Appen Drops 28% on 69% Decline In Underlying EBITDA For First Half

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Appen Drops 28% on 69% Decline In Underlying EBITDA For First Half

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  • Higher product development amortisation costs and weaker digital advertising demand hits profit margin and revenue
  • US$9.4 million Statutory net loss after tax for the June 2022 half-year, compared to US$6.7 million profit in previous corresponding period
  • Higher employment and IT costs have reduced operating margin from 9.5 percent to 4.6 percent
  • Cash balance at 30 June 2022 was US$42.2 million
  • Half-year audited results to be announced on August 25 and will include full 2022 financial year outlook.

Appen Limited (Appen or the Group) was founded 1996 and is listed on the ASX under the code APX. The Company is a global leader in the development of machine learning and artificial intelligence (AI) products. Data types include speech and natural language data, image and video data, text and alphanumeric data and relevance data to improve search and social media engines.

Appen’s expertise is drawn from a global crowd of more 1 million skilled contractors in over 70,000 locations across 170 countries.  Product expertise and specialist service capabilities encompass technology, automotive, financial services, retail, healthcare, and governments

First half-year 2022 Results Update

Weaker than anticipated digital advertising demand and a slowdown in spending by some of Appen’s major customers has seen a 7 percent decline in Group revenue for the six months ended 30 June 2022. This decline in revenue has translated to a 69 percent decline in Underlying EBITDA to US$8.5 million in the first half-year, compared to the prior corresponding period. The impact of higher amortisation on product development has pushed statutory net profit of US$6.7 million in the first half -year of 2021 to a US$9.4 million statutory net loss after tax for the June 2022 half-year.

Higher amortisation costs arise when the amortisation rate applied to intangible assets like capitalised product development costs increases to reflect a valuation write-down of the asset. This occurs when the estimated future economic benefit to be derived from the incurrence of product development costs is revised downward because the end product is now unlikely to generate the value originally envisaged at the outset of the particular project to which the development expenditure relates.

Higher transformation costs and investment in product and technology resulting in higher employee expenses, recruitment and IT costs has also impacted earnings and margins. The Group’s Underlying EBITDA margin in the current half-year has declined significantly from 9.5 percent to 4.6 percent.

China however is a bright spot on the horizon, where first half revenue is up 141 percent to S$18 million. Appen has established itself as a leading Artificial Intelligence (AI) data business in China, as it serves leading tech giants, social media, mobile providers and autonomous vehicle companies.

Pleasingly, the Group saw solid free cash flow generation and cash conversion from EBITDA increase from 101 percent to 211 percent in the half-year. Cash balance at 30 June 2022 was US$42.2 million.

2022 Financial Year Update

Management consider that business fundamentals remain strong for the Group and have acknowledged the Group’s operational performance and service quality continues to improve. This implies that improvement was necessary and the lag effect before operational improvements begin to have a positive impact on revenue and margins means that this operational improvement may take time to positively impact reported results.

Interestingly, the material decline in Appen’s revenue, profit and operating margin comes just a couple of months after Canadian Technology giant, TELUS International, suddenly walked away from short-lived negotiations over a $9.50 per share cash takeover offer, without any rationale or explanation. The takeover bid was withdrawn within a day of being formally announced by Appen.

Appen will release its half-year audited results on August 25 and will include further details about the half-year financial performance and outlook for the full 2022 financial year. Declining margins on falling revenue and higher employment and product amortisation costs suggest that any earnings recovery may take some time.

Louis Mosmann

Louis Mosmann is a Private Wealth Client and Research Assistant at KOSEC- Kodari Securities. Louis covers macroeconomic events, global markets and ASX300 company announcements, allowing clients to make more informed investment decisions. Email Louis at l.mosmann@kosec.com.au.

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