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Appen Ltd shares rocket on massive profit growth

Source: Appen

The Appen Ltd (ASX: APX) share price has rocketed 21% higher to $9.89 in morning trade following the release of the machine learning and artificial intelligence dataset provider’s full-year results.

For the year ended December 31, Appen delivered a 50% increase in revenue to $166.6 million and a 62% lift in underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to $28.1 million. Underlying net profit after tax came in 86% higher at $19.7 million or 19.86 cents per share, allowing management to increase its dividend to a fully franked 6 cents per share.

The key driver of its revenue growth during FY 2017 was its Content Relevance segment. This segment posted a 64% year-on-year increase in revenue to $120.2 million thanks to strong demand from existing and new customers. Amongst other things, this segment is focused on using machine learning to improve search engine results or the relevance of social media content to users. Pleasingly, segment EBITDA grew at an even quicker rate of 110% during the year to $22.1 million.

The performance of its Language Resources segment was a bit of a disappointment, though. Segment revenue rose 7% to $40.4 million, but segment EBITDA declined 17.5% to $12.2 million as a result of its investment in a secure facility, the mix of work, and client cycles. Management does, however, believe that the long-term trends for speech remain strong, possibly indicating that this is just a one-off.

The Leapforce business that Appen acquired last year contributed just $6 million to total company revenue in FY 2017 due to its completion in December. But had Appen had ownership of the business for the entire 12 months, its contribution to revenue would have been $77 million.

Appen finished the year with a cash balance of $24 million, up from $16.5 million a year earlier. Net debt rose to $43.9 million.

Looking ahead, management has provided FY 2018 underlying EBITDA guidance in the range of $50 million and $55 million. This represents year-on-year growth of 77.9% to 96% and is based on the Australian dollar averaging 80 U.S. cents during the year.

Should you invest?

I think this result demonstrates why Appen is regarded as one of the most exciting tech shares on the Australian share market alongside the likes of Altium Limited (ASX: ALU) and Aconex Ltd (ASX: ACX).

Although its shares may be a little on the expensive side, I think its current growth profile more than justifies the premium and makes it a great option for a buy and hold investment.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended ACONEX FPO. The Motley Fool Australia owns shares of Altium and Appen Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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