Agora (API) Q1 2023: Agora Division Grows 10% as China Headwinds Persist
Agora’s strategic reorganization, splitting US/international and China operations, sharpened market focus but exposed diverging growth realities. International momentum offset China’s regulatory and macro drag, while product innovation and AI positioning signal long-term expansion opportunities. Investors should watch for further divergence between divisions as macro and regulatory forces continue to shape demand and profitability.
Summary
- Segment Realignment Spotlights Divergence: International growth contrasts with persistent China softness and regulatory drag.
- Cost Discipline Drives Margin Recovery: Reduced R&D and sales spend sharply narrowed operating loss margins.
- AI and Product Innovation Set Up New Use Cases: Generative AI integration and vertical solutions lay groundwork for future demand.
Business Overview
Agora, Inc. (API) is a real-time engagement (RTE) platform provider, enabling developers to embed voice, video, and interactive streaming into applications. The company now operates through two independent divisions: Agora, US/international RTE business, and Shengwang, China RTE business. Revenue is generated from usage-based pricing across verticals such as online education, social entertainment, e-commerce, and enterprise collaboration. The business is split between developed markets (Agora division) and China (Shengwang division), each with its own management and go-to-market strategy.
Performance Analysis
Q1 marked a structural turning point as Agora began reporting results separately for its two core divisions. The Agora division (US/international) delivered 10% year-over-year revenue growth, driven by expansion in live streaming e-commerce, creator economy, and sports verticals, as well as broader international adoption. In contrast, Shengwang (China) saw revenue decline by 14%, reflecting regulatory headwinds in K-12 education, the disposal of a lower-margin cloud business, and currency depreciation. Adjusted for these factors, Shengwang would have shown modest local-currency growth, but headline results reveal the scale of the domestic challenge.
Cost discipline was a standout: Non-GAAP R&D and sales/marketing expenses fell over 25% year-over-year, sharply narrowing both operating and EBITDA loss margins. Gross margin improved slightly, buoyed by the exit from lower-margin segments. Active customer growth was robust internationally (up 31% for Agora) but muted in China (up 2%). The company’s net retention rates diverged as well, with Agora at 130% and Shengwang at 92% (excluding K-12), highlighting stickier, expanding relationships overseas.
- International Demand Outpaces Domestic: Agora division’s revenue growth and customer expansion contrast sharply with China’s macro and regulatory drag.
- Margin Structure Recovers on Lower Spend: Operating loss margin halved year-over-year as R&D and S&M costs were cut aggressively.
- Retention and Usage Signal Health Split: High net retention in international business points to deepening customer relationships, while China remains under pressure.
Share repurchases continued, with 10% of the buyback program executed in Q1, reflecting management’s confidence in long-term value despite near-term volatility. Free cash flow remained negative but improved materially from the prior year.
Executive Commentary
"We will now operate two independent divisions under the same holding company... Agora will focus on acceleration of growth and on gaining market share in the US and international markets... Shengwang will focus on enhancing our quality of experience advantage and improving the ease of adoption of our products, further strengthening our competitive position in the China market."
Tony Zhao, Founder, Chairman & CEO
"Non-GAAP operating loss was 9.2 million, translating to a 25.4% non-GAAP operating loss margin for the quarter, compared to an operating loss margin of 49% in Q1 last year."
Jim Bowen, Chief Financial Officer
Strategic Positioning
1. Segment Independence and Local Focus
The split into Agora and Shengwang divisions enables each to tailor product, go-to-market, and operational priorities to local market realities. US/international is positioned for growth and share gains, while China is focused on retention, product quality, and regulatory navigation.
2. Vertical and Geographic Diversification
Agora’s international business is diversifying into new verticals (live streaming e-commerce, sports, creator economy) and geographies (South Asia, Middle East, South America), reducing reliance on any single market. In China, the company is pivoting from digital-native to digital-transformation enterprise customers to offset K-12 and macro weakness.
3. Product Innovation and AI Integration
AI-powered features and vertical solutions (such as flexible classroom, VR/Metaverse integrations, and upgraded karaoke experiences) are being rolled out to drive differentiation and unlock new use cases. Early generative AI pilots are underway across education and entertainment, positioning Agora to benefit from AI-driven RTE expansion.
4. Cost Structure Reset
Significant cost reductions in R&D and go-to-market functions have restored margin leverage, giving the company more flexibility to invest in growth initiatives or weather revenue volatility.
5. Capital Allocation and Buybacks
Ongoing share repurchases signal management’s conviction in long-term value and provide downside support, even as free cash flow remains negative.
Key Considerations
This quarter’s results underscore a growing divergence between Agora’s international and China businesses, with the former gaining momentum and the latter facing persistent headwinds. The company’s ability to maintain product innovation and customer engagement while controlling costs will be key to bridging this gap.
Key Considerations:
- International Expansion Momentum: Agora’s global business is benefiting from new vertical adoption and geographic reach, driving customer and usage growth.
- Regulatory and Macro Drag in China: Shengwang’s revenue remains pressured by education sector regulation and muted digital-native demand.
- Margin Recovery from Cost Cuts: Operating loss margins have improved sharply, but long-term sustainability depends on reigniting China growth or further international scaling.
- AI as a Future Demand Catalyst: Generative AI integration is still early-stage but could unlock new use cases and verticals, especially in education and entertainment.
- Retention Divergence: Net retention rates highlight stickier, expanding relationships in international markets versus softness in China.
Risks
Ongoing macroeconomic uncertainty, regulatory changes in China, and competitive pricing pressure (especially in domestic markets) represent major risks to revenue stability and margin improvement. The shift to quarterly guidance reflects management’s caution amid volatile customer budgets and unpredictable demand cycles, particularly in China. Investors should monitor for further regulatory actions, FX swings, and the pace of AI-driven adoption.
Forward Outlook
For Q2 2023, Agora guided to:
- Total revenues in the range of $34 to $37 million
For full-year 2023, management discontinued annual guidance due to rising macro uncertainty.
- Quarterly guidance now replaces annual outlook, citing FX, inflation, and interest rate volatility
Management cited continued strong international demand, persistent China headwinds, and the need for agility in navigating evolving market conditions.
- International growth expected to outpace China in coming quarters
- AI and product innovation remain long-term strategic focuses
Takeaways
Agora’s operational split reveals a tale of two businesses: international growth and stickier customer relationships versus China’s regulatory and macro drag. Cost discipline is driving margin recovery, but future upside hinges on international scaling and successful AI-driven product expansion.
- International Strength: Growth in Agora’s US/international segment and high net retention demonstrate a scalable, sticky RTE business outside China.
- China Remains a Drag: Regulatory and macro headwinds continue to weigh on Shengwang, with only modest growth after adjusting for disposals and FX.
- AI and Product Bets: Early AI integrations and vertical-specific solutions could position Agora for the next wave of RTE adoption, but execution and demand realization will be key watchpoints.
Conclusion
Agora’s Q1 marks a structural inflection point, with international growth and cost discipline offsetting China’s persistent challenges. The company’s dual focus on product innovation and geographic diversification is prudent, but investors should expect ongoing volatility as macro, regulatory, and competitive forces play out.
Industry Read-Through
Agora’s results highlight a broader industry trend: RTE platform providers with diversified global exposure are better positioned to capture new vertical growth and weather local regulatory shocks. AI integration is emerging as a horizontal catalyst, with potential to expand use cases across education, entertainment, and enterprise collaboration. For China-focused SaaS and cloud businesses, regulatory and macro risks remain elevated, and the ability to pivot toward enterprise and international markets will be increasingly important. Investors in RTE, SaaS, and communications platforms should monitor customer retention dynamics, vertical adoption patterns, and the pace of AI-driven product innovation for sector-wide implications.