Communications infrastructure platform Agora (NASDAQ:API) reported results in line with analyst expectations in Q1 FY2023 quarter, with revenue down 5.55% year on year to $36.4 million. However, guidance for the next quarter was less impressive, coming in at $35.5 million at the midpoint, being 7.71% below analyst estimates. Agora made a GAAP loss of $16.8 million, improving on its loss of $26.9 million, in the same quarter last year.
Agora (API) Q1 FY2023 Highlights:
- Revenue: $36.4 million vs analyst estimates of $36.2 million (small beat)
- Adjusted EBITDA: ($6.4) million vs. analyst estimates of ($11.3) million (beat)
- EPS: -$0.16 vs analyst expectations of -$0.14 (10.5% miss)
- Revenue guidance for Q2 2023 is $35.5 million at the midpoint, below analyst estimates of $38.5 million
- Free cash flow was negative $9.11 million, down from positive free cash flow of $1.94 million in previous quarter
- Gross Margin (GAAP): 62.7%, in line with 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
But this quarter Agora's revenue was down 5.55% year on year, which might be a disappointment to some shareholders.
Agora is guiding for revenue to decline next quarter 13.4% year on year to $35.5 million, a further deceleration on the 3.2% year-over-year decrease in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 2.45% over the next twelve months.
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 62.7% in Q1.
That means that for every $1 in revenue the company had $0.63 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.
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 $9.11 million in Q1, reducing the cash burn by 46.5% year on year.
Agora has burned through $41.3 million in cash over the last twelve months, a negative 26.1% 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 Q1 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 $292 million and more than $66.1 million in cash, the company has the capacity to continue to prioritise growth over profitability.
Revenue beat slightly, and adjusted EBITDA posted a more convincing beat. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results were mixed. That the company changed its reporting approach makes analysis of the quarter a bit more difficult. We removed our standard modules outlining customers and net revenue retention because they are no longer apples-to-apples comparable with historical figures. The company is up 1.05% on the results and currently trades at $2.9 per share.
With regards to the updated reporting, management said "Over the past few months, we have worked diligently to streamline our organizational structure and improve our operational efficiency. Going forward, we will operate two independent divisions under separate brands and led by separate leadership teams. The U.S. and international business will operate under the Agora brand, and the China business will operate under the Shengwang brand...We believe that this strategic reorganization will allow us to optimally focus our resources on the priorities of each business – driving growth for the Agora business and competing more effectively for the Shengwang business – while taking into consideration the unique economic and product needs of customers in each market. This new organizational structure will also enable us to become more agile as new opportunities emerge.”
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 very weak, and analysts believe that rate will remain roughly steady. And on top of that, unfortunately its existing customers have been reducing their spend, which is a bit of a concern, and customer acquisition is less efficient than many comparable companies.
Given its price to sales ratio based on the next twelve months is 7.5x, 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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