Appen (ASX:APX) share price tanks after 55% profit fall

Here's how the data services company performed in its first-half of FY21.

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The Appen Ltd (ASX: APX) share price has dropped by more than 17% in early trading on Thursday.

This follows the annotated dataset provider releasing its FY21 first-half results this morning.

Appen share price slides after reporting steep earnings fall

  • Group revenue down 2% to US$196.6 million
  • Annual contract value increased 16% to US$119.6 million
  • Underlying earnings before interest, tax, depreciation, and amortisation (EBITDA) down 14.3% to US$27.7 million
  • Interim dividend of AUD4.5 cents per share 50% franked declared, flat on 1H20 dividend.
  • Net profit after tax down 55.1% to US$6.7 million
  • Appen to acquire location data provider Quandrant for US$25 million upfront
  • Outlook: higher confidence in the pipeline supported by a stronger order book

What happened in FY21 for Appen

Investors seem to be squeamish this morning after the company dished out its half-year result.

The significant reduction in profits will no doubt be a point of interest for shareholders as Appen continues to navigate a challenging environment. In addition to this, ongoing regulatory scrutiny and a changing privacy landscape were mentioned as impactful factors.

According to its release, Appen recorded group revenue of US$196.6 million in 1H21 — representing a 2% reduction compared to 1H20. The company noted this was expected with its project delivery skewed to the second half of the year.

Additionally, global services revenue was impacted during the period as global customers allocated resources to new and non-advertising related projects.

However, Appen reported further growth from its new markets revenue segment. In 1H21, new markets revenue jumped 31.5% to US$47.8 million as the business pushes forward with its new 'product led' approach. As a result, new markets now make up 24% of total revenue.

Moving towards the bottom line, underlying profits were down 35% following the realisation of increased amortisation expenses associated with investment in product development.

Despite the weaker earnings result, Appen declared an interim dividend of 4.5 cents per share — in line with the previous year. Based on the current Appen share price, the interim dividend alone presents a yield of 0.32%.

Acquisition

In addition to its half-year result, Appen also announced the acquisition of location data provider Quadrant today. This acquisition is slated to expand the company's capabilities and product offering in the global location intelligence market.

Quadrant was founded in 2014 and provides location data services to enterprise customers to perform location analytics. Similar to Appen's core products, Quadrant's Geolancer provides point-of-interest data that is manually verified by crowdsourced workers.

Moreover, Appen plans to acquire 100% of Quadrant with an upfront cash consideration of US$25 million. An additional US$20 million payment in Appen shares will be conditional on revenue milestones in 2022 and 2023.

What did management say?

With the Appen share price in focus, Appen Chief Executive Officer Mark Brayan said:

As expected, our first half results were impacted by our global technology customers' focus on new AI products and applications, as they broaden their revenue base outside of digital advertising and respond to data privacy changes. This resulted in lower ad-related services revenue, but higher product revenue as Global customers used our market-leading annotation platform and tools for new AI use cases.

Additionally, regarding the company's acquisition of Quadrant, Mr Brayan said:

The acquisition of Quadrant enables Appen to increase our addressable market and to expand our product and service offering to our customers to include more mobile location and POI data capabilities.

We already have the broadest AI training data offering in the industry, and we see an opportunity to grow in the mobile location and POI data space. With Quadrant's Geolancer and our global crowd, we will be strongly positioned to serve our customers' scale, speed and quality requirements.

What's next for Appen?

Looking ahead, Appen reduced its full-year underlying EBITDA guidance due to the impact of the Quadrant acquisition. Specifically, the market expansion is expected to reduce its EBITDA range by US$2 million to between US$81 million and US$88 million.

Additionally, year-to-date revenue plus orders in hand for delivery in FY21 is now roughly US$360 million. This represents a 10% increase on the August 2020 guidance.

Overall, Appen anticipates full-year revenue growth for global services to be mid to high single digits. Meanwhile, new markets revenue is expected to be circa 25%.

Appen share price snapshot

It has been a disappointing 12 months for the Appen share price. Over the period, shares in the dataset provider have dropped 68%.

Meanwhile, the S&P/ASX 200 Index (ASX: XJO) has gained 23%. Multiple downgrades to guidance shifted investor sentiment during the year.

Motley Fool contributor Mitchell Lawler owns shares of Appen Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and has recommended Appen Ltd. The Motley Fool Australia owns shares of and has recommended Appen Ltd. 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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