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Agora (NASDAQ:API) Misses Q3 Revenue Estimates, Stock Drops


Full Report / November 22, 2022
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Communications infrastructure platform Agora (NASDAQ:API) missed analyst expectations in Q3 FY2022 quarter, with revenue down 8.99% year on year to $40.9 million. Guidance for the full year also missed analyst expectations with revenues guided to $161 million at the midpoint. Agora made a GAAP loss of $27.6 million, down on its loss of $21 million, in the same quarter last year.

Agora (API) Q3 FY2022 Highlights:

  • Revenue: $40.9 million vs analyst estimates of $44.4 million (7.83% miss)
  • EPS: -$0.25 vs analyst expectations of -$0.20 (27% miss)
  • The company dropped revenue guidance for the full year, from $177 million to $161 million at the midpoint, a 9.03% decrease
  • Free cash flow was negative $9.91 million, compared to negative free cash flow of $24.2 million in previous quarter
  • Net Revenue Retention Rate: 84%, down from 95% previous quarter
  • Customers: 2,987, up from 2,877 in previous quarter
  • Gross Margin (GAAP): 59.4%, down from 65.1% 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 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 mediocre over the last two years, growing from quarterly revenue of $30.8 million in Q3 FY2020, to $40.9 million.

Agora Total Revenue

But this quarter Agora's revenue was down 8.99% year on year, which might be a disappointment to some shareholders.

Ahead of the earnings results the analysts covering the company were estimating sales to grow 25.7% over the next twelve months.

Customer Growth

You can see below that Agora reported 2,987 customers at the end of the quarter, an increase of 110 on last quarter. That is a little slower customer growth than last quarter but still in line with what we are used to seeing lately, suggesting that the company still has decent sales momentum.

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 84% in Q3. That means if they didn't win any new customers, Agora would have decreased its revenue 16% year on year. The retention rate is poor and has been going down over the last year showing us that Agora's customers are churning and that for a lot of them the current product might not live up to the expectations.

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 59.4% in Q3.

Agora Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.59 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 been going down over the last year, which is probably the opposite direction shareholders would like to see it go.

Cash Is King

If you have followed 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 burned through $9.91 million in Q3,

Agora Free Cash Flow

Agora has burned through $48.2 million in cash over the last twelve months, a negative 29.9% 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 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 $388.1 million and more than $483.4 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We struggled to find many strong positives in these results. On the other hand, it was unfortunate to see that Agora's revenue guidance for the full year missed analysts' expectations and revenue growth was quite weak. Overall, this quarter's results were not the best we've seen from Agora. The company is down 7.92% on the results and currently trades at $3.08 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 mediocre, and analysts believe that rate will remain roughly steady. And on top of that, unfortunately its customer acquisition is less efficient than many comparable companies, and gross margins show its business model is much less lucrative than the best software businesses.

Agora's price to sales ratio based on the next twelve months is 1.9x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

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