Appen cuts $21m in costs to plug $127m hole left by loss of Google contract

The tech services company will close two North American offices as part of cost cuts in an effort to recover from Google’s shock decision to terminate a lucrative contract.

ASX-listed tech services company Appen will embark on a $21m cost cutting program after its lost its $US82.8m contract with Google.

Embattled Appen will make $US13.5m ($20.7m) worth of cost cuts as it seeks to plug an $US82.8m hole left on its balance sheet from Google’s shock termination of a lucrative contract.

ASX-listed Appen – which cleans up large data sets and sells them to AI-focused companies – says it will spend up to $US2.5m to complete the cuts, which will include the closure of two North American offices.

The company said it had “no prior knowledge of” Google’s decision to terminate its contract late last month – a move that sent shares of the one-time market darling tumbling and ultimately led to the resignation of its chief executive Armughan Ahmad.

Investors cheered the cost cutting news, with Appen’s shares surging more than 16 per cent to 32c, giving a market value of $71.25m, on Monday. But across the past four weeks, it is trading 32.3 per cent lower – while losses extend to 83 per cent during the past six months.

Appen chair Richard Freudenstein says the board is focused on returning the company to profitability.

Overall, billions of dollars have been blasted from its market value since its peak of $35.43 a share in mid-2020.

Appen will complete all its work for Google by March 19. In a statement to the ASX on Monday, Appen’s board led by former Richard Freudenstein made no mention of job cuts but said the savings came from direct and indirect cost from the Google contract.

“Appen remains focused on returning to profitability and is committed to managing costs in line with the revenue opportunity,” the board said.

“The cost initiatives represent direct and indirect costs associated with the delivery of Google projects. The bulk of the costs are direct costs, however indirect costs have been further scrutinised resulting in the eventual closure of the Toronto and Bellevue offices in North America.

“Appen expects to complete 80 per cent of the cost initiatives by March 2024 and the

remainder by June 2024. The first full year benefit of these cost savings is expected to be realised in FY25.”

The board said the $US13.5m worth of annual savings were separate to a $US60m cost cutting program completed last financial year. That round catapulted Appen’s earnings before interest, depreciation and amortisation into the black – a milestone it achieved in December.

But the board was less certain if it would achieve the same feat this year.

“Achieving cash EBITDA profitability in FY24 will largely depend on revenue growth from our non-global customers, the timing of which remains uncertain.

“The one-off costs associated with implementing the cost reduction initiatives are expected

to be approximately $US1.5m –$US2.5m and will be reported as a non-recurring expense and excluded from underlying EBITDA for FY24.”

Chief operating officer Ryan Kolln replaced Mr Ahmad immediately as chief executive last week.

Appen’s new chief executive Ryan Kolln.

Google ditched Appen for a new supplier who could provide a more “efficient” partnership. The move was the result of a year-long review process of all of the company’s major vendors and suppliers.

Appen’s Google contract generated $82.8m in revenue last financial year at a gross margin of 26 per cent. The Alphabet Workers Union suggested that Google’s termination of that contract showed how AI was now eating into the roles of those who had helped to develop it.

Appen was one of the so-called group of WAAAX stocks, which also includes Wisetech, Afterpay, Altium and Xero.

As early as May 2019, there were concerns of a market bubble forming on the ASX, after the WAAAX share prices doubled on average in the previous 12 months.

Appen, however, was unlike a conventional tech company in that it was essentially a contractor, providing a service to technology companies. Its performance therefore rose and fell depending on the contract cycle. But it is the only company out of the WAAAX group to suffer a spectacular fall in share price.