Appen hit as tech giants pivot to new AI projects
Local technology darling Appen says it can ride out the unexpected hit to its books, as its core clients like Facebook, Google and Amazon shift their focus away from big projects that require the company’s expertise.
Appen, valued at $3.2 billion, downgraded its 2020 earnings guidance on Thursday on the back of its heavyweight technology customers tackling fresh lockdowns in California and also shifting their resources to new projects in the wake of COVID-19.
Those actions have led to Appen’s traditionally strong fourth quarter coming in weaker than expected, with underlying earnings for the period to fall as much as 15 per cent below previous forecast.
Appen expects FY20 underlying EBITDA – including the impact of the stronger Australian dollar – to be in the range $106 million to $109 million at the actual exchange rates to November of US74c. The original guidance was for EBITDA of $125 million to $130 million at that exchange rate.
The news sent Appen’s shares plunging over 12 per cent to $26.20.
Appen is one of the big five WAAX stocks on the ASX, along with WiseTech, Afterpay, Altium and Xero that have found favour with investors in recent years.
It makes most of its money in the US from crowdsourcing a global workforce that does the low-level grunt work for the technology giants. The workers teach computers to recognise basic images and speech, laying down the basic groundwork for the development of ‘Artificial Intelligence’ solutions.
Around 80 per cent of Appen’s revenue is generated by just five customers which includes Google, Facebook, Amazon and Microsoft.
“November results, just finalised, show that while Q4 has improved on Q3 the usual ramp up we traditionally see at this time of year is not occurring,” Appen said on Thursday.
“COVID has clearly disrupted and reshaped the priorities and activities of our customers.”
RBC Capital’s Garry Sherriff said that in the wake of Facebook, Microsoft, Google, and Amazon all beating consensus advertising revenue estimates in their latest quarterlies, Appen’s downgrade begs the question – “Is it customer behavior changing or also competitive pressures?”
However, Appen chief executive Mr Brayan assured analysts it was a change in customer behaviour.
“We’re in the middle of a storm of activity,” he said, as Appen’s major tech customers reshape their priorities in the wake of the pandemic.
“The pandemic has meant that our major customers are accelerating the new product development,” he said.
Mr Brayan added that while work on some large mature projects had slowed down Appen was well placed to pick up new projects in the new year.
“Material projects have slowed as a result and reduced our revenue and the new projects are yet to require the data volumes that offset the slowdown.”
“Although it is impacting this year, it is setting a foundation for a strong year in 2021,” he said.
“This new product development trend is positive for us and we are seeing a significant increase in the number of new projects amongst our major customers, albeit some are early in their lifecycle.”
Colin Kruger is a business reporter. He joined the Sydney Morning Herald in 1999 as its technology editor. Other roles have included the Herald’s deputy business editor and online business editor.
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Source: Thanks smh.com