Provider of real-time engagement technologies posts 3.2% revenue decline in the second quarter, but sees rebound in second half of the year

Key Takeways:

  • Agora posted its second consecutive revenue decline in the second quarter as it continued to feel the effects of lost business related to China’s education crackdown last year
  • Company reiterated its forecast for 5% revenue growth in 2022, indicating it expects to return to double-digit revenue growth in the second half of the year

By Doug Young

Agora Inc. (API.US), which briefly shot to global fame last year as the supplier of real-time engagement (RTE) voice technology to chatroom sensation Clubhouse, is going through an identity crisis right now after losing a major part of its business. But you would never know that by observing signals from the company, which continues to spend heavily on new product development and also on a major new headquarters in its hometown of Shanghai.

Agora’s latest financial results, which it released on Monday after U.S. markets closed, do appear to show the low-point associated with its ongoing identity crisis may have passed in the first half of the year. What’s more, the company is moving beyond its traditional focus on sound-related RTE technology to video and other applications, as it rolls out new suites of products related to the emerging areas of the metaverse and internet of things (IoT). 

But investors still seem unconvinced. After all, it’s one thing to talk up new initiatives, but another to show actual results.

Agora’s stock was down 1.7% in after-market trading after it published its latest results, even as U.S. markets posted modest gains on Monday. The decline took the company to a new post-IPO low that has seen the stock lose about two-thirds of its value so far this year. At its latest close of $4.73, the stock has lost more than three-quarters of its value from its June 2020 IPO price of $20.

Of course, there’s the threat of a forced delisting hanging over Agora and all U.S.-listed Chinese stocks, which would happen if the U.S. and China fail to reach a key information-sharing agreement that would bring the group of Chinese stocks into compliance with the U.S. Holding Foreign Companies Accountable Act. But even taking that into account, investors seem decidedly unexcited about Agora at the moment.

We can understand that position, though some may argue investors might be just a tad too bearish. And Agora’s management certainly doesn’t seem too concerned, at least based on their continued heavy spending in a wide range of areas.

The company announced a $200 million share buyback in February and said it has repurchased about $20 million worth of shares through the end of June. In June, the company also announced it would build a major new headquarters in its hometown of Shanghai, paying about 1.15 billion yuan ($170 million) for land rights as part of its 46% stake in the project.

The company’s overall spending rose 20% in the second quarter, even as its revenue contracted in the period, including a 20% increase in R&D spending to $32.4 million. All those figures hardly seem to reflect a company in retreat. Perhaps that’s partly due to Agora’s relatively large cash cushion, which dropped somewhat but was still a relatively sizable $641 million at the end of the quarter from $755 million at the end of last year.

The company also had reason for optimism in its steady margin improvement, with its gross margin climbing to 64.9% in the second quarter from 61.1% a year-earlier. Its net customers, excluding those it gained from its acquisition last year of instant messaging technology provider Easemob, also grew 17.5% in the second quarter to 2,877 from 2,449 a year earlier.

Overreliance on education

Now that we’ve covered the positive signals coming from the company, we’ll move on to the elephant in the room, namely the loss of one of Agora’s biggest revenue sources. That’s a reference to China’s private online tutoring sector, which was effectively killed at the end of last year as the result of a government crackdown that outlawed after-school tutoring services by privately owned for-profit companies.

Agora previously said that tutoring services in China once accounted for about a quarter of its revenue. That source effectively dried up this year, contributing just $1.3 million in the first quarter versus more than $11 million a year earlier. The company didn’t provide any breakdown for private tutoring revenue in its latest results announcement, but we can probably presume the figure was around $1 million or less for the second quarter as well.

As a result, the company’s total revenue fell 3.2% in the second quarter year-on-year to $41 million. While that’s bad, it marked a slight improvement from a larger 4.1% decline in the first quarter. As revenue fell and costs continued to grow, the company’s net loss roughly doubled to $30.7 million from $15.4 million a year earlier.

Despite that less-than-encouraging bottom line, the company reiterated its previous guidance for revenue of $176 million to $178 million for the entire year. If we do some math, that means the company expects its revenue to grow sequentially from $79.6 million in the first half of the year to about $97 million in the second half, which would represent sequential growth of around 21% and year-on-year growth of 13%.

All that would indicate Agora is making progress in filling the hole left by its former China education services revenue, and the company said that revenue from its non-China markets was growing by about 50% in the first quarter.

Outside its geographic diversification, the company, which has cited third-party data saying it is the undisputed leader in the RTE platform-as-a-service market, is aggressively developing RTE technology to provide voice, video and other capabilities in metaverse and IoT applications. We detailed one of those earlier this year, a technology called MetaKTV, that helps developers create metaverse karaoke applications. Its IoT products, used in applications like smart speakers, video calling, and surveillance, also seem to have strong potential.

At the end of the day, Agora really does seem like an underappreciated company when one considers its position at the forefront of a new generation of cutting-edge RTE technologies. The company currently trades at a price-to-sales (P/S) ratio of 3.5, which isn’t bad but still trails the 4.6 for Twilio (TWLO.US), though it’s ahead of the 0.9 for 8×8 (EGHT.US).

The company will need to post a return to strong revenue growth to really show why investors should give it higher multiples. That could occur as early as next year, after the effects of the education crackdown recede firmly to the past.

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