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Agora (NASDAQ:API) Q3: Beats On Revenue, Gross Margin Improves


Full Report / November 18, 2021
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Communications infrastructure platform Agora (NASDAQ:API) reported Q3 FY2021 results beating Wall St's expectations, with revenue up 46% year on year to $45 million. Agora made a GAAP loss of $21 million, down on its loss of $2.92 million, in the same quarter last year.

Agora (API) Q3 FY2021 Highlights:

  • Revenue: $45 million vs analyst estimates of $39.6 million (13.5% beat)
  • EPS (GAAP): -$0.19
  • The company lifted revenue guidance for the full year, from $160 million to $164 million at the midpoint, a 2.5% increase
  • Free cash flow was negative $15.6 million, compared to negative free cash flow of $11.5 million in previous quarter
  • Net Revenue Retention Rate: 104%, down from 110% previous quarter
  • Customers: 2,564, up from 2,449 in previous quarter
  • Gross Margin (GAAP): 65.1%, up from 62.4% same quarter last year

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 demand for audio and video functionality inside apps is growing, and making tools for developers is a good business to be in.

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

Sales Growth

As you can see below, Agora's revenue growth has been very strong over the last year, growing from quarterly revenue of $30.8 million, to $45 million.

Agora Total Revenue

And unsurprisingly, this was another great quarter for Agora with revenue up 46% year on year. On top of that, revenue increased $2.7 million quarter on quarter, a very strong improvement on the $2.1 million increase in Q2 2021, and a sign of acceleration of growth.

Analysts covering the company are expecting the revenues to grow 16.4% over the next twelve months, although estimates are likely to change post earnings.

Customer Growth

You can see below that Agora reported 2,564 customers at the end of the quarter, an increase of 115 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 Q3. 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 65.1% in Q3.

Agora Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.65 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.

Key Takeaways from Agora's Q3 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 $3.05 billion and more than $767.4 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by how strongly Agora outperformed analysts’ revenue expectations this quarter. And we were also glad to see the improvement in gross margin. On the other hand, it was less good to see the deterioration in revenue retention rate. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company is flat on the results and currently trades at $26.3 per share.

Is Now The Time?

Agora may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although Agora is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been exceptional, though we don't expect it to maintain historical growth rates. But while its customers are increasing their spending quite quickly, suggesting that they love the product, 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.

Agora's price to sales ratio based on the next twelve months of 15.6x indicates that the market is definitely optimistic about its growth prospects. We can find things to like about Agora and there's no doubt it is a bit of a market darling, at least for some. But we are wondering whether there might be better opportunities elsewhere right now.

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