years. Total revenue grew 46% year-over-year and 6% quarter-over-quarter to $45 million in the third quarter of 2021. Number of active customers reached more than 2,500, excluding [indiscernible], up 41% year-over-year. The growth in revenue and active customers was mainly driven by continued adoption of our technology by developers as well as the emergence and the growth of new use cases. Revenue growth in the quarter was negatively impacted by the new regulation on K-12 academic tutoring sector in China, and we expect such impact to be more significant in the next two quarters as the government continues to enforce regulation. Our trailing 12 months constant currency dollar-based net expansion rate is 1.4% excluding Easemob. As we mentioned in previous earnings calls, in order to help investors better understand our organic growth, excluding the impact from one-off events such as a complete lockdown in China in the first half of 2020 due to COVID-19, we calculated adjusted total revenues for these periods. If we use adjusted total revenues, the adjusted expansion rate would be 126%. Moving on to cost 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 third quarter was 65.5%, which was 2.7% higher than Q3 last year and 4% higher than Q2 this year. As we mentioned in previous earnings calls, increases were mainly driven by technical and infrastructure optimization, as we have been implementing since the beginning of this year. Non-GAAP R&D expenses were $22.9 million in Q3, up 112% year-over-year, as we…

[Operator Instructions]. Our first question comes from Yang Liu at Morgan Stanley.

Thanks for the opportunity to ask questions. I have two questions, both related with the overseas business. The first one is, given the pretty fast reopening post-COVID in the overseas countries, do you see any sign of slowing down in terms of growth in overseas market? And what is current outlook for this line going into 2022? And what should be the growth driver going forward? And the next question is, what does the margin look like for the overseas business now as we see a very big jump in the blended gross margin this quarter? Is it helped by the overseas scale ramp-up?

All right, I'll take the first part. So for overseas business, we continue to see strong demand from developers in the US, APAC and other parts of the world, including many, many new use cases. Some of those are described in our recent release atlas of real-time engagement use cases. In this quarter, revenue from outside China actually grew 90% year-over-year and accounted for nearly 30% of our total revenues. US-Rest of World market is already our strategic focus, and we will continue to invest more to grow into that market. In terms of reopening, many markets, for example, the US have largely reopened and many are in the process of further coming back to work or coming back to school. Our observation is that reopening typically reduced demand from use cases such as education, virtual event or virtual collaboration in the short term. Demand from social and gaming use cases are less effective. So if we look at the long term, the prolonged work-from-home experience has changed people's lifestyle, and I think digital transformation will also continue after the pandemic. And the way we live our lives will be different permanently. First is the hybrid mode for work -- remote working plus coming back is going to be here to stay. And live streaming e-commerce or other form of new way to conduct business is also going to continue to grow. Of course, like I said, social and gaming use cases, we see a much less impact and would be growing faster. We will use a lot more real-time video and audio engagement in overall our life and work in almost everything we do online. About the use cases, I can add more. As I mentioned, we published the atlas for real-time engagement use cases. And there are a…

Sure. So on the second question on gross margin, certainly, since the beginning of this year our gross margin has been improving across all regions in China and US, APAC. It's really driven by limitless technical optimization and improved capacity planning and management. Currently, gross margin outside China is still slightly lower than the gross margin in China. This is because, from a technical perspective, China is one big region. Outside China is now the one region, it's 10 to 20 testing regions. The scale of our operation in most of these regions is significantly smaller than our scale in China. So, we don't enjoy the same level of economy of scale. So, we expect that as we continue to scale our business outside China, gross margin will eventually catch up with what we are seeing in China.

Our next question comes from Emerson Chan from Bank of America Securities.

I have a few questions. My first question is related to our Q4 outlook. I think we have achieved a pretty solid growth in Q3 despite the [indiscernible]. If you look at our full-year guidance implied Q4 [indiscernible] decline sequentially quite a bit. So I wonder what are the key drivers behind the sequential decline in Q4 and what we are seeing business in Q4 versus Q3 so far? That is my first question. My second question is a follow-up on our GP margin outlook, whether we believe our GP margin will continue to improve in the future or we will invest our margin upside for growth, given I believe the RPs are still in early stage yet? So just wonder how management tries to balance between gross margin and [indiscernible]. And lastly, we mentioned we covered 200 use cases from 20 industries. So I'm just curious how many vertical solution or SDK we have now and how does it compare to our competitors, whether our competitors are mostly offering general SDK across different use case? And what are the key benefits of offering these vertical strategic solution versus general SDK?

Thanks. So, I will take the first two questions. So on the first question regarding Q4 revenue outlook, so as we mentioned in our last earnings call, K-12 education in China represented about 25% of global revenues in Q2. And in light of the new regulations that came out in July, we revised our full year revenue guidance in our last earnings release. We have revised the guidance to $159 million to $161 million. Now looking back, K-12 education revenue in Q3 was better than our earlier expectations because many tutoring service providers were able to finish their classes in the summer vacation. Now as we go into Q4 and we see that government is moving to enforce new regulation, we have seen that usage from K-12 education sector has dropped to a lower level. So, we have updated our full-year revenue guidance to $163 million to $165 million to reflect our best estimate at this point. However, as -- similar to our situation last quarter, it is very hard to predict how exactly the sector will evolve and play out this quarter -- for the remainder of this quarter and in the coming quarters. And on the second question on GP margin, as I explained, the improvement in GP margin was mainly due to technical optimization. So looking forward, I think there are multiple -- several factors at play here. First of all, the lower usage from education customer in China will reduce the utilization rate of our infrastructure. So, that's a negative impact on our GP margin. On the other hand, we are trying very hard to optimize our cost to offset some of that impact and internal strategy. I think our strategy has always been that we intend to maintain healthy and fair margin -- healthy and fair GP margin, instead of maintaining a -- instead of maximizing our prices. So generally, as we have done in the past, we will pass on our cost savings to our customers, deliver really the most competitive and the best performance to price ratio for our customers.

All right, about the vertical solution and SDKs, we have dozens of different vertical solutions, as mentioned earlier, like education APOS, live audio cast, karaoke, LTE solutions, multiple IoT solutions. We also offer a lot of different SDKs to support diverse development platform or environment, like Unity or Unreal or CoCos or Flatter as needed, et cetera. Those SDKs and the vertical solutions provides use case specific features and higher-level APIs so that the developers can integrate and go live with less lines of code and much less effort. The key benefits of those solutions are ease of use for developers. We have, by far, the most comprehensive vertical offers compared to competitors.

Our next question comes from Vincent Yu from Needham & Company.

Thank you, management for taking my questions. I have two. One is, we do see some weakness in the live streaming industry in China, and what do we expect the trend of this revenue source for our business? My second question is trying to follow-up on the overseas business. So in terms of the -- like the online conference and -- or the like online or virtual kind of meet -- showcase application of our product, do we see -- can we ensure the strong insight on the progress in terms of capping orders in the key markets such as US?

About live streaming, as an industry, it is still growing but has reached to a relatively mature stage. We think it's actually positive for us because users are no longer excited by traditional form of live streaming such as talent show or games -- or game forecasting. Live streaming operators now need to constantly come up with new engaging experience to attract users. And the most engaging experience is always real-time interactive ones. Essentially, we are not relying on the expansion of user base of live streaming, rather we are relying on penetration of RTE within its user base. For example, the karaoke use case we were just promoting in the last few months or the interactive games inside our live streaming experience are all kind of new, and we see very strong demand for using those use cases. And I also mentioned the virtual idol live streaming or more interactive experience on e-commerce apps, those are all very active areas even inside the live stream industry. Around -- the progress is about overseas demand. As I mentioned earlier, we see our US-Rest of World business has a faster growth rate and even -- but even bigger potential in front of us. Our app registration is currently 12,000 per month, out of which, there are 3 -- two-third is from US-Rest of World. It's much clearly bigger than where the registration come from China. So we are also working with several large customers on social and media use cases. Jingbo also talked about some of those progresses reflected in our growth rate of US-Rest of World. But we believe US and Rest of World market has an even bigger potential. One of the driver of US-Rest of World is the convergence of use cases globally. As I mentioned earlier, I've actually talked about how social deduction games although it took years, but now appear in South America and other parts of the market. We believe it's a validation of our logic of those use cases would be replicated in different regions. Another example is online education. We see clear trend that the online classroom service is actually being replicated to other regions in this world. So, those are all growth drivers for US-Rest of World but the natural demand and unique use cases is also a strong indication of the potential of the market.

[Operator Instructions]. Our next question comes from Bing Duan at NOMURA.

Management, thank you for giving me the opportunity for asking questions. I have two questions. One is regarding the net dollar retention rate. We see some sequential slowdown in the third quarter. The adjusted DRR is now around 126. So just curious, what's the major reason to that? And how do we think about the trend in the next few quarters and the major drivers? The second question is about our pricing. So, do we see any changes in the pricing to the -- to our large or strategic customers in major industry verticals? And what about the train and how do we think about the impact to the gross margins?

Sure. So I'll take those questions. Yes, it's true that -- [indiscernible] for looking at the adjusted expansion rate because the raw expansion rate was really affected by the spike in demand in the first half of last year in China. So, the adjusted number will reflect the organic growth better. Actually 126% is a pretty healthy level and it's actually in line with the expansion rates we saw pre-COVID. We think that's the kind of normal -- within the normal range, we are seeing for this business and in line with our expectation going to the future. So there -- we don't really think there's anything wrong with the number. In the next few quarters, if we look at the raw expansion rate we'll be under additional pressure due to the new addition regulation in China. It is estimated to become a big drag on the expansion rate. So in term of pricing, as I explained earlier on, the ETP margin, I think it's very similar -- very similar to other RTE PaaS cloud services. Here, our aim is to provide customers with the PaaS performance to price ratio, the PaaS value per dollar. So, we never had a strategy to maintain the same price or to continue to maximize the price. I think that will be very -- where we see in the RTE PaaS business. So in the past we have generally passed on our own cost savings to our customers. That has resulted in a gradual drop in price year-over-year, which again is similar to many other cloud services like AWS. And with the -- what we saw in this year and last year was no different and it's exactly healthy for the growth of the entire market.

[Operator Instructions]. Our next question comes from Allen Li at JP Morgan.

Thanks management for taking my questions. I have two questions. The first one is on your CDN initiative. So just wondering, will we do the CDN business by ourselves or we just leverage our technology capability to help client choose the best city vendor? So what's our business model here? And the second one is on the head count. So, could you give us some color on your headcount plan next year?

I'll explain on the Fusion CDN offering. I want to emphasize again, it's actually a very innovative product. It's not a mere aggregation of the CDN services. But you're right, we won't build our CDN network. It's going to be integration of existing CDN provider service, but we add a lot more on top of it. One thing is to leverage our SD-RTN network to optimize the upstream quality and efficiency. And also, we have SDK embedded into customers' app where a CDN in provider does not have that kind of presence. And leveraging that SDK, we have a much better chance to detect and monitor the downlink performance of all CDN services and dynamically choose from the best quality and also the best cost for our app developers and customers. Combine all those, it becomes a very good offering for developers to provide a high-quality and cost-effective solution for their long latency streaming services. And it's going to be a natural extension for a lot of our customers' streaming demand when they're using us for interactive real-time services. But a lot of times, they also want to use some long-term streaming service. With this offer, I think it's a natural expansion of our existing offer and market.

And just to add one point on the business model, so here we offer an integrated solution. So the CDN providers will become our supplier and will sell the whole solution to our customers. So in terms of headcount for next year, obviously, as Tony talked about right, we are very optimistic in our business also in China, in US, in APAC, Europe, South America. We continue to see very strong developer sign-ups, customer POCs and projects running up. The business in China is more challenging, given the change in regulation education. So, we will be more cautious about our head count next year. If we take that back, in the past two years, we roughly doubled on headcount from 400 to 800 and the acquisition of Easemob another 200, so we are now at about 1,000. So, we do not plan to significantly expand our headcount gain next year. And the increase will mainly come from US-Rest of World market, and the increase in the China market will be very moderate.

[Operator Instructions]. There appear to be no further questions. So I'll hand back to management for closing. Thank you.

Thank you, operator. Thank you, everyone, for attending today's meeting. Again, if you have any further questions, you may rely on our materials being posted on our IR website or directly e-mail us at investor@agora.io. Thank you again very much. Thank you. Have a nice day.

Thank you.

Thank you.

Thank you so much. This does conclude today's conference call. Thank you all for joining. You may now disconnect.