Appen fulfils its own prophecy with weak update

Company News

by Glenn Dyer

Appen (ASX:APX) shares slumped 30% at one stage on Tuesday after it revealed a stunningly weak trading update for its first half of 2022.

The company reported underlying EBITDA for the half collapsed 69% to just $US8.9 million in the first half.

That missed analysts’ estimates by 67% according to market forecasts – which doesn’t say much for the analysts does it?

The bottom line is a $3.8 million loss for the June half that no one forecast.

Appen’s stunner was just another weak update or news from the listed tech sector in recent months.

It’s not that the market was caught unawares by the report – it was just the overall weakness in the figures

But six weeks ago, Appen had pointed out that it wasn’t travelling all that well.

“On 26 May 2022, Appen advised that its year-to-date revenue (as of 30 April 2022) was lower than the prior corresponding period. Appen also advised that 1H FY2022 EBITDA was expected to be materially lower than the prior corresponding period, due to lower than expected revenue, investment in transformation, product, and technology, as well as lower share-based payments in the prior corresponding period.”

Hurting Appen as well have been the new privacy features in Apple products that have reduced the ability of big advertisers including Facebook, which is owned by Meta Platforms Inc, and Alphabet Inc’s Google to target users, impacting their appetite for pinpoint-accurate user data, say analysts.

Appen’s business model involves outsourcing hundreds of data-checking projects to contractors who manually check and label online content, which clients then feed into their algorithms.

The weak underlying EBITDA came on a modest 7% fall in revenue for the half to $182.9 million.

The company said its underlying net loss after tax for the half was $3.8 million, compared to a $12.5 million net profit after tax in June half of 2021.

That has now come to pass and the realisation of that gloom saw Appen shares hit a day’s low of $4.04 on Tuesday and end at $4.15, down 27.3% for the day.

There was nothing in the update to please anyone – not only was the interim profit data weak but the outlook for the rest of 2022 was similar.

“We expect to achieve higher volumes in the latter part of the second half due to the delivery of seasonal projects and ramp up in existing projects,” Appen directors said in the ASX statement in an attempt to gild an absent lily.

“However, with no improvement in July trading there remains uncertainty about a continued slowdown of spending from our Global customers and their exposure to weaker digital advertising demand. As a result, the conversion of forward orders to sales is less certain this year compared to prior years.

“Given the revenue skew and fixed cost operating leverage of the business, we expect FY22 EBITDA to be weighted to the second half.

“We are reviewing all investments in the business to accelerate productivity improvements and margin expansion.

“While some of our customers are slowing the pace of their investments, their AI product development is expected to increase. We remain confident that the AI training data market will continue to grow in the longer term,” Appen CEO Mark Brayan said in Tuesday’s statement

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