Shares in Appen Limited are down 26% after releasing their Appen HY21 Earnings Report to the market on the 26th of August. The stock has been a little troubled over the last reporting seasons due to decreasing growth and fear of revenue stability from major customers.
Appen HY21 Earnings Report
The group released their HY21 results to the market on 26th August, headline results were as follows:
- Group revenue of $196.6M, down 2.0%, due to lower Global Services revenue as Global customers allocated resources to new, non-advertising projects in the first half of 2021
- Global Product revenue of $22.3M, up 15.2%, as Global customers invested in new AI use cases supported by Appen’s annotation platform and tools
- New Markets revenue of $47.8M, up 31.5%, driven by China, new Enterprise customer wins and product-led growth
- Acquisition of Quadrant, a global leader in mobile location and Point-of-Interest data, further extends our product offering
- China continued to grow strongly, with 1H21 revenue 5.8x 1H20 revenue
- Annual contract value (ACV) of $119.6M, up 16%
- Underlying EBITDA3 of $27.7M, down 14.3%, due to higher costs related to growth investments
- $66M in cash at 30 June 2021
- Interim dividend of A$ 4.5 cps, 50% franked, flat on 1H20 dividend
One of the key metrics Prophet was looking out for since our first reports were relating to the growth of their China Segment. This segment continued to perform well in HY21 increasing 5.8x compared to 1H20.
It’s very important to remember that 1H20 was from an extremely low base, however, the growth rate seemed to increase significantly in the period from 1Q21 to 2Q21
APX HY21 Earnings Report
The group delivered a 2% reduction in total revenue compared to the prior comparable period 1H20, however, management reiterated that 1H20 was a considerably strong period.
Statutory EBITDA fell 24.6% to US$25.2 million and Statutory NPAT fell 55.1% to US$27.7 million.
Appens balance sheet took a small adjustment compared to the prior 6 month period ending Dec 2020, with Total Assets, and total equity being reduced to US$448.7m and US$372.8 respectively. The group have no debt on their balance sheet.
We welcome the move of Appen to report their figures in USD due to the high reliance on global revenue and the current weakness of the AUD in comparison.
Appen Aquires Quadrant a Leading Location Data Provider
On the same day as the earnings report, Appen also informed investors that they have agreed to acquire 100% of the shares in Quadrant a leading location AI provider.
Appen will make an upfront cash payment of US$25 million and a potential additional payment of up to US$20 million in Appen shares to be issued upon achieving revenue milestones in 2022 and 2023.
The upfront cash payment will be funded from existing cash reserves and the transaction is expected to close in September 2021.
Whilst Appen have approximately US$66 million of cash on their balance sheet without strong cash generation over the next half-year period we presume that the group will conduct a capital raising or other capital measure to firm up their balance sheet sometime over the next year.
Appen provides little information on how the deal will contribute to the group’s combined performance after the deal completes except that Appen’s FY21 underlying EBITDA will be reduced by approximately US$2 million.
We would like to have seen Appen provide additional fundamental financial data and strategic rationale for this deal.
APX HY21 Share Price
The Appen share price is down a massive 71.6% over the last 12-months to trade at a current price of $10.20 per share and a market cap of just over A$1.3 billion.
The shares are trading at the low end of their 52-week range of $9.98 – $40.73 and the group has a current Price to Earnings Ratio of 26.5x. The PE of Appen is still considerably higher than the ASX200, which seems to indicate investors are expecting better growth still in the future.
APX HY21 Dividend
Appen despite the disappointing result still announced a distribution of A$0.045 per share, which equates to a yield of about 1% at current prices.
APX HY21 Dividend Facts:
|Dividend Amount||A$0.045 / shares|
|Dividend Payment Date||24/09/2021|
|APX Dividend Yield||~1%|
The group in their HY21 Earnings Report announced that the dividend would be paid on the 24th of September and have an ex-date of the 31st of August. Appen does not allow investors to participate in a dividend reinvestment plan.
Appen HY21 Earnings Report – Prophets Take
Whilst Appen Shares are down a monumental 73.6% in the last 12-months they may not be out of the wood quite yet, whilst we have bought a few shares in Appen as an AI bet unless the company can start generating meaningful revenue in their China segment and innovate in their current markets there may be more pain in store.
The group’s decision to align their reporting to USD was a welcome move as it removes the currency impact as the majority of the group’s revenues are earned from outside of Australia.
COVID interrupted many businesses last year and that, in turn, reduced their digital ad spend for a period. This impacted our major customers’ sources of revenue, and although digital ad spend has bounced back nicely, that experience is driving them to invest in new AI products that are less reliant on advertising.
We would like to see large customers return to spending and partnering with Appen for their ad spend. However, we are also wary that performed well during COVID and had a reliance on systems that actually helped to improve their performance did not cut spending. This makes us a little nervous in this regard, as had the advertisers been generating more sales with Appen software then without the spending would not have been cur in our opinion.
Whilst the Appen HY21 Earnings Report (APX HY21) was a little underwhelming and the details around the Appen Acquires Quadrant deal were lacking we will continue to hold a very small parcel of shares in our portfolio as exposure to the Australian AI sector. We will re-evaluate our position again at the company Full Year results at the end of the year.