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Agora (NASDAQ:API) Surprises With Q4 Sales But Stock Drops On Weak Guidance


Full Report / February 22, 2022
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Communications infrastructure platform Agora (NASDAQ:API) reported Q4 FY2021 results topping analyst expectations, with revenue up 21.4% year on year to $40.3 million. On the other hand, guidance for the full year missed analyst expectations with revenues guided to $177 million at the midpoint, or 1.98% below analyst estimates. Agora made a GAAP loss of $21.1 million, down on its loss of $6.18 million, in the same quarter last year.

Agora (API) Q4 FY2021 Highlights:

  • Revenue: $40.3 million vs analyst estimates of $37.9 million (6.41% beat)
  • EPS (GAAP): -$0.19
  • Management's revenue guidance for upcoming financial year 2022 is $177 million at the midpoint, missing analyst estimates by 1.98% and predicting 5.36% growth (vs 26.3% in FY2021)
  • Free cash flow of $2.91 million, up from negative free cash flow of $15.6 million in previous quarter
  • Net Revenue Retention Rate: 104%, in line with previous quarter
  • Customers: 2,670, up from 2,564 in previous quarter
  • Gross Margin (GAAP): 62.9%, up from 60.4% same quarter last year
  • Agora announced a share repurchase program under which it may repurchase up to US$200 million of its Class A ordinary shares

Founded in 2014 by former engineers at WebEx and based in China, Agora (NASDAQ:API) provides a cloud platform that makes it easy for developers to integrate real-time audio and video functionalities in their apps.

Developers often have limited time and resources when creating software applications. Agora’s software makes the process of building high quality voice and video functionality into web applications faster and more cost effective. Using easy to install blocks of code and integrations with a wide network of third-party apps, Agora simplifies the complex part of the work so that its customers can focus on building other parts of their application.

For example, the audio-based social network, Clubhouse, which took off during the Covid pandemic, was supposedly built on Agora within a week by only a couple of developers.

Students, content creators, and other web users with limited budgets can also use Agora to bring their creative ideas to life. With Agora, Yoga and gym instructors can now include live audio and video streaming functionality into their apps to manage classes, monitor their students and correct them when they make the wrong moves.

The company relies on its software technology to efficiently route network traffic via data centers distributed across the globe. This means that users with a slow network can also have a seamless experience when using video and audio streaming applications powered by Agora.

The first shift towards voice communication over the internet (VOIP), rather than traditional phone networks, happened when the enterprises started replacing business phones with the cheaper VOIP technology. Today, the rise of the consumer internet has increased the need for two way audio and video functionality in applications, driving demand for software tools and platforms that enable this utility.

Agora’s competitors include Twilio (NYSE:TWLO), Tencent, and Vonage.

Sales Growth

As you can see below, Agora's revenue growth has been strong over the last year, growing from quarterly revenue of $33.2 million, to $40.3 million.

Agora Total Revenue

This quarter, Agora's quarterly revenue was once again up a very solid 21.4% year on year. But the revenue actually decreased by $4.65 million in Q4, compared to $2.7 million increase in Q3 2021.

For the upcoming financial year management expects revenue to be $177 million at the midpoint, growing 5.36% compared to 26.3% increase in FY2021.

Customer Growth

You can see below that Agora reported 2,670 customers at the end of the quarter, an increase of 106 on last quarter. That's in line with the customer growth we have seen last quarter but a bit below what we have typically seen over the last year, suggesting that sales momentum may be slowing a little.

Agora Customers

Product Success

One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.

Agora Net Revenue Retention Rate

Agora's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 104% in Q4. That means even if they didn't win any new customers, Agora would have grown its revenue 4% year on year. Despite it going down over the last year this is still a fair retention rate and it shows us that customers stick around. But Agora is lagging a little behind the best SaaS businesses that achieve net dollar retention rates of over 120%.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Agora's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 62.9% in Q4.

Agora Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.62 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Agora's free cash flow came in at $2.91 million in Q4,turning positive year on year.

Agora Free Cash Flow

Agora has burned through $32.2 million in cash over the last twelve months, a negative 19.1% free cash flow margin. This low FCF margin is a result of Agora's need to still heavily invest in the business.

Key Takeaways from Agora's Q4 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Agora’s balance sheet, but we note that with a market capitalization of $1.03 billion and more than $755.3 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We liked to see that Agora beat analysts’ revenue expectations pretty strongly this quarter. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that Agora's revenue guidance for the full year miss analyst's expectations and indicates quite a significant slowdown in growth. Overall, this quarter's results were not the best we've seen from Agora. The company is down 5.59% on the results and currently trades at $9.45 per share.

Is Now The Time?

When considering Agora, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of Agora we will be cheering from the sidelines. Its revenue growth has been exceptional, though we don't expect it to maintain historical growth rates. But while its very efficient customer acquisition hints at the potential for strong profitability, the downside is that its gross margins show its business model is much less lucrative than the best software businesses and its growth is coming at a cost of significant cash burn.

Given its price to sales ratio based on the next twelve months is 6.1x, Agora is priced with expectations of a long-term growth, and there's no doubt it is a bit of a market darling, at least for some. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

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