I recently started a position in new IPO Agora $API or commonly referred to as the “Twilio of China”. I generally dislike buying the “x” of “y” but while researching Agora, I discovered that it is far from just a Twilio clone.
At a high level, Agora offers a Software Development Kit (SDK) for developers to embed real-time video, voice, messaging and recording functionalities into their apps without having to build the infrastructure themselves.
Traditionally, video chatting features have been primarily available on standalone apps like Skype, Zoom, or FaceTime, falling under the category of Real-Time Communications (RTC). While the open-source WebRTC project enabled live video within standard web browsers, it came with a host of its own challenges making implementation difficult (more on that later). Agora is changing that by enabling developers to build interactive video-chat centered apps that can scale to millions of concurrent users on any device, anywhere in the world. Agora calls this category "Real-Time Engagement Platform-as-a-Service" (RTE-PaaS), which they pioneered.
The key components of Agora’s platform are their SDK and SD-RTN (Software-Defined Real-Time Network).
The Agora SDK is fully customizable and contains all the tools a developer needs to embed real-time engagement capabilities into an application. This is done with the use of Application Programming Interfaces or APIs which are software intermediaries that enable two applications to interact with each other.
Before the advent of the API Economy, implementing features like real-time video or voice was costly and time-consuming. Today, companies like Agora and Twilio are leveling the playing field by removing the need to build the underlying technology and infrastructure. With just a few lines of code, Agora enables developers at companies of any size to deepen user engagement through real-time video or voice.
Source: Agora Investor Presentation
Before diving into Agora’s architecture, let’s look at the open-source protocol that video chat APIs are built on, WebRTC (Web Real-Time Communication). WebRTC enables video and audio communication in web browsers and mobile applications, eliminating the need to install plugins or download separate apps. This opened up a plethora of use cases in building video chat applications but comes with a few limitations: making good use of it requires specialized domain knowledge, and since data is transmitted through the internet the quality is unpredictable and data privacy is an issue, and its peer-to-peer nature makes scalability a challenge on group calls.
Source: Agora F1
Agora builds on this with over 200 co-located data centers globally, dedicated to processing real-time audio and video data. To further improve performance, Agora uses intelligent algorithms to monitor requests and optimize data transmission paths to ensure low latency (~300ms) and resilience to packet loss (up to 70%) which ultimately translates into a superior end-user experience. This virtual overlay network is called the SD-RTN. Such global routing optimization is not directly available on the public internet with traditional WebRTC, as it is decentralized and managed by disparate network operators.
Agora also has a short learning curve, with no hardware overhead to manage, drastically cutting down the cost and complexity of implementation. Finally, Agora allows applications to scale stress-free as it supports up to 17 active co-speakers and one million listeners and provides a high level of security as well as cross-platform support across web browsers, Android, iOS, Unity, Mac, Windows, and Linux, among others.
Agora is naturally developer-driven with a bottom-up sales motion, they have a flagship annual conference called AllThingsRTC. Last year, the event brought together over 300 developers and business leaders to discuss the future of real-time communication technology.
The company’s history is a short one, and they’ve managed to scale very quickly. Agora was founded in 2013 in Silicon Valley by Tony Zhao who was a founding engineer at WebEx and previous CTO at YY. It serves users in over 100 countries but 79% of its revenue came from China in 2019. It has dual headquarters in Shanghai and Santa Clara. Its US HQ is called Agora Lab. Their real-time video product was launched just 5 years ago in 2015 and powered more than 600 million minutes of real-time video and voice engagement through more than 1,000 applications in December 2016 alone. In 2018, the SD-RTN expanded to more than 100 co-located data centers worldwide and by 2019, it grew to 200. Finally, in March 2020, at the height of the COVID-19 pandemic in China, they powered more than 40 billion minutes of real-time video and voice engagement across more than 10,000 active applications.
The industry is growing blazingly fast – the larger CPaaS market is forecasted to grow at a CAGR of 39.3% through 2023 to $17.2B and video itself at 43.6% to $3.5B. However, this estimate is likely outdated and I believe the overall market opportunity is now much larger after COVID-19 as I will explain in the next section.
Agora also believes it will be able to capture a portion of the CDN market ($13B by 2023 at a CAGR of 17.3%) as the traditional one-way distribution offered by CDNs transitions to multi-way engagement powered by real-time engagement tools. This enables potential use-cases like live-stream shopping which influencers go on live broadcasts to showcase products, try them on, and describe them to the viewer. The difference between this and QVC for instance, is that viewers can buy with just one click in-app. This trend is really taking off in China, which is ahead of the rest of the world in e-commerce adoption. Amazon launched its own live-stream shopping platform Amazon Live last year and Facebook is piloting its own version as well.
Market Opportunity - The Unbundling of Zoom
Like Zoom founder Eric Yuan, Agora’s founder was also a founding engineer at WebEx and ironically, his platform is enabling the unbundling of Zoom. To learn more on the topic, check out this excellent article from a16z which is quoted below:
“In all but a few circumstances, the broad horizontal verticals eventually break. They become a victim of their own success. As the platforms grow, their submarkets grow too; their product gets pulled in a million different directions. Users get annoyed with an experience and business that caters to the lowest common denominator. And suddenly, what was previously too small a market to care about is a very interesting place for a standalone newco. Like clockwork, a new wave of innovation begins to swell, picking off the compelling verticals the new horizontal players cannot satisfy.”
COVID-19 turned Zoom into a household name but now that video is everywhere, it is starting to become commoditized. Although Zoom has already made significant inroads into education and telehealth, there is a significant opportunity for competitors to chip away at their moat by focusing on serving specific user needs in a way that Zoom can’t.
Compare Teladoc and Zoom, it’s clear who is the better telehealth tool. Zoom is just a video conferencing tool repurposed for telehealth. Most people can agree that Zoom is simply better than Microsoft Teams, Cisco WebEx, or Google Meet; that has already been established and that’s why Zoom’s stock is up 325% this year and sports an $81B market cap. Zoom’s real competitors don’t come from the tech giants, they come from the over 250 companies that are verticalizing video chat as JJ puts nicely in this article.
Let’s take the example of YouTube, which is being unbundled by TikTok in short-form mobile videos, by Twitch in video game live streaming, and by Masterclass in premium educational videos. Although these types of videos all exist on YouTube already and it has a larger total audience, by catering to all types of content, it is not the best format for any of them. On TikTok, Twitch, and Masterclass, viewers were more engaged and creators could extract a larger share of the value they provided. In Q1’20, Twitch clocked in 121.4 million streaming hours, whereas Youtube Gaming Live only did 14.2 million. Entire communities started to migrate away from YouTube to these specialized platforms.
Likewise, with live video, are increasingly looking for contextual video and voice engagement embedded in the app they’re already using rather than relying on dedicated communication apps like Zoom. From Agora’s F1:
“Students in an education application want to see their classmates and work on a group assignment together; players in a poker application want to see each other’s faces to pick up on visual tells; users in a dating application want to see their potential partners as they get to know one another; and buyers in a shopping application want to talk to sellers. The potential opportunities for such contextual real-time video or voice engagement are only limited by one’s imagination.”
Market Opportunity - The COVID-19 Spark
For better or worse, periods of great turmoil like wars, recessions, and pandemics often coincide with periods of great innovation. The devastation wrought by the Black Death on Medieval Europe’s lower class led to widespread labour shortages which ultimately resulted in the demise of feudalism and enabled the rise of the modern middle class; World War 2 led to inventions such as radar, the first electronic computer, and jet engines; and some of the most recognizable businesses today were created during the Great Recession such as Airbnb, Cloudflare, Github, Pinterest, Slack, Stripe, Twilio, Uber, and Whatsapp. Perhaps the best example would be the 2002-2004 SARS pandemic in China; like today, Chinese consumers stuck at home turned to online shopping which catalyzed the rise of Alibaba and JD.
Microsoft CEO Satya Nadella now famously said “we saw 2 years of digital transformation in 2 months”. Perhaps more pertinently, a survey of over 2,500 enterprise decision-makers by Twilio revealed the following:
97% of respondents said that COVID-19 accelerated their digital communications strategy by an average of 6 years
79% said that previous inhibitors to innovation like lack of a clear strategy, getting executive approval, reluctance to replace legacy software, and lack of time are no longer relevant
92% said that transforming digital communications is extremely or very critical to address current business challenges.
I wrote about potential beneficiaries of the new remote work paradigm earlier in the year including Fastly, Datadog, Slack, and CrowdStrike. In my article on the Teladoc / Livongo merger, I posited that COVID-19 was an inflection point in the adoption of telemedicine.
COVID-19 has forced businesses in every industry to experiment and adapt. There have also been significant shifts in consumer behaviour and we saw a similar surge in e-commerce penetration as the example I gave of the SARS pandemic in China. Furthermore, the boredom of quarantine coupled with historic jobless rates might be a boon for innovation.
Ultimately, I think some revolutionary businesses will be ideated in this period. What is different today, is that the API economy enables the democratization of once highly specialized functionality like Real-Time Communications and that will lead to huge opportunities for companies like Agora or Twilio that are in the business of helping these businesses scale fast. Agora highlights use cases across social, gaming, retail, and education. The advent of 5G, which is at least 10 times faster than current 4G networks, will further open up new possibilities for enterprises to deepen mobile-engagement experiences through nascent technologies like augmented reality.
Let’s take a look at some of their customers, you will notice that most happen to be SMBs while competitors like Twilio focus mainly on enterprise and mid-market customers.
As of their latest earnings, Agora had 1,486 active customers, more than 217,000 developers registered on its platform, and a Net Promotor Score of 64.
Source: Agora Investor Presentation
If you frequent VC Twitter, you’ve probably heard of Clubhouse, a very exclusive voice-based social app. It was built in a week with Agora. Other US customers include Bunch, a social mobile gaming app; EastMeetEast, an Asian dating app that saw significantly increased engagement since incorporating a live video component; Hallo, an app that allows users to practice English by video chatting with native speakers; and Talkspace, a mobile therapy platform that connects patients with licensed therapists.
Given that most of their revenues come from China though, their Chinese customers are probably more recognizable. These include New Oriental, ByteDance, TAL, Bilibili, MOMO, Lenovo, YY, Xiaomi, Huya, TCL, and more. There is some concentration risk with the top 10 customers account for 50% and 38% of revenues in 2018 and 2019 respectively. In their Q2’20 earnings, however, they reported that they did not have any customers that contributed to more than 10% of total revenue. Twilio also had significant customer concentration when it IPO'd. Uber was 12% of its revenue when they decided to migrate off its platform and as a result, its stock fell 27%. However, through continuous product innovation, efficient developer-led sales efforts, and strong secular trends like two-factor authentication, it was able to continue growing and diversifying its customer base. In its recent earnings call, Twilio CEO Jeff Lawson actually pointed out how their diversified customer base was a reason they were less affected by COVID-19.
One example of a good use-case for Agora is their recent partnership to power Scener’s Watch Party platform, a virtual movie theater where up to one million participants can simultaneously stream content from Netflix, Prime Video, HBO Max, Disney+, Hulu, etc. in a synchronized video chat environment. Scener has seen over 100x growth since March and that’s been enabled by Agora’s scalable platform.
Having a dedicated network allows Agora to use sophisticated algorithms to plan traffic and optimize routing, a feature unavailable on the public internet, and ultimately resulting in a superior user experience. Its architecture is purpose-built for video. As a result, Agora able to handle an incredible 1-million-person audience and 17 hosts in a live video stream and maintain quality across a global userbase in over 100 countries.
Some of Agora’s pure-play competitors include Twilio and TokBox in the US and Zego, 3ttech, and RongCloud in China.
Agora benefits from a first-mover advantage and has a majority market share in the Chinese market. I believe they should be able to easily maintain their lead.
Although Twilio is more established and has a larger developer community, its programmable video product is intended for group chats, not one-to-many use cases like broadcasting. The maximum number of participants in a group room is 50 and in a peer-to-peer room is 10. As I mentioned, WebRTC is fundamentally a peer-to-peer technology and Twilio’s scalability is limited by that. They advertise use-cases in education (Air Tutors), telemedicine (Epic, MDLive, and Zocdoc), contact center, and collaboration (Volunteer Vision). Perhaps the most exciting vertical is healthcare though, they became HIPAA compliant in February, and they've since seen more than a 100 percent increase in active healthcare customers using its video product. I think as traditional healthcare systems digitize then TWLO can do really well here even though this vertical is non-material to their growth right now.
As an aside for fellow TDOC investors, I don’t believe that EHR vendors like Epic pose a significant threat at this point, EHR systems are notoriously hard to work with and they were not designed to enable real-time, point-of-care clinical decision support and analysis from a range of sources; to do so, health systems must integrate the EHR with many other digital resources which can be quite challenging and time-consuming.
TokBox (acquired by Vonage) offers live streaming capabilities but only scales up to 3000 viewers. They advertise use-cases across financial services, healthcare, travel and hospitality, retail and e-commerce, and logistics and transportation. Vonage’s high-value API services revenue grew 32% in Q2’20 driven by programmable video, their dollar-based net expansion rate was over 200% in this area which was driven by customers like doxy.me, a telehealth leader, that added more than 700,000 physicians to its platform since March. It is important to note that high-value API services only form 9.4% of their total revenues, which results in a smaller figure than API. Notably, management indicated that this was helping drive customer growth and that they would focus their investments there.
When comparing performance, all 3 perform around the same with Agora edging out a higher bit rate and faster call setup.
Besides scale and live streaming capabilities, price is a major consideration. Agora also offers a very generous 10,000 free minutes of real-time engagement per month per account and charge based on usage beyond that. Prices range per product from $0.99 per 1,000 minutes for voice to $3.99 per 1,000 minutes for 720P video (1 to 1 and group video chats) to $2.50 per 1,000 minutes for live interactive video streaming (broadcasting). Twilio charges $0.01 per participant per minute for group rooms of up to 50 people and $0.004 per participant per minute for small rooms with up to 4 people. TokBox also charges per minute with a basic plan including 2,000 minutes for $9.99 per month and $0.00475 per minute after that until 100,000 minutes then gradually lower rates. When you compare plans, Agora is clearly the most budget-friendly option, especially with the free 10,000 minutes, allowing developers to scale to up to millions of concurrent users without breaking the bank.
Agora also competes against Chinese IaaS providers, mainly Tencent. While Tencent has much more resources, lower infrastructure costs, a larger customer base, and a strong brand, Agora wins for many of the same reasons why US companies like MDB or ESTC win against AWS: focusing on a specific need, customers wanting to avoid vendor lock-in, and a passionate developer community. 210,000 apps have registered on Agora’s platform as of Q2 earnings, mainly in China but increasingly in the global market.
Agora recently reported strong Q2’20 results. They achieved $33.9M in revenue (+127.5% YoY), a tremendous dollar-based net expansion rate of 183.2%, gross margins were down 2.8% YoY to 66.4% due to infrastructure costs associated with international expansion, they were FCF positive and profitable, grew their active customer count to 1,486 (+85.5% YoY and +26%! sequentially), had a strong $640.9M cash position, and they issued FY’20 guidance of 125-130M, representing 101% YoY growth on the high-end.
They also saw accelerating developer mind share with new 30,000 new apps registered on their platform which is an acceleration from the 20,000 they added in Q1. This contributed to their incredible customer growth, who they define as users who spend more than $100 on their platform in the preceding 12 months. This sets up a great funnel for future growth as well as developers start scaling their apps and new live-streaming use-cases emerge. Their efficient go-to-market efforts can be seen in their rapidly dropping S&M expense ratio, which formed 16.2% of total revenues in the quarter, compared to 30.4% in the previous year.
Historically, they were growing around 50% YoY. So it’s clear that COVID-19 was an inflection point. In terms of quantifying that boost, although they saw lower usage from peak levels in February and March, they believe that it will continue to remain above pre-COVID levels as video chat apps rose to the mainstream. They claim that no more than 20% of the usage increase was due to COVID and are not forecasting much impact for the remainder of the year which bodes well for their long-term growth prospects.
Agora seems expensive trading at 34.5x 2020 revenue estimates but as you can see from the graph below, if it is able to sustain its recent hypergrowth then its valuation is reasonable. Another consideration when trying to determine an appropriate multiple is the extent to which they should get an ADR discount. Total US revenue contribution still remains under 10% and I do not believe they would be directly impacted by trade disputes although a potential delisting of Chinese stocks would certainly affect them, such a measure is unlikely, however.
Rule of 40 (LTM FCF) = Sum of Revenue Growth and LTM FCF %
Source: Public Comps
Firstly, being an ADR, investors are understandably cautious of fraud with recent scandals like LK. There are a couple of factors that help my confidence though, including Tony Zhao’s history of working in the US, that Agora has dual headquarters in China and the US, and only expanded to China a year after it was founded, their impressive customer list with giants like Xiaomi, and some famous investors like Coatue that reportedly decided to invest after just two weeks.
In terms of competition, I think Agora has carved a nice niche in broadcasting use-cases, and with the help of SD-RTN, their first-mover advantage in RTE, and focus. This has resulted in them being able to fulfill particular use-cases that Twilio or TokBox cannot, like the one I outlined with Scener, and that it would take significant investment and time for them to replicate. Neutrality also plays in Agora’s favour here when competing against IaaS providers like Tencent. Larger customers are at risk of migrating towards in-house solutions but as I mentioned earlier, Agora has diversified their revenue base significantly in recent quarters and if their customer growth is any indicator, they will continue to do so. For most customers, the value proposition is clear in terms of time and development costs saved. The overarching trend of unbundling and verticalization in video communications will play out in Agora’s favour as well here. I believe that Zoom has not made any significant attempt at making a platform play because they would be moving the center of gravity away from their core application which would accelerate the commoditization of video and negatively affect their ability to sustain their current pricing plans and serve their core enterprise userbase. Essentially, Agora wins through counter-positioning.
With the rise of Zoom and TikTok, it’s clear that video is changing the way we communicate with each other. During COVID-19 induced lockdowns, more people were watching live-streaming streaming programming than ever, the entire sector grew 45% between March and April. As consumers get used to video, they come to demand contextual, real-time in-app video chat experiences rather than using a dedicated app like Skype, Facetime, or Zoom. This provides a tremendous opportunity for a new generation of vertical-focused startups to make real-time engagement ubiquitous using Agora.
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Disclosure: Richard Chu owns shares of API, CRWD, DDOG, FSLY, LVGO, TDOC, TWLO, and ZM. Saga Partners owns shares of LVGO. Saga Partners does not have a position in API at the time of writing.