API.US
Agora sees big things in AI

The real-time engagement technology provider announced the executive shuffle two weeks after reporting its revenue contracted for a seventh consecutive quarter

Key Takeaways:

  • Agora said its COO will leave the company less than three years after joining, as it tries to stabilize its business after nearly two years of revenue contraction
  • The company said the recent rapid takeoff of AI could give rise to a new generation of apps using its real-time engagement technology

  

By Doug Young

What does it mean when one of your top executives leaves and nobody cares?

Probably that the executive was inconsequential to the company and thus nothing has changed with his departure, in a best-case scenario. Or at worst, it could also signal that investors are already so cold on your stock that a big executive change fails to register on their radar.

Either of those could be the case for the lack of reaction after Agora Inc. (API.US) announced the departure of Stanley Wei as its COO and chief strategy officer late last week. The stock was virtually unchanged in the two trading days afterwards. That could be partly because Wei only joined Agora in early 2021, and came from a financial background that doesn’t seem to crucial to the company’s key products providing real-time audio and video engagement services for online apps.

But reaction was far more negative just a couple of weeks earlier when Agora announced its latest quarterly results, which showed its revenue contracted for a seventh consecutive quarter in the three months to September. The company separately breaks out revenue for its China business, known as Shengwang, as well as for its international business, which uses the Agora name.

Contraction has haunted Agora’s China business for nearly two years now, the result of Beijing’s 2021 crackdown on private tutoring companies that were once some of its biggest customers. But the international business continued to grow – until the second quarter of this year, that is. Revenue from that business fell 5.6% year-on-year in the three months to June, and the decline rate accelerated to 8.9% in the third quarter, according to Agora’s latest results released on Nov 21.

The falling international business owed to dropping usage in some emerging markets due to a “challenging macroeconomic environment and tightening financing conditions,” CFO Wang Jingbo said on the company’s earnings call. That’s one of the first instances we’ve seen where recent high interest rates seem to be directly affecting a company’s business, in this case forcing some of Agora’s customers to rein in their spending due to the high cost of borrowing.

While the departure of its COO failed to worry investors, the release of the glum earnings report was quite a different story. Agora’s shares tumbled 9% the day after that announcement, and continued to fall after that. The stock has lost about a third of its value this year, though Agora’s surprisingly high price-to-sales (P/S) ratio of 1.9 seems to show investors haven’t given up on the company just yet.

In fact, Agora is sitting in an internet sweet spot by providing the technology that enables live audio and video interactions for a wide range of apps. That popularity shows up in its large user base, which rose 6% year-on-year in China to 4,034 active customers by the end of September, and by an even larger 26% internationally to 1,664, despite the company’s falling revenue. Agora’s founder Tony Zhao is also quite well respected in the real-time engagement space, with a resume that includes his role as a founding engineer at Webex, a web conferencing services provider that was later acquired by Cisco (CSCO.US).

AI potential

Agora’s latest report looks quite gloomy, though Zhao was quick to point out that the rise of artificial intelligence (AI) could offer a huge opportunity for his company in the future. He added that livestream shopping that has become all the rage in China could also offer a major new opportunity if and when it gains traction in developed markets like the U.S.

We’ll look at some of his comments in more detail shortly. But first we’ll review the company’s latest earnings report that shows its business is sputtering, even though it’s not in any real danger of running out of cash anytime soon. While some might see its big $373 million cash pile at the end of September as a good cushion during hard times, others might say it reflects too much conservatism for a company in such a technological sweet spot.

Agora reported revenue of $35 million for the three months to September, down 14.6% from a year earlier. Revenue for its China-based Shengwang service fell 9.2% to 141 million yuan ($20 million), accounting for 57% of the company’s total. The international Agora business fell by the 8.9% we previously mentioned to $15.3 million. The company forecast fourth-quarter revenue of $35.5 million to $37.5 million, which would equate to a 9% decline at the midpoint of that range from the $40.1 million it reported a year earlier.

The company benefited from high interest rates, with its interest income nearly doubling to $4.9 million. It also slashed its operating expenses by 34%, partly the result of previously announced layoffs. But those were offset by a big investment loss, and the company reported a $22.5 million third-quarter net loss, improving slightly from a $27.7 million loss a year earlier.

While none of that looks particularly exciting, Zhao’s discussion of the potential for new demand from AI could be cause for longer-term optimism toward the company. We saw similar signals coming recently from data center operator Chindata (CD.US), which said an explosion of data-hungry AI apps could sharply boost demand for its storage capabilities.

Zhao noted that many AI applications have been mostly text-based so far, but that OpenAI, the creator of ChatGPT, has recently beta launched a product that allows direct voice conversation between human users and AI models.

“I believe we are uniquely positioned to enable human users and AI models to interact with each other through video and audio, in addition to text, which will transform all kinds of use cases such as AI companions, social games with AI players, and AI tutors for learning languages,” Zhao said. He added that Agora also recently rolled out a video-based solution to power live shopping experiences to take advantage of the growing preference for livestream shopping.

At the end of the day, such initiatives could have good potential and potentially bring Agora back to a growth track. But such developments will take time to gain traction, and the company’s conservative stance could ultimately cause it to fall behind more aggressive rivals.

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