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Agora $API: I Thought We Were Going Clubbing?
An article by • Published Feb 25, 2021
Agora, Inc. ($API) reported earnings this week. Seemingly caught up in the technology turmoil, $API dropped nearly 20% Monday before earnings were released, but has continued to move lower post-earnings.
Technology stocks have been in stormy waters recently with many 10-30% drops, but Agora had held in, viewed as a play on the explosive growth of Clubhouse. API's revenue guidance with its earnings release disappointed. Indeed, ex-M&A related revenue growth, the guide was in-line with Street estimates before Clubhouse took off and only 33-36% y/y. So What Gives?

TLDR Summary

1.
Agora has to overcome +86% **sequential** 4Q19 to 1Q20 and +166% 1Q20 yearly growth, making comps brutal
2.
Tough 1H20 comps due to COVID-related online learning usage are masking the true underlying growth, 2H21 vs 2H20 growth should be north of 50% with the possibility of entering 2022 off a +/- 60% 4Q21
3.
Gross margins have been getting whacked in recent quarters, due to 'expansion and network costs.' They need to find a bottom soon to help the stock, but Agora has a very low cost structure and is +/- cash flow neutral with a ton of liquidity
4.
There is likely little in 2021 revenue guidance for Clubhouse, it mostly remains an embedded option, and one that likely begins to look mis-priced too much below $70
5.
Agora looks and feels a lot like $TWLO from a few years ago. API's revenue this year will approach that of Twilio in 2016. TWLO now has an enterprise value roughly 8-9x that of $API The usage-based model exposes the company and investors to customer success, which in the case of Agora that is often start-ups, creating quasi-venture exposure.
6.
The China risk feels overstated in reality but perception matters more to current and potential customers
7.
Is API overvalued? Hard to say. With $BILL at 70x revenue, $CRWD at 40x and $SNOW at 80x who is to say why Agora can't trade at 40x given the known optionality of Clubhouse growth. Regardless, management appears focused on building a large business.


Earnings Recap

2020 revenues = $133.6 million +107%
2020 COGS +131.2%, gross margins contracted 600 +/- basis points due to 'international expansions and higher infrastructure costs and capacity expansions in anticipation of future growth'
Active customers of 2,095, +101% vs 2019
Registered developers = 272,000 +166%
Constant currency $-based net expansion rate = 179%
2021 revenue guidance = $178 to $182 million, ONLY 33 to 36% annual growth
The drag or knock on the Agora story since its IPO, other than being China-based, has been the high multiple for the sequentially declining revenue growth. API saw massive usage from online learning in China in 1Q20 (86% q/q) due to COVID-19 but that usage unwound and went away as re-openings happened. API has a usage-based model rather than seat or subscription-based. The more minutes you use the more you pay. With fewer students online in China, Agora's revenue's declined from 1Q20 through 3Q20.
You can see visually that even with sequential growth in 1Q21, $API will barely eke out y/y growth. A smooth estimate for 2021 revenue to hit the top-line estimate of $182 million would look like:
1Q = 37mm, 2Q = 43mm, 3Q = 48mm, 4Q = 54mm
On those numbers, $API would be growing at 59% in 2H21 vs 1H21, potentially entering 2022 off a > 60% y/y 4Q21 - it is likely API's 2H21 growth rate will lead the SaaS / software peer group.
Gross margins have been taking a hit due to network expansion and capital costs. Investors should dig into the counter-intuitive drop as revenues declined 2Q to 4Q20. Gross margins should level out but a low cost structure allowed API to remain at +/- 5% FCF bleed for 2020. Of note, API gross margins remain 8% above those of TWLO

Clubhouse Discussion

A recent story and other reports point to Clubhouse having 8 to 10 million subscribers and 2 to 2.5 million weekly average users (WAUs) as of Feb. '21. Agora confirmed its pricing structure on the call, whereby each listener or speaker in an audio live cast is one user session and each user session is charger on a per minute basis. The per-minute pricing for Agora audio is $0.99/1,000 minutes.
So lets do some Clubhouse math for Agora: 2.5 million WAUs x 30 minutes per week x $0.99/1,000 mins = $3.8mm ANNUAL revenue, or less than $1 million per quarter The current reported WAU run-rate would equate to < 3% of 2020 revenue
Clubhouse is currently invite-limited and restricted to iPhones only. There is material embedded growth once invites are removed as a gating mechanism and android options are released, which will benefit API if it happens, but it is hard to imagine API management included much of a hockey-stick for Clubhouse in the 2021 guidance.
To cuff it:
10x'ing WAUs to 25 million would mean +/- $40 million in revenue for API
100x'ing WAUs to 250 million would mean +/- $400 million in revenue for API
API management likely wants to keep a low-profile as it relates to Clubhouse for many reasons, least of which is so that Clubhouse gets the attention and not the 'Chinese-based' back-end provider. Agora should be 'nose-to-the-ground' with great support for Clubhouse. It is unclear if recent technology glitches and security events were related to Agora or Clubhouse infrastructure.
It is highly unlikely Clubhouse attempts to in-house the back-end audio to replace Agora anytime the next few years. $YALA - a Clubhouse look-alike in the Middle East notes that it has a
three-year contract with Agora
. It is probable that Clubhouse has a similar contract tenor. Further, it would take years to find the engineering talent and build a network comparable to API's, if at all possible.
But there remains significant risk to Agora's Clubhouse-related revenue growth. Twitter Spaces is a competing product launching broadly soon. Facebook has been reported to have interest in audio chat rooms. Social network overload and COVID reopening are risks to growth. And China ties and China-security concerns are real risks for investors as well as a customer perception risk - does Agora being 'Chinese' hurt your brand if you use them for the rails of your app?
But how much is $API 'pricing in' for Clubhouse. Not all that much, in our opinion. We viewed Agora as a $60 stock before Clubhouse given the underlying +/- 50% growth. With the solid engineering team and usage-based model, growth was all but assured as uptake for real-time audio and video became more common.
Versus story high-growth, high-valuation 'comps' Agora doesn't appear obscenely priced given the embedded Clubhouse optionality. Indeed, the similar revenue multiples could arguably present a case that very little value is being embedded in Agora stock price for Clubhouse. API had underperformed post its IPO during 2020 due to a high valuation and slowing sequential growth, along with China headlines under the prior administration. $60 +/- is where these comps would put the stock ex-Clubhouse.
More Clubhouse ("CH") Math ** It has been estimated Clubhouse had approximately 50,000 downloads in Nov '20 and that 6-7 million of the approximately 10 million current downloads were done in Feb '21** Clubhouse revenue for API would have been close to nil in 4Q20 / 2020 Assume Clubhouse revenue in 2021 guidance is $4 million, the Feb '21 run-rate At the high-end of $182 million revenue, remove the $4 million from CH, leaving $178 million. For this exercise forget Eastmob revenue in 2021 guidance and assume management was low balling by +/- 5%, so ex-Eastmob would have been close to $182 million. Ex-Clubhouse revenue would be growing mid-to-high 40's % in 2H21, assuming 42.5% growth 2022 = $254 million Clubhouse revenue of $4 million plus an assumed wide-open platform in 2022 so 10x'ing WAUs would mean another $40 million of CH revenue ($44mm total; 27.5mm WAUs) At $70/share 2022 revenue multiple = 24.5x Same math in 2023 but 35% for ex-Clubhouse and same growth for CH (now 50mm WAUs total) 2023 revenue multiple = 16.8x Same math for 2024 but 30% for ex-Clubhouse and CH grows by 50% more users (2.5mm + 25mm + 25mm + 37.5mm = 90mm total) 2024 revenue multiple = 12.2x ---- Clubhouse would be +/- $140 million revenue in 2024 ---- 2024 revenue multiple ex-CH = 15.9x ** All hypothetical - Assumes no volume discount - Assumes no other killer apps using API for the rails take off **
What is unmeasurable and unknowable for $API is the copy-catting benefits its gets from Clubhouse clones or look-a-likes. The press has been both positive and negative for Agora, something they must manage, but the high-profile exposure for its developer tools should be a net positive.

Twilio As a Roadmap

In 1Q16, $TWLO had $59 million revenue. $API should do +/- $54 million in 4Q21. Through organic growth and M&A, TWLO is on an annual run-rate of over $2 billion revenue five-years later and worth over $60 billion, 8-9x Agora.
Twilio and Agora compete in similar markets so they are a good comp. The communication and RTC ("Real-time Communications") application program interfaces with developer-focused go-to-market and usage-based pricing models are similar. Get in the stack and grow with your customers. Meanwhile the dev-focused GTM allows for low sales and marketing expense.
Agora had a business before Clubhouse that was growing at a peer-leading pace, albeit slowing sequentially due to COVID-related usage. It would appear to be growing at a peer-leading pace in 2H21 even with little CH revenue and will likely grow at a pace near the top of the group in 2022 - before Clubhouse expectations are baked in.
Frankly, Zoom $ZM should buy Agora. The CEOs previously worked together at WebEx. Overlapping and complementary technologies could potentially create an unmatched audio and video communications platform. But API may have more upside on its own. The usage-based model has significant leverage. Agora discussed creating verticals and supporting innovators - they are doing what they can to create and stoke demand and the 'next Clubhouse.' Investors are exposed to start-ups and the innovators behind them, quasi-VC investing in public markets.
If you believe in real-time audio and video communication as a growth market, Agora has a chance to follow a similar trajectory as TWLO did in SMS, email and call center.

Earnings Call Discussions

New Use Cases (Clubhouse)
The second one is audio live cast. I believe most people are familiar with audio podcast but what is audio live cast. Podcast is like video channels. There is one speaker or sometimes multiple speakers in the same physical room, and all the audience simply listen to the speakers. Live cast on the other hand, create a virtual in-the-same-room experience. Here, multiple speakers can join from different locations worldwide and discuss spontaneously thanks to ultra-latency audio. Instead of just listening, the audience can reach in their hand and come on stage to join the speakers anytime. We believe live cast represents a new way for people to connect the learn, and we are particularly proud that our proprietary NOVA audio codec further enhanced experience by offering crystal-clear actually audio.
Tony Zhao on Competitive Advantages
In terms of our advantage in all the use cases, there are at least 3 of those advantages. We have a proportion codec to provide higher quality and we have a much better network to cover global audience. And also we leverage AI technology to further enhance audio experience on our services. We have a proprietary product called NOVA, which is widely used in today's live cast users, where they provide full audio -- full-band audio is very low bit rate, which is a key feature for all the large cost use cases. And again, our network, which is called SD rtn, provides the best global coverage in this market. In any country, especially cross long distance. It's hard to really ensure the experience across region and various type of devices. And we also use artificial talent to improve various aspects of auto quality. For example, we have this noise reduction and cancelation. On the third question were about listening-only audience use cases on RTE. I think it's important to understand that listen-only use cases is so-called podcast, and listen most of the time but can jump in anytime to discuss is hugely different from strictly listening only. You need to understand because this is a new use case. We're psychologically, the audience or the participants feel really different from strictly listening only. Having the ability to interact gives people the feeling of being there or being together, whether they make any response or not, means a lot in that environment. And people do come on stage to interact from time to time when they hear something they are really passionate about, which makes the whole discussion more spontaneous. So that's very different from strictly this only. That's why we see it's necessary for such use case to use RTE.
Easemob Adding $10mm to Revenue Guidance
On the second question, revenue -- Easemob has a revenue run rate of around $1 million amount. And we are only in the closing stage of the acquisition, we expect the acquisition to complete in the next few weeks. So with that, I would say, the full year contribution would be something around $10 million.
Refusal to Answer Clubhouse-specific Question
So I guess I'll take all the 3 questions. On the first question, first of all, we have internal policies on customer disclosure, and we cannot comment on particular customers other than what's already disclosed on our website. So we will not comment on any particular customer names.
Noting Pickup in Audio Live Cast But Not Forecasting Large Upside
And obviously, recently, there have been developments in the area. We do see a significant pickup in usage. With that said, because audio price per minute is much lower than medium price per minute. So audio live cast. As a whole, the revenue contribution is that significant. If you think about the overall picture. So we wouldn't guide a very significant revenue upside from this one use case alone, given we have so many use cases on the platform.
Details on Pricing Model For Clubhouse or Others
Richard Frank Valera•Needham & Company, LLC, Research Division•Senior Analyst First question is a follow-up on the new voice model that you've been talking about. And just wanted to get a sense of how you actually get paid on that. Is it fair to think that each room in one of these voice-based social apps would be one live interactive audio stream, and you could have many participants in that stream that would effectively be free? I just wanted to try to understand how to think about that. Jingbo Wang•Agora, Inc.•CFO Thanks. We actually charge based on per minute per participant. So let's say, there are 10 participants in that room. There is 10 minutes of engagement. So that will be 10 times 10, 100 minutes charged.
Strategy - Back Innovators
But as history has shown, right, people will always innovate and the need to learn and the need to interact will not go away. So that's on the verticals. But we will not just stay at the PaaS or SDK level and wait for customers to build apps. We'll also, at the same time, try to verticalize ourselves. So the education aPaaS, Agora flexible classroom is one of the first efforts from us in terms of verticalization. So this will -- because aPaaS is a local solution. So basically, it will reduce friction of adoption and allow companies with a smaller development team -- or let's say, a more traditional enterprise rather than a pure technology company will allow them to be able to adopt our technology and build apps much more easily. And that will expand the addressable market, addressable developer or customer base
Competition
In terms of competition, I guess people have saying that recently, there have been new entrants into the market, including some large companies, which we actually think, again, confirms the potential of this market. The difference -- I would say the non-China, U.S. and rest of world market, is less well defined and still shaping up compared with China. In China, the [marquee] has been well-defined primarily by us and the competitors who compete with us in a more direct way. But also China, I think we also play a key role in defining the market. But we see competitors from various different background, and they try to offer some overlapping products. But very few are competing with everything we do. Some of them do a little bit of video calls. Some do a little bit of voice, some do streaming. But we don't see a lot of competitors really try to do the same thing we do. That is to power all kinds of immersive engagement use cases. So I would say the market outside China overall is still less developed.
Agora Resources
Kevin Xu Interconnected Blog - What Does Agora Do?


** The author is long some Agora. None of this is meant as investment advice or as a recommendation. **

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