Agora Fine Tunes Its Business With Non-Core Asset Sale

Key Takeaways:

• Agora agreed to sell the customer engagement cloud business of Easemob, which it acquired less than two years ago, to TI Cloud for about $14.6 million
• The transaction is a win-win for all parties involved due to the more complementary nature of the unit being sold with TI Cloud’s business

By Warren Yang

Agora Inc. API, best known as maker of the software that powers Clubhouse, may have lost its investor appeal since the buzz around the audio social app died down. But the company still deserves credit for finding a clever way to get rid of a business it no longer wants as it seeks to slim down its operations and control costs.

Last Thursday, the company said it agreed to sell the customer engagement cloud business of Easemob, which it acquired less than two years ago, to TI Cloud Inc. (2167.HK) for about $14.6 million in cash. It may sound like a typical M&A deal, but there’s more to it than a simple sale. That’s because Agora holds 2.8% of the buyer, a software-as-a-service (SaaS) provider for lifestyle customer contracts, which it acquired by purchasing TI Cloud IPO shares about six months ago.

Agora bought Easemob, which also makes instant messaging application programming interfaces (APIs), for $54 million in January 2021, though it’s not clear how much the customer engagement cloud part of the company was worth at that time. That means no one really knows whether the latest sale represents a gain or loss on its investment. Regardless, the deal looks like a shrewd way to dispose of a non-core operation.

Investors didn’t seem too impressed, with Agora’s shares dropping 3.1% the day of the deal’s announcement. TI Cloud didn’t do much better, falling 1.1% in Hong Kong the next trading day. But then again, many larger issues are currently in play for such Chinese stocks these days that may have overshadowed this relatively small deal.

Agora has already integrated Easemob’s messaging APIs into its own technologies and released Agora Chat this year. But evidently, Easemob’s remaining customer engagement business wasn’t a great match for any of Agora’s offerings. That means Agora could just let Easemob run that business independently, or sell it. It apparently decided on the latter.

Revenue from the customer engagement business increased about 22% to $8.8 million in 2021 from the prior year, slower than a 26% gain in Agora’s overall sales. That operation’s gross profit also grew more slowly than its revenue, resulting in a falling gross profit margin. This means the business’ costs grew faster than its sales under Agora’s ownership, eroding the parent company’s profitability.

But the business looks like a better fit for TI Cloud, which specializes in cloud services for customer engagement, and thus could likely derive more synergies from the acquisition than Agora. And since Agora has a sizable stake in TI Cloud, it will potentially benefit if the new owner can operate the business more profitably.

Even though the amount Agora will raise from the sale may look small, it equals nearly half of the $31 million in cash and cash equivalents the company held at the end of September. So, the deal looks like a win-win for all parties involved.  

Roller coaster years

Agora could use such creative ideas to streamline its operations as it tries to right its ship after a couple of roller coaster years. The company shot to fame early last year after its role as Clubhouse’s audio technology provider became widely known. Agora’s stock soared past $100 in February last year, rising more than five-fold from the value at its market debut less than a year earlier.

But the good times proved short-lived. Most fundamentally, Clubhouse lost its popularity just as quickly as its rise, in large part because conferences and other social gatherings, which the app sought to emulate at the height of the Covid-19 pandemic, started returning as many countries rolled back restrictions on social contact.

Then, there have been reports, considered troubling by some, saying Clubhouse’s web traffic was directed through Agora’s servers in China and the company’s encryption had flaws. Agora was also hit by a sweeping crackdown on China’s private after-school tutoring centers, which were a major customer group for the company.

As the tide turned for Agora, its shares dropped precipitously from their peak. At the end of the Monday trading day, they were worth just $3.67 apiece – well below even the $20 price from its 2020 IPO.

New challenges continue to abound. Beijing’s strict Covid-19 policies, which it just started easing, still create a lot of uncertainty for the company’s customers in China, many of which are curbing their spending. Slowing economies outside China – which have hit tech companies especially hard – and volatility in capital markets are also hindering Agora’s efforts to boost sales.

These headwinds led to a 9% year-on-year decrease in Agora’s revenue to $41 million in the third quarter. Its net loss widened more substantially, almost by a third, to about $28 million as the company maintained its R&D spending while ramping up sales and marketing costs. Agora’s overall operating expenses also increased due to severance costs as it trimmed its workforce to reduce redundancies as part of its efforts to become more focused on its core products.

Agora shares have gone up and down since it announced the Easemob deal, though the relatively small transaction was quite likely overshadowed by bigger macro elements as we’ve previously noted. Those included China’s sudden decision to relax its Covid-19 policies, and a positive outcome from the first U.S. inspections of New York-listed Chinese companies under a new information-sharing agreement between U.S. and Chinese regulators.

And while Agora’s stock is well below earlier levels, investors don’t seem to have given up on the company. Its stock trades at a price-to-sales (P/S) ratio of about 2.9, higher than 2.4 for Twilio TWLO, which provides a cloud communications platform, as well as 0.76 for voice-over-internet pioneer 8×8 EGHT.

After its brief period in the spotlight, Agora has been facing a harsh reality. But if it proves it can weather times like these, it could gain newfound respect and trust from investors, which may last much longer than its Clubhouse-attached fame.