Appen shares plummet with revenues to ‘decline materially’

Once one of the ASX’s strongest performers, this AI specialist’s new CEO has not arrested its falling share price.

Appen CEO Armughan Ahmad. Source: Supplied.

Shares in artificial intelligence specialist Appen plunged 28 per cent, slashing $112m of market value, after the company surprised investors by revealing an expected sharp decline in revenue this year.

Revenue will “decline materially” in the current financial year due to challenging external operating and macroeconomic conditions, new chief executive Armughan Ahmad said.

In a trading update on Wednesday the company, which was once the ASX’s strongest performer, said that it expects underlying earnings before interest, taxation, depreciation and amortisation (EBITDA) for the first half of FY23 to be materially lower than the same time a year earlier.

The company has kicked off a “strategy refresh” along with a “series of significant measures to achieve further annualised cost savings” after what it said was a soft start to the financial year.

In an unaudited FY23 financial update for the four months ending 30 April 2023, it reported revenue of $95.7m – down 21.4 per cent on a year ago, gross profit of $35.8m – down 24.7 per cent on a year ago, and underlying EBITDA (excluding forex), of $12.4m, up 57 per cent on a year ago.

Appen announced $36m in annualised cost savings – including $10m announced in February – which will be implemented over FY23 and take full effect in FY24.

“Should current conditions persist throughout the year, we believe the initiatives announced today will result in Appen exiting FY23 with a return to underlying EBITDA and underlying cash EBITDA profitability on an annualised, run-rate basis,” Appen’s board said in a trading update.

“Longer term, we expect to deliver greater diversification of revenue and profitability through implementation of our operational rigour initiatives and strategy refresh.”

Investors punished Appen for the update, sending its shares down 28 per cent to close at $2.29, cutting its market capitalisation to $284.7m. At its peak in August 2020, shares in the then market darling had been worth $40.08 each.

“Appen has tremendous potential. These important initiatives announced today represent a refresh of the business,“ Mr Ahmad told shareholders on Wednesday.

“We are highly focused on the areas that are within our control and have taken the necessary steps to align our cost structure with current revenue expectations and now expect to exit 2023 as an underlying EBITDA and cash EBITDA positive business.

“With this stronger foundation, we look to the future to fully capitalise on the exciting growth opportunities enabled by generative AI.”

Five years ago the Sydney-based Appen was the hottest company on the bourse, with its share price hitting record highs in 2020 buoyed by strong demand from the tech giants who were using Appen’s services to help build out their AI chatbots. The company was one of the famed ‘WAAAX’ stocks, alongside WiseTech Global, Afterpay, Altium and Xero.

Appen’s business model is built around its crowd of more than 1 million people who earn money by training AI, through completing tasks like performing web searches and evaluating the quality of the responses, to more complex jobs like taking photos of all the electric vehicle charging stations across a city to help map their locations.

Its shares are down 62 per cent over the past year.

Appen CEO Armughan Ahmad. Source: Supplied.

“We are supportive of today’s cost out program identified given Appen’s operating costs growth has been running ahead of its revenue growth since 2021 which has impacted its operating leverage,” Wilsons analysts said in a research note on Wednesday.

“We remain cautious however on whether this cost out program will result in a further deterioration in sales or underinvestment in its technology/product offering leading to a catch-up from competitors.”

The lure of a turnaround opportunity was a strong one for the Toronto-based Armughan Ahmad, he told The Australian in a recent interview. He said he’s been through turnarounds before, having served at Dell when it acquired EMC and VMWare with the help of Silver Lake, and Hewlett Packard when it worked with Bain Capital to buy 3Com for $2.9bn just over a decade ago.

Its last CEO Mark Brayan exited after a share price slump.

“I’ve been through three private equity turnarounds,” Mr Ahmad said. “When I got the call about the opportunity at Appen, I saw this is a company that compared that all the VC-backed AI companies that are losing money, this is making money. And yes not enough money that we need to make, but I sent it to all my friends in private equity and said ‘this seems like a great turnaround opportunity’.

“I told my friends I beat them to the opportunity. It has great bones already, it’s in the AI market, and we have some of the most advanced technology clients, including some of the world’s biggest technology companies.”