Via SeekingAlpha.com

Quick Take

Agora (API) has filed to raise $100 million in an IPO of its ADSs representing Class A shares, according to an F-1 registration statement.

The firm has developed a suite of voice and video APIs (Application Programming Interfaces).

API is growing strongly in a favorable industry expected to grow sharply in the years ahead.

I’ll provide a final opinion when we learn more IPO details from management.

Company & Technology

Shanghai, China-based Agora was founded to develop APIs for facilitation voice and video communications between people online and in real-time.

Management is headed by founder, Chairman and CEO Mr. Bin (Tony) Zhao, who was previously director of YY, a video-based social network.

Below is a brief overview video of Agora’s offerings:

Source: Agora

Agora’s partners or major customers include:

  • Bunch

  • EastMeetEast

  • Hallo

  • Meet Me

  • Talkspace

The firm has created what it calls a ‘Real-Time Engagement Platform-as-a-Service’ that provides developers with easy to implement video and voice functionalities within their apps or web pages.

Below is a graphic indicating how the firm sees its platform:

Agora offers its service based on a freemium model, with the first 10,000 minutes per month free of charge.As of March 31, 2020, the firm had 1,176 active customers and had generated more than 40 billion minutes ‘in more than 100 countries through more than 10,000 active applications.’

Agora has received at least $170.4 million from investors including Morningside, Coatue, SIG and Shunwei Technology.

Customer/User Acquisition

The company pursues medium and large accounts via a direct sales model. It pursues developer engagement activities.

In addition, the firm has invested in partner development activities to provide clients with ready-made plug-in technologies for specific use cases.

Sales & Marketing expenses as a percentage of total revenue rose to 30.1% as revenues have increased, as the figures below indicate:

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Sales & Marketing

Expenses vs. Revenue

Period

Percentage

2019

30.1%

2018

27.5%

Source: Company registration statement

The Sales & Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales & Marketing spend, was 1.1x in the most recent reporting period.

The company reported its dollar-based net expansion rate for 2019 as 131% versus 2018’s 133% on a constant currency basis. A figure above 100% is considered good as it indicates that for an existing customer cohort, the firm is gaining additional revenue when compared to a prior period.

Market & Competition

According to a 2020 market research report by Allied Market Research, the global market for web-based real-time communication was approximately $2.73 billion in 2019 and is expected to reach $45.9 billion by 2027.

This represents a forecast stunning CAGR of 41.7% from 2020 to 2027.

The main drivers for this expected growth are the increasing cost-effective benefits of web-based communications, increased smartphone usage in developing countries and growing adoption of these technologies by enterprises worldwide.

Major competitive or other industry participants include:

  • Tencent (OTCPK:TCEHY)

  • TokBox

  • Twilio (TWLO)

  • Open source projects

  • Network operators

Financial Performance

Agora’s recent financial results can be summarized as follows:

  • Strong growth in topline revenue

  • Increased gross profit but reduced gross margin

  • A swing to operating loss

  • Slightly increased cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

2019

$ 64,428,690

47.6%

2018

$ 43,656,954

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

2019

$ 44,011,226

41.9%

2018

$ 31,022,389

Gross Margin

Period

Gross Margin

2019

68.31%

2018

71.06%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

2019

$ (6,088,945)

-9.5%

2018

$ 262,567

0.6%

Net Income – Ordinary Shareholders (Loss)

Period

Net Income – Ordinary Shareholders (Loss)

2019

$ (66,853,864)

2018

$ (42,820,168)

Cash Flow From Operations

Period

Cash Flow From Operations

2019

$ 706,423

2018

$ 536,101

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Source: Company registration statement

As of December 31, 2019, Agora had $105.6 million in cash and $18.5 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2019, was negative ($4.1 million).

IPO Details

Agora intends to raise $100 million in gross proceeds from an IPO of its ADSs representing Class A shares, although the final amount may differ.

ADSs representing Class A shares will be entitled to one vote per share and the CEO, who will own all Class B shares, will be entitled to 20 votes per share.

The S&P 500 Index no longer includes companies with multiple share classes into its index.

Management says it will use the net proceeds from the IPO as follows:

We intend to use the net proceeds of this offering for research and development, marketing and branding, investment in technology infrastructure as well as for working capital and other general corporate purposes.

Management’s presentation of the company roadshow is not available.

Listed bookrunners of the IPO are Morgan Stanley and BofA Securities.

Commentary

Agora is seeking U.S capital market funding for its expansion efforts, of which international expansion is a priority.

The company’s financials show a firm that is growing revenue quickly, generating moderate operating losses while producing a small amount of operational cash flow.

Sales & Marketing expenses as a percentage of its total revenues have increased somewhat; its Sales & Marketing efficiency rate was 1.1x in the most recent period.

Notably, the firm’s dollar-based net expansion rate was an impressive 131% in constant currency in the most recent period. Any figure above 100% is considered good as it indicates existing customers are increasing their usage and amount paid to the firm for its services.

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The market opportunity for real-time voice and video communications is large and expected to grow at a tremendous rate over the next several years, so Agora has very positive industry growth dynamics in its favor.

On the legal side, like many Chinese firms seeking to tap U.S. markets, the firm operates within a VIE structure or Variable Interest Entity.U.S. investors would only have an interest in an offshore firm with contractual rights to the firm’s operational results but would not own the underlying assets.

This is a legal gray area that brings the risk of management changing the terms of the contractual agreement or the Chinese government altering the legality of such arrangements. Prospective investors in the IPO would need to factor in this important structural uncertainty.

When we learn more about the IPO’s pricing and valuation assumptions, I’ll provide an update.

Expected IPO Pricing Date: To be announced.

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