Executive Summary / Key Takeaways

• Agora, Inc. (NASDAQ:API) is undergoing a significant transformation, pivoting its core real-time engagement (RTE) technology to capitalize on the burgeoning conversational AI market. This strategic shift is the primary driver of its renewed growth and profitability.
• The company has achieved three consecutive quarters of GAAP profitability, with Q2 2025 net income reaching $1.5 million, more than tripling the previous quarter. This financial turnaround is a direct result of solid revenue growth from new use cases and disciplined cost management.
• Agora's technological differentiators in conversational AI, including ultra-low latency, advanced voice processing, and multimodal capabilities, create a competitive advantage, enabling natural human-AI interactions crucial for high-value applications.
• A robust balance sheet, with $377.3 million in cash and equivalents as of Q2 2025, coupled with an active share repurchase program, provides financial flexibility for strategic investments in AI and shareholder value creation.
• Management projects sustained GAAP profitability and sequential net income growth throughout 2025, with conversational AI solutions expected to command significantly higher pricing, unlocking substantial future revenue potential.

The Dawn of Conversational AI: Agora's Strategic Pivot

Agora, Inc. (NASDAQ:API), established in 2013, has long been a pioneer in real-time engagement (RTE) platform-as-a-service, offering developers robust APIs and SDKs for voice, video, and interactive live streaming. Operating under both the Agora and Shengwang brands, the company's foundational strength lies in its global network infrastructure, designed for low-latency, high-quality real-time interactions. This core business model empowers developers and businesses to build custom real-time communication solutions, allowing clients to focus on innovation within their industries.

The company's journey has not been without its challenges, including the widespread impacts of the pandemic, evolving regulatory landscapes, and macroeconomic pressures. A notable setback occurred in 2021 when China's regulatory changes significantly impacted its K-12 after-school tutoring sector, leading to a three-year contraction for the China-based Shengwang service. However, Agora has strategically responded to these headwinds by making a decisive pivot towards artificial intelligence, leveraging its core RTE technology to become a key infrastructure provider for real-time conversational AI. This strategic evolution is now driving a significant resurgence for the company.

The broader industry is experiencing a transformative shift with the rapid advancement of generative AI, creating extraordinary opportunities for businesses like Agora. The demand for seamless voice-based interactions between humans and AI models is escalating, moving beyond basic text chat to more intuitive and expressive multimodal conversations. This trend introduces entirely new use cases where traditional text input is impractical or inefficient. Agora's strategy is to position itself at the forefront of this revolution, enabling these advanced human-AI interactions across various high-growth verticals such as live shopping, entertainment, IoT, and digital transformation.

Technological Edge: The Heart of Agora's Transformation

Agora's competitive advantage is deeply rooted in its differentiated technology, particularly its Software-Defined Real-Time Network (SDRTN) and its rapidly evolving Conversational AI Engine. The SDRTN provides a virtual overlay network optimized for reliable, ultra-low-latency data transmission, which is critical for real-time voice and video applications. This proprietary infrastructure offers a cost structure advantage over cloud-dependent competitors.

Building on this foundation, Agora's Conversational AI Engine is an enterprise-grade solution designed to enable natural, human-like voice experiences with any AI model. The tangible benefits of this technology are significant and quantifiable. The engine intelligently detects and pauses for user interactions within a remarkable 350 milliseconds, ensuring conversations feel smooth and intuitive. Leveraging its global infrastructure, the engine responds to queries in as little as 500 milliseconds, dynamically handling packet loss and minimizing delays across diverse network conditions. Furthermore, its advanced voice processing capabilities include a selective attention algorithm that allows AI models to focus solely on the primary speaker, filtering out background distractions, alongside advanced noise suppression and echo cancellation.

Recent innovations have further enhanced the engine's capabilities. In Q2 2025, Agora unveiled major upgrades, introducing advanced attention locking, which enables an AI agent to focus on specific users' voices even in noisy environments, preventing confusion for large language models. Real-time vision-based intelligence was also added, allowing AI to understand visual context along with spoken conversation, such as identifying landmarks or math problems on a whiteboard. Additionally, natural interactive avatars were introduced, synchronizing lifelike facial and body movements with speech, making conversations more engaging for applications in education and customer support. These features are crucial for seamless user experiences in real-world scenarios, from subway stations to shopping malls.

Agora's commitment to innovation extends to its R&D initiatives and developer ecosystem. The company sponsors the Transformative Expansions Network (TEN), an open-source orchestration framework for building real-time multimodal AI agents. TEN has gained significant traction, accumulating 6,000 GitHub stars and becoming the fastest-growing project in its category globally, with support from leading cloud providers like AWS (AMZN) and Oracle Cloud (ORCL). Agora also launched a conversational AI device kit, a turnkey IoT module that combines its software, cloud services, and high-performance chips. This kit significantly reduces upfront R&D costs and time to market for device manufacturers looking to integrate conversational AI into products like toys, robotics, and smart speakers.

For investors, the "so what" of these technological advancements is profound. Agora anticipates that its conversational AI solutions will command pricing "an order of magnitude higher than our standard RTC audio product," unlocking significant revenue potential. This technological leadership creates a strong competitive moat, driving higher average selling prices (ASPs), potentially lower costs through efficiency, and ultimately better margins and long-term growth.

Competitive Positioning: Carving a Niche in a Dynamic Market

Agora operates in a highly competitive landscape, facing both direct and indirect rivals. Direct competitors in the Real-Time Engagement Platform-as-a-Service (RTE-PaaS) space include established players like Twilio (TWLO), Zoom Video Communications (ZM), RingCentral (RNG), and Cisco (CSCO) (through its Webex offerings). Each competitor brings distinct strengths, but Agora's specialized focus and technological depth provide key differentiators.

Compared to Twilio, which offers a broader suite of programmable communications APIs, Agora's proprietary Software-Defined Real-Time Network provides a more integrated and optimized solution for low-latency, high-reliability real-time interactions, particularly advantageous in verticals like gaming and live streaming. While Twilio may have a larger market presence and more diversified revenue streams, Agora's integrated tools can offer greater efficiency in specific real-time use cases.

Against Zoom, a leader in video conferencing, Agora's broader RTE-PaaS and its low-code/no-code platforms (Flexible Classroom, App Builder) offer greater flexibility for developers building custom applications, particularly in specialized verticals like AI-powered education. Zoom's strength lies in its polished, end-user-focused video solutions and strong brand recognition, but Agora's technical depth in real-time engagement for custom applications provides a distinct edge.

When contrasted with RingCentral's cloud-based unified communications, Agora's dedicated real-time network can deliver superior performance in high-demand, low-latency scenarios. Agora's extensions marketplace allows for more tailored solutions, potentially giving it an advantage in product performance and innovation speed over RingCentral's broader platform. Similarly, against Cisco's more hardware-integrated Webex solutions, Agora's lightweight, cloud-native RTE-PaaS offers significantly easier implementation for developers.

The competitive landscape in China, where Agora operates its Shengwang brand, is particularly fierce. Management notes that while many major cloud providers have competed in this market, only a few meaningful players remain. Agora's strategy in China focuses on higher-value use cases and continuous technical optimization to maintain stable gross margins. The company believes its heavy investment in conversational AI will strengthen its competitive position, as rivals may not have the same level of focus in this emerging area.

Indirect competitors include open-source WebRTC-based tools and communication APIs from tech giants like Microsoft Azure (MSFT) and Google (GOOGL). These alternatives could pressure Agora's market share, especially in cost-sensitive segments. However, Agora's rapid integration capabilities, such as integrating with Google Gemini's multimodal live API and Deep Fit within 24 hours of their release, demonstrate its agility and broad compatibility, helping to mitigate these threats. Agora's overall market positioning is that of a specialized player, strong in technological innovation and customization, which enables effective competition, particularly in the evolving AI-driven communication space.

Financial Performance: A Return to Profitability

Agora has achieved a significant financial turnaround, marking three consecutive quarters of GAAP profitability. This resurgence is a testament to its strategic pivot and disciplined operational execution.

In the second quarter of 2025, Agora reported total revenues of $34.3 million, an 11% increase year-over-year, excluding revenues from certain end-of-sale low-margin products. The Agora segment, serving global markets, was a strong contributor, with revenues reaching $18.2 million, representing 16.7% year-over-year growth. This growth was primarily driven by successful market penetration and increasing adoption in high-growth verticals such as live shopping and entertainment. The Shengwang segment in China also showed positive momentum, with revenues of RMB 115.5 million, growing 6.7% year-over-year and 9.5% sequentially, excluding low-margin products. This was fueled by business expansion in digital transformation and IoT.

The company's GAAP net profit for Q2 2025 was $1.5 million, more than tripling the previous quarter's profit, resulting in a GAAP net margin of 4.3%. This represents a substantial improvement from a 23% net loss margin in Q2 2024. Gross margin for the quarter stood at 66.8%, remaining relatively stable for the continuing business. Operating expenses saw significant reductions, with R&D expenses decreasing 23% year-over-year to $14 million (40.8% of total revenues) and G&A expenses down 26.6% year-over-year to $6 million (17.6% of total revenues). These reductions reflect the impact of a global workforce restructuring initiated in November 2024, aimed at enhancing operational efficiency.

Looking back, Q1 2025 also demonstrated strong performance, with total revenues of $33.3 million, up 12% year-over-year (excluding low-margin products), and a GAAP net profit of $0.4 million, representing a 1.2% net income margin. The company's liquidity remains robust, with $377.3 million in cash, cash equivalents, bank deposits, and financial products as of June 30, 2025. While operating cash flow was negative $0.4 million in Q2 2025, it was positive $17.6 million in Q1 2025, including $17.8 million in interest proceeds. Agora continues to demonstrate its commitment to shareholder value through its share repurchase program, having repurchased $127.2 million worth of shares through June 30, 2025, and extending the program through February 2026.

Outlook and Guidance: Sustained Momentum

Agora's management is confident in its ability to sustain and improve profitability through the remainder of 2025, driven by its strategic initiatives and operational efficiencies. For the third quarter of 2025, the company expects total revenues to be between $34 million and $36 million, representing a year-over-year growth rate of 7.6% to 13.9% compared to $31.6 million in Q3 2024.

Management anticipates net income to grow sequentially throughout 2025, projecting sustained GAAP profitability for the full year. In the medium to long term, the company targets an operating margin of between 15% and 20%. Gross margins for the core RTE business are expected to remain stable around 67%. While conversational AI products may initially have lower margins due to ramp-up and testing costs, management expects these margins to eventually be at least on par with, or higher than, RTC products, given their higher value and technical sophistication.

The cost savings from the Q4 2024 restructuring are a key assumption underpinning the profitability outlook, with an estimated $4 million in savings in Q4 2024 and $7 million in Q1 2025 compared to the Q2 2024 baseline. These savings are expected to translate directly into bottom-line improvement without significantly impacting revenues. Analysts share a positive outlook, with a Zacks Rank #2 (Buy) upgrade reflecting an upward trend in earnings estimates. BofA (BAC) upgraded Agora to Buy with a $6 price target, citing potential demand recovery and improving profitability, noting the stock trades close to the company's net cash level of $3.90 per ADS for FY25. For fiscal year 2025, Agora is expected to earn $0.06 per share.

Risks and Challenges: A Measured Approach

Despite the promising outlook, Agora faces several pertinent risks and challenges that warrant a measured approach from investors. The adoption of conversational AI, while transformative, is still in its early stages. Agora's solutions are continuously being optimized and require ongoing improvement for certain "corner cases." The massive adoption of AI agents will depend on the maturity and product-market fit of specific vertical use cases, a process that will unfold gradually. Management acknowledges that the maturity of these products is not solely determined by Agora but by the industry-specific know-how and product designs of its customers.

Furthermore, many large language models currently lack robust voice interaction capabilities, and existing experiences often suffer from high latency, awkward pauses, interruptions, and sensitivity to background noise. While Agora's technology addresses these issues, the broader ecosystem's development remains a factor. The gross margin for new conversational AI products may initially be lower due to ramp-up, testing, and prototyping costs before reaching a steady state.

The competitive landscape, particularly in China, remains fierce, requiring Agora to continuously focus on higher-value use cases and technical optimization to maintain its market position and margins. The macroeconomic and regulatory environment, especially in China's social and entertainment verticals, continues to pose headwinds for the Shengwang segment. While Agora's strategy emphasizes replacing segments of human functions with AI agents to improve productivity and efficiency, rather than creating entirely new use cases, the pace of this transformation and the successful achievement of product-market fit across diverse industries remain critical factors.

Conclusion

Agora, Inc. is at an inflection point, strategically leveraging its foundational real-time engagement technology to become a pivotal infrastructure provider in the rapidly expanding conversational AI market. The company's disciplined cost management and robust revenue growth, particularly from new use cases like live shopping and entertainment, have driven a commendable return to GAAP profitability, marking three consecutive profitable quarters.

The core investment thesis for Agora rests on its technological leadership in conversational AI, characterized by ultra-low latency, advanced voice processing, and multimodal capabilities, which are crucial for creating natural human-AI interactions. These differentiators, coupled with its open-source initiatives and turnkey IoT solutions, position Agora to capture significant value from the AI revolution. While the path to widespread AI adoption presents inherent challenges and competitive pressures persist, particularly in China, Agora's strong liquidity, commitment to shareholder returns, and clear strategic roadmap for sustained profitability and sequential net income growth in 2025 underscore its potential. Investors should recognize Agora's strategic pivot and technological prowess as key drivers for long-term value creation in the evolving landscape of real-time human-AI interaction.