Good day, and thank you for standing by. Welcome to Agora Inc.'s Second Quarter 2022 Financial Results Call. At this time, all participants are in the listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference call is being recorded. I'd now like to hand the conference over to Ms. Fionna Chen, Head of Investor Relations. Thank you. Please go ahead ma'am.

Thank you operator. Good evening everybody, good morning for people in Asia and thank you for joining us for Agora's second quarter 2022 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, our 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 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?

Yes. Thanks Fionna, and welcome everyone to our earnings call. Our revenue for the quarter was $41 million, a decrease of 3% year-over-year, and an increase of 6% quarter-over-quarter, bringing us back on the growth track after regulatory change in the K-12 acquisition sector in China. During this quarter, 33,000 new applications registered on our platform. At the end of June, our number of active customers exceeded 2,800, adding over 400 compared to one year ago. In the US and international markets, demand for our real-time engagement platform remain strong. Our revenue for this segment recorded a 63% increase compared with the same period last year with a dollar based net expansion rate consistently above 130% since 2021. Following our announcement of the promotion of several key executives in May, I'm confident that we are well-positioned to enhance our go-to-market efficiency and expand our platform globally. In recent months, we have witnessed a strong response to our sub-second interactive live streaming product globally. We believe this product has the potential to disrupt the traditional CDN-based live streaming market as we can deliver live streaming experiences and lower latency in a highly synchronized fashion with only a moderately higher cost. We already have several benchmark customers in the sports and gaming live streaming sector. Powered by this product, our customers can create a wide range of engaging and interactive experiences for their end users such as chat among audience and in-game live betting. For example, MBC Group, the largest media country in the Middle East and North Africa uses this product on their social gaming platform WIZZO to offer game players high-quality interacted live streaming and it has become one of the biggest attraction of the WIZZO platform. With Agora-powered live streaming in place MBC has already seen a 10% increase…

Thank you, Tony. Hello, everyone. Let me start by first reviewing financial results for Q2 and then I will discuss our outlook for the fiscal year of 2022. Total revenues were $41 million in the second quarter of 2022, a decrease of 3.2% year-over-year, and an increase of 6.2% quarter-over-quarter. As we mentioned, in previous earnings calls, our revenue growth in this quarter was negatively impacted by the new regulation on K-12 academic tutoring sector in China. Our revenues from this sector were approximately $1 million in the second quarter of 2022, compared to $12 million from the same period last year. On the other hand, our growth momentum in other geographies and sectors remained solid in this quarter. In particular, revenues from US and in international markets grew 63.2% year-over-year and 13.4% quarter-over-quarter to $18.6 million in Q2, representing 45.4% of our total revenues. Our trailing 12 months constant currency dollar-based net expansion rate is 95%, excluding Easemob. Specifically, expansion rate was about 130% for the US and international business, which remains strong and healthy; and approximately 80% was China business, which was negatively impacted by the K-12 sector. Moving on to cost expenses. For my following comments, I will focus on non-GAAP results, which excludes 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 first quarter was 65.8%, which was 4.3% higher than Q2 last year, mainly driven by technical and infrastructural optimizations. Non-GAAP R&D expenses were $27 million in Q2, up 30% year-over-year, as we continue to hire talented employees and strengthen our R&D team. Non-GAAP R&D expenses were 56% of total revenues in the quarter compared to 49.2% in Q2 last year. Non-GAAP sales and marketing expenses were $10.9 million in Q2, up…

Thank you. [Operator Instructions] Our first question comes from the line of Yang Liu from Morgan Stanley. Yang, your line is open. Please ask your question.

Thank you for the opportunity. I have two questions here. The first one is can management update us in terms of the overseas market demand for RTE, especially the demand from start-ups? Because on the positive side we see a good pickup in terms of the new customer this week -- this quarter, but on the negative side, we also from time-to-time hear that the overall overseas funding environment is getting tougher and a lot of start-ups cannot lose equity or risk funding in the market. So, could you please update us in terms of what Agora is seeing on the demand? And the second question is the gross margin because we see a very good pickup in gross margin this quarter, what should be the outlook in the second half of this year? Do you think this is a structural or sustainable trend or is it helped by some one-off benefits?

I'll take the business trend on our customers fund raising etcetera. Overall, we do hear some start-ups talking about fund raising getting harder and the valuation is much lower now, but we don't have a strong impression of difficulties from our customer base. We have a very diverse customer base from large to very smaller ones. In some individual cases, we see things like customers slow down their own hiring, delay rollout of new products or features or become more sensitive infrastructure costs etcetera. I believe this is normal, given the challenging market environment we are in today. In terms of impact to our own business despite the challenge I mentioned just now we see that overall trend of adoption of real-time engagement technology by developers and users remain strong especially for the global market. This is why we still achieved a strong revenue growth in Q2 in the US and international markets with revenue up 63% year-over-year. We will continue to monitor the situation closely and see how it pays off.

Okay. I'll take the second question on GP margin. So, in the past six quarters since beginning of 2021 our back-end engineering team has really worked very, very hard to optimize infrastructure costs and improve our architectural design, so that the same task consumes less server and less resources. This has resulted in a very significant reduction in our COGS per minute of video or voice call delivered. And this is why, despite them have annual decrease in average selling prices of about 10% to 15% which is normal for cloud services like ours, we were still able to improve our non-GAAP margin from 58% in Q2 or in Q1 last year to 65% in Q2 this year which is more than 7% improvement. So I guess that's the most important reason. There was also a small one-off factor in this quarter. Easemob has a small private cloud business which has lower GP margin. This quarter many of their private cloud projects are delayed due to the COVID situation in China. And this actually had a positive impact on the GP margin because the revenues were delayed. Looking forward further COGS optimization will be harder and new products such as the integrated CDN will have lower GP margin. So we do not expect GP margin to increase significantly in the near future. It will likely fluctuate from quarter-to-quarter in the second half.

Thank you. Just one very quick follow-up here. Could you please update us in terms of the gross margin in China and in global market? Are they quite still now, or is there still a gap between these two markets?

Yes. So latest number we see there is no gap six quarters ago. GP margin in US and international market was quite a bit lower and now it's obviously at parity. There's no difference between the two markets.

Thank you.

Thank you. Our next question comes from the line of Bing Duan from Nomura. Please ask your question. Bing, your line is open. Please go ahead.

Hi. Sorry. Hi. Good morning, management. So I have two questions. One is about the trend of the operating expense. Can you give us more colors on the second half, especially, about the R&D and the sales and marketing expense, the expense ratio as compared to the first half? And the second question is about a follow-up on the overseas market growth. Can you give us some more color about the revenue and/or volume breakdown by application or by the vertical segments? And do we see any of the negative impact as more people are getting back to work? Thank you.

Okay. So the first question on expenses you're right as you can see in the financial statements the fastest-growing segment of our expenses is R&D. We have always invested a lot very heavily R&D in the past and will continue to do so in the future because ultimately this is where is the foundation of our competitor business. But on the other hand we acknowledge the challenging macroeconomic environment in the US in China and the other markets as well. So we do intend to become more focused when it comes to R&D. For example product-wise we will focus on products where we see strong demand such as sub-second live streaming as Tony mentioned in his opening remarks where we have a strong advantage such as special audio. And we'll really focus on resources on these kind of promising products. And customer-wise we will focus on large customers and the small group of really innovative customers who can help us drive our road map and be the future of real-time engagement. And in terms of the organization, we will streamline our internal processes and bring our engineers closer to our customers. So all these initiatives will improve our R&D efficiency. And hopefully as our revenue scale, we will see that percentage drop in the second half. In terms of sales and marketing, the increase in sales and marketing expenses were mainly due to our expansion in US and international markets. In China, actually -- part of -- was mostly flat. We think that sales and marketing expenses overall will continue to increase in dollar terms, but the pace will slow down and as our revenue scales to also drop as a percentage of revenue. I want to add another point on the G&A expenses. So, in the past three to…

Thank you.

[Operator Instructions] Our next question comes from the line of Allen Li from JPMorgan. Allen, your line is open. Please go ahead.

Yes, thanks management for taking my question. My question is on competition. So, we know that some large platforms have shifted their focus from revenue growth to profitability, so just wondering if this is also the case, for private competitors. And could you give us an update, on the competitive landscape and also the pricing trend in the mass market? Thank you.

We don't see much change compared to last quarter's competition landscape. As you mentioned the large cloud providers, as we heard also they reduced their investment in our field actually maybe partially, due to their effort to shift the focus to more profitability instead of just revenue growth. On private sector, I think there are similar trends where companies all kind of look more on profitability, instead of just growth. But overall, there's no huge change compared to last quarter.

All right. Thank you.

[Operator Instructions] We have a follow-up question from the line of Yang Liu from Morgan Stanley. Please ask your question.

Just one, very quick follow-up in terms of FX. I think management mentioned, that the China part of the business have a few percentage of the FX negative impact in second quarter. And currently, given the sustained strong US dollar, do you think this kind of a trend or this kind of impact will continue in the second half? And also in terms of the full year guidance, management retains is unchanged, but does it mean that actually the company needs to deliver a little bit more than expected to reach the number given the FX headwind?

Yes. So, for Q2, if the US dollar-RMB exchange rate state where it was at the end of Q1, we would have a major nearly $1 million more in revenue that impact for Q2. So when we give the full year guidance, we're assuming a constant FX exchange rate at where it was at the end of Q2. So we are not factoring in any further appreciation of US dollar. And you're right, to deliver the same guided revenue, we need to work harder. The full year impact if it stays where it is now, it will be close to $5 million. So that means, we need to make $5 million more.

Got it. Thank you.

Our next question comes from the line of Boris Svend [ph] from Bernstein. Boris, your line is open. Please go ahead.

Hi. Good morning. Thanks for taking my question. This is Boris Svend [ph] from Bernstein speaking. I have two questions, I would love to ask. The first is regarding, I think, the gross margin performance. I think it's very positive to hear about the reengineering and the cost opportunity. Just wanted to check is this a one-off, or is this something that can be continued to gain in terms of further efficiencies on an ongoing basis? And the second question I had was broadly in the same vein around R&D. I would like to hear a little bit more about, how do you think about R&D and your investments in R&D going forward? Because it seems like you have a lot of good use cases. But does this mean that R&D continues to grow or when should we start getting efficiencies in R&D over time? Thank you.

Okay. The first question on GP margin, as I explained, the improvement since 2021 was mostly due to the engineering effort to -- also a procurement effort, but mostly engineering effort to optimize the technical design, so that to do the same thing we need less server or bandwidth resources a bit more. We'll continue to optimize the design. But there is this diminishing return of the optimization. So it will get harder. It's not like Internet always gain the same amount of improvement over time, so it will get harder. And that's why we're not guiding kind of a higher GP margin. And in addition, as I mentioned before, our strategy is really to keep a healthy GP margin instead of trying to maximize GP margin whenever we can, so that we can keep enough competitive pressure our competitors as well. So that's on GP margin. In terms of R&D, it's true, we are both investing for today and investing for the future. As we expand globally, we see more use cases, we see more regions, more different macro environment, so we need to invest to really optimize the performance there. But we also made a lot of investments for the future. And we expanded our R&D team so much, almost eight times in the past two years. Obviously, there are a lot of inefficiencies. So looking forward, we will -- as I said, right, we'll be more focused and we'll work hard to remove some of the efficiencies. So in simple terms, we do not expect R&D to continuing to drive as we expand our operation globally. And there should be actually a very strong operating leverage, because a lot of the technology, a lot of the products we build can be leveraged across different use cases and across geographies. When we do the education solution we built in China, or we go to Eastern Europe or we go to South Asia, actually it's essentially the same product with very little modification. So actually we're seeing, in the end, there will be a lot of R&D leverage. So, again, we do not expect R&D Q2 rise [indiscernible] revenue.

All right, Boris. Do you have any follow-up question?

Thank you, for that. That's very, very, very positive. Would you be in a position to maybe guide us on how are you thinking about the sort of the long-term steady-state R&D and maybe sales and marketing?

We've always guided that for this business. We see that the long-term R&D would be somewhere around 30% of revenue which is high compared to most SaaS or PaaS business because we see really a very sophisticated technology. That's why we will maintain this relatively high level of R&D for even longer. And sales and marketing on the other hand should be lower given all the advantage we gained through R&D. So we think that will stay at around 20% in the longer but that's not for the long time steady state if not this year next year.

Okay. Thank you, very much. Thank you.

Thank you. [Operator Instructions] There are no further questions. I'll now turn the call back to the management team for closing remarks.

Thank you, operator and thank you everybody for attending our call today. As a reminder, the recording in the earnings release will be available on our website investor.agora.io. And if there are any questions, please feel free to e-mail us. Thank you.

Thank you. Bye-bye.

Thank you.

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