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Appen delivers strong profit growth and beats its upgraded guidance

The Appen Ltd (ASX: APX) share price could be on the move on Tuesday.

This morning the global leader in the development of high-quality, human annotated datasets for machine learning and artificial intelligence has announced its full year results for FY 2019.

How did Appen perform in FY 2019?

For the 12 months ended December 31, Appen delivered revenue of $536 million and underlying EBITDA of $101 million. This was a 47% and 42% increase, respectively, on FY 2018’s result. The latter was also ahead of management’s upgraded guidance for EBITDA in the range of $96 million to $99 million.

On the bottom line, underlying net profit after tax increased 32% to $64.7 million. This underlying result excludes the after tax impact of items relating to acquisitions. These include amortisation of identifiable assets, share based payment expenses, transaction costs, and fair value adjustments for the Figure Eight earn out liability.

On a statutory basis, which includes the above, net profit after tax was flat in FY 2019.

What were the drivers of Appen’s growth?

The key Relevance segment was the star of the show for Appen in FY 2019. It delivered a 37% increase in revenue to $430 million during the 12 months. This means it now accounts for 80% of total revenue. Segment EBITDA increased 66% year on year to $110.5 million thanks to the expansion of its margin to 25.7%.

This was supported by a 32% lift in revenue from the Speech & Image segment to $67.7 million. However, margin contraction led to EBITDA growth of just 11% to $21.4 million. Management advised that this was the result of a trade-off in its gross margin to fuel its sales expansion.

Also contributing to its top line growth was the acquisition of the Figure 8 business, which was not part of the prior corresponding period. It added $37.9 million of revenue to FY 2019’s result. Figure Eight had a strong finish to the year thanks to new customer and expansion deals and improved churn management. However, this did not stop the business from posting a loss during the year.

Management commentary.

Appen’s chief executive officer, Mark Brayan, was pleased with FY 2019, which he notes was underpinned by strong organic growth.

He said: “We’re pleased with this performance. The Company’s ability to maintain this high level of growth in revenue and translate this into improving margins and earnings growth, while investing heavily in technology, is a testimony to the strength and durability that we’ve built into the business.”

“We are particularly proud that we are able to achieve these results in conjunction with a strong focus on the ethical treatment of our crowd and an ongoing commitment to social impact through our Crowd Code of Ethics and membership of the Global Impact Sourcing Coalition,” he added.

Outlook.

Mr Brayan advised that the integration of Figure Eight and Appen has commenced with major components expected to be completed by the end of 2020.

He added: “Our new growth markets are progressing well, although it is early days, setup of our US government operations is on track and will enable greater participation in government contracts.”

The chief executive also revealed that the coronavirus outbreak was expected to have a minimal impact on its business. He advised that its “China operations are young and targets are modest. As such, Appen expects a negligible impact from the Coronavirus on FY20 group revenue and earnings based on currently available information.”

In light of this, it advised that it expects underlying EBITDA to be in the range of $125 million to $130 million in FY 2020. This is based on an Australian dollar averaging 70 U.S. cents between February and December 2020. This guidance represents year on year growth of 24% to 29%.

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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 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 Scott Phillips.

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