AI group Appen warns of ongoing headwinds after revenue plunges by 24 per cent

The artificial intelligence group expects customers will keep re-thinking their technology spend, after its interim losses quadrupled and shares hit a seven-year low.

Artificial Intelligence group Appen expects ongoing headwinds from the broader technology market slowdown to continue as customers re-evaluate their AI strategies, after its interim loss more than quadrupled.

Appen reported a statutory loss was $43.3m in the six months to the end of June, compared to $9.4m a year earlier. It included one-off restructure costs of $5m related to the cost reduction program and one-off costs of $1.3m associated with strategy refresh.

Meanwhile revenue dived 24 per cent in the first half of the 2023 financial year, to $138.9m, primarily reflecting a lower contribution from Global Services which recorded a revenue reduction of 27.4 per cent to $100.1m.

With no dividend declared by Appen, investors were quick to sell their shares with the stock down 32.1 per cent to $1.52 — the lowest close since February 2016.

Appen had a cash balance of $55.2m as at June 30 which includes proceeds of the $60m equity raising in May.

Appen chief executive Armughan Ahmad, who joined the group earlier this year, said the poor first half reflected a challenging external environment. He added that Appen remained committed to releasing new AI products and ending the fiscal year underlying earnings before interest, taxes, depreciation and amortisation and cash EBITDA positive.

“To help achieve this, we are exploring further actions to prioritise our investments into a more focused set of higher potential areas and expect to exit the year with a further reduced cost base,” he said.

“We now expect to exit fiscal year 2023 with an annualised run-rate operating cost base lower than $113m.

Mr Ahmad warned that the back half of the financial year would remain equally difficult with market conditions unlikely to change because of a broader slowdown in the tech space.

Appen chief executive Armughan Ahmad has forecasted that revenue will be similar to the first half of the 2023 financial year. Source: Supplied.

“Appen continues to face headwinds from the broader technology market slowdown and as customers evaluate their AI strategies,” Mr Ahmad said.

“Due to the ongoing uncertainty across all customers, we now expect second half revenue to be closer to first half revenue.”

However, Appen was upbeat about future potential amid a surge in interest for AI, saying that it “continues to play an important role in the industry” with its data and services powering the major AI models.

“We are seeing growing demand in generative AI and have seen some early green shoots in our new generative AI product offerings. To date, 42 large language model projects have been delivered and we have signed our first million-dollar deal with Nvidia,” Mr Ahmad said.

“We believe that our go-forward strategy along with our strong AI capabilities and market momentum related to generative AI will enable Appen to return to growth.”

Appen also revealed a shake-up of its management line up with Ryan Kolln, senior vice president of strategy and operations, to also step into the new role of chief operating officer.

Wilsons Equity Research analyst Ross Barrows said that revenue was 3 per cent below consensus forecasts with generative AI potential not yet offsetting market headwinds for the business.

“The GenAI opportunity needs to be balanced against its current business that is seeing more volatile spending patterns from its largest customers, has (and always has had) limited revenue visibility and arguably increasing competition,” he said.

“So, while we are excited and constructive about the GenAI opportunity, we need to see stabilisation then growth in the core business before turning more positive on Appen.”

The group will also consolidate leadership of its product functions with Mike Davie, general manager of Quadrant, to become chief product officer in addition to his current role.

Sales and Marketing functions will now fall under the remit of chief revenue officer Andrew Ettinger. The changes will see Sujatha Sagiraju and Fab Dolan leave Appen.

It follows chief financial officer Helen Johnson leaving Appen in June after just two months in the role.