IPO Launch: Agora Prepares Terms For $298 Million IPO

IPOStreet

Agora (API) intends to raise $298 million in an IPO of ADSs representing underlying Class A stock, plus another $110 million in a concurrent private placement, according to an amended registration statement.

The company offers a suite of voice and video application programming interfaces, or APIs, for enterprises.

API’s growth prospects, dollar-based net retention rate and institutional investor interest are strong, so my opinion on the IPO is a BUY at up to $17.00 per ADS.

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To listen to an audio version of this report, click on the graphic below:

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

Management is led 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:

agoraplatform

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.

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.

The Sales & Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales & Marketing spend, was a decent 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.

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
  • TokBox
  • Twilio
  • Open source projects
  • Network operators

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:

agorapl

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).

API intends to sell 17.5 million ADSs representing underlying Class A shares at a midpoint price of $17.00 per ADS for gross proceeds of approximately $298 million, not including the sale of customary underwriter options.

Certain existing shareholders have indicated an interest to purchase shares of up to $110 million in a concurrent private placement.

Additionally, entities affiliated with Dragoneer have indicated an interest to purchase up to $50 million of the IPO ADSs at the offering price.

Taken together, these two signals are strongly positive for API’s valuation at IPO.

Class A shareholders will be entitled to one vote per share and the founder, Mr. Zhao, will hold all Class B shares and be entitled to 20 votes per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $1.8 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 17.47%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds 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 underwriters of the IPO are Morgan Stanley, BofA Securities and Needham & Company.

Commentary

Agora is a fast-growing technology company in an interesting space that is expected to grow at a quite high rate of growth over the coming years.

The firm’s financials, while a bit stale, still show significant revenue growth and the company is within striking distance of operating breakeven while producing positive operating cash flow.

Sales and marketing expenses as a percentage of total revenue have risen somewhat and API’s sales and marketing efficiency is 1.1x.

Most impressive is its dollar-based net retention rate, at 131% in 2019 on a constant currency basis.

A dollar-based net retention rate of above 100% means that the company is generating ‘negative net churn,’ i.e., increasing the amount of revenue from each customer cohort. A figure of 131% is considered quite high.

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.

Morgan Stanley is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 59.8% since their IPO. This is a top-tier performance for all major underwriters during the period.

As a comparable-based valuation, API appears to be valuing itself at IPO at above that of competitor Twilio, based on a Price/Sales multiple of 26.44x vs. 23.26 for TWLO.

So, the IPO isn’t cheap. However, I am very impressed by the investor support and interest, which is large and atypical for a non life science IPO.

Given the firm’s industry position, growth prospects, dollar-based net retention rate and institutional investor interest, my opinion on the IPO is a BUY at up to $17.00 per ADS.

Expected IPO Pricing Date: Week ending June 26, 2020.

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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