Appen shares plunge on revenue drop, major revenue downgrade

Once one of the ASX’s hottest performers, the tech group drops more than 25 per cent following profit warning with analysts warning of more pain to come.

Shares in Appen, led by Mark Brayan, plunge after the tech group’s latest profit warning. Picture: Jane Dempster/The Australian

Shares in ASX-listed artificial intelligence data provider Appen have plummeted by more than 25 per cent, after the tech company posted a major earnings downgrade with analysts warning of further pain to come.

Appen, which provides AI data to tech giants and other companies, on Tuesday posted a year-on-year revenue drop of 7 per cent to $182.9m, blaming weaker advertising demand and a slowdown in spending from some of its largest customers.

Underlying earnings before interest, taxation, depreciation and amortisation was down a whopping 69 per cent to $8.5m, and the company posted an underlying net loss after tax of $3.8m – compared to a $12.5m net profit after a tax a year earlier – and a statutory net loss after tax of $9.4m.

The 69 per cent drop in EBITDA was 67 per cent below analyst expectations, according to the Royal Bank of Canada.

The Sydney-based Appen creates human-curated datasets to train artificial intelligence programs and its customers are thought to include tech giants including Amazon.

The company has struggled with privacy changes made by Apple to iPhones, which have also hit tech giants including Facebook, which earlier this year reported a $US10bn hit to its advertising revenues due to the changes. Apple’s privacy tweaks restrict how much data third parties can glean off end users when they use apps and browse the web.

Appen shares closed on Tuesday down 26.4 per cent – or $1.56 – at $4.15. They have fallen 62 per cent this year alone.

“The first half of the financial year has been characterised by challenging external operating and macroconditions, which has resulted in weaker digital advertising demand, and a slowdown in spending by some of our major customers,” chief executive Mark Brayan said in a statement.

“This has especially impacted our global division, particularly those customers with a high exposure to digital advertising. While only 26 of our first half global revenue supports digital advertising, we are seeing a flow on effect to non ad-related projects and some of our core programs, as our customers reduce their overall spend.”

Mr Brayan said that costs for the half had ballooned due to transformation costs, and investment in product and technology, resulting in higher employee expenses, recruitment, and IT costs.

“Together with lower-than-expected revenue, this has impacted earnings and margins,” he said.

Mr Brayan pointed out that the business was still performing well in China despite a three-month Covid-19 lockdown, with first half revenue up 141 per cent to $18m.

“We have established ourselves as a leading AI data company in China, and continue to service the leading tech giants, social media, mobile providers, and autonomous vehicle companies,” he said.

Richard White, WiseTech Global, Anthony Eisen, Afterpay, Chris Vonwiller, Appen, Aram Mirkazemi, Altium and Kirsty Godfrey- Billy from Xero. Picture: John Feder/The Australian

“The fundamentals of our business remain strong and our operational performance and the quality of our service we provide customers continues to improve, evidenced by higher NPS. We are increasing our range of products and through our product investments remain well positioned to serve our customers. Despite the current challenging operating conditions, we remain committed to our longer-term growth strategy and confident of our prospects in the high growth AI market.”

Appen tumbled out of the ASX 200 in June, weeks after Canadian IT firm Telus walked away without explanation from a $9.50-per-share takeover bid, which would have valued Appen at $1.2bn.

Appen’s shares were worth as much as $43.50 in August 2020.

“Another major downgrade will likely see share price materially impacted today,” RBC Capital Markets analyst Garry Sherriff said on Tuesday.

“The limited revenue visibility continues to be an issue for forecasting revenue and earnings. The de-rating of APX is likely to continue in our view given multiple material downgrades and questions on revenue visibility and strategy.”

Mr Brayan said in an interview with The Australian in May the Telus saga demonstrated that his company “is still a valuable commodity”.

“We’ve got great people, great products and fantastic customers, and that’s why people do things like this, because there’s a lot of value in a business like ours,” he said.

“It underscores the importance of our customers and looking after them, because my reflection when this happened is that I want to make sure that whatever happens with this outcome, I’m doing the right thing by my customers and the staff.

“So in some ways, it refocuses you on what’s important.”