The benefits of having a cloud-based API for complex voice and video interaction are well established. Twilio (TWLO) is the market leader here. Twilio started on the text and voice side and then moved to support more video and (with the acquisition of SendGrid) email.
Agora (NASDAQ: API) is scheduled to go price their IPO this Thursday night and open for trading on Friday, June 26th. The current range is $16-18 on 17.5M ADSs where each ADS = 4 ordinary shares. The offering is all primary shares. There is a concurrent private placement of $110M allocated to three investors. (Coatue $50M, Neumann Capital $30M, Vitruvian $30M) The books on the deal are with Morgan Stanley and BofA with Needham along for the ride as a co-manager.
Comparing and Contrasting Agora
First of all, Agora is based in China although they are working hard to have a global footprint and present themselves as a global solution. They will need to keep building out their team as the roadshow presentation was not delivered by current management but rather in that third-person IR style.
Agora offers a mix of technologies as part of their platform that combines several elements. Real-time communications are definitely the focus with the ability to do voice, chat, and video. However, there is extra functionality included in their video services that allow customers to build their own Zoom-like functionality into their applications.
Agora also provides a more complete software development kit (SDK) and a set of cloud services than just communication. It’s a little like what companies like Cloudflare (NET) and Fastly (FSLY) provide although it’s not a substitute for those products in broad use cases. But it does allow Agora customers to incorporate some of these features directly into their application without needing them.
This is illustrated in their platform picture where it’s clear that video and audio communications are key areas (TWLO) but they also offer some streaming acceleration (NET, FSLY) and video interaction and recording (ZM).
The initial developer experience is much more video-focused than platforms like Twilio. In some ways Twilio made a strategic decision to go in a different direction when they acquired SendGrid. This tilted Twilio to a more “transactional” approach. Agora is tilted more towards real-time and video.
There are some compromises one makes with Agora. Mostly because they are a less mature company. For example, you might encounter a broken link here or there on their website and their support for languages and programming models is more limited. The latter is due in part to their greater focus on mobile and video applications.
It’s worth showing how they organize their supporting documentation because it really tells the story of how their products fit into the market. They have broadcasting, recording, and interactive gaming right upfront. It makes it clear that they are not quite a general-purpose platform but aimed more at these application areas.
Business Model and Margins
Agora uses the usual PaaS model and offers an initial free tier which then switches over to usage-based billing. One thing to note is that Agora has pretty good margins.
Agora grew revenues last year 47% to $64.4M and in Q1 growth accelerated to 166% with revenues of $35.5M. It appears that demand spiked in areas like online education that had to shift rapidly due to the COVID crisis in China.
They have managed to achieve an operating profit (excluding SBC) and have much better margins than similar companies at their stage of development. This appears to be because they are spending less than usual on sales and marketing and overall have a lower cost profile than a typical US-based company.
Management doesn’t provide a target model but if their growth in 2020 continues at a similar pace than that of Q1 then operating margins and earnings can be material in 2021.
There is some customer concentration (as there was with Twilio when they came public and they had a snafu with their largest customer, Uber, just after they came public) but it’s seeing the typical growth-driven drop. The top 10 customers represented 50% of revenues in 2018 and 38% in 2019.
This has been a hot space so valuations are already high. However, by looking at the comps it appears that at the top of the filing range API stacks up well and would be bought at that level. We make take a stab at a PFV on this one after a quarter or two but it will clearly trade up in the after-market.
Using relative P/S off a rich TWLO would get you to $36. You can argue for a higher multiple based on operating margins and a lower one based on their youth and China origins. It wouldn’t be surprising to see this generate more interest in Vonage who owns some technology in this area. We may do a little more digging there and update this post if we like what we see.
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