Appen (ASX:APX) share price crashes 17% after FY21 guidance miss

Appen shares are deep in the red today…

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Key points

  • Appen shares are sinking today after its FY 2021 results fell short of expectations
  • The artificial intelligence data services company delivered solid top line growth but margin weakness weighed on its earnings
  • No guidance has been given for FY 2022, but management has laid out five-year growth targets

The Appen Ltd (ASX: APX) share price is being crushed on Thursday morning.

At the time of writing, the artificial intelligence data services company's shares are down 17% to $7.11 following the release of its full year results.

Appen share price crushed following earnings and guidance miss

What happened in FY 2021?

For the 12 months ended 31 December, Appen delivered an 8% increase in revenue to US$447.3 million. Management advised that this was driven by a strong second half from Global Services and a higher contribution from New Markets.

Global Services revenue was up 5% for the year to US$344.7 million thanks to a 32% half on half lift in the second half. Management highlights that non-ad related projects now represent 76% of total revenue from Global customers.

Elsewhere, New Markets revenue grew 21% year on year to US$102.5 million. This was driven by a 55% increase in revenue from Enterprise, China, Government and Quadrant to US$60.8 million. Collectively, these channels now account for 14% of group revenue, up from 9% in FY 2020. Management notes that this is improving its customer diversification.

However, despite this growth, Appen has fallen short of its earnings guidance. With its half year results, Appen downgraded its EBITDA guidance to the low end of US$81 million to US$88 million. This compares to its actual EBITDA of $77.7 million or US$78.9 million excluding foreign exchange impacts.

Also missing the mark was its net profit after tax, which fell 20% to US$28.5 million. This compares to the Factset consensus estimate of US$36.1 million.

This may go some way to explaining the weakness in the Appen share price today.

Management commentary

Appen CEO Mark Brayan said:

Appen has maintained its track record of profitable growth in 2021. The result benefited from an increase in new non-ad-related Global projects and a significant increase in new business in China.

We continue to invest for the future. Our investments in product development reflect the important role our technology plays to drive new business, scale, quality and margin expansion.

This year we also completed a strategic review to ensure that we remain at the forefront of technology and market trends. As part of this strategy, we've set ourselves ambitious future revenue, business mix and profitability targets.

Outlook

No short term guidance will be given anymore, with management instead laying out longer term targets.

It is aiming to at least double its FY 2021 revenue by FY 2026, which would imply a top line compound annual growth rate (CAGR) of approximately 15%.

Appen is also targeting improvements in its customer mix, with one-third of revenue coming from non-Global customers. And, finally, it is aiming to lift its EBITDA margin to 20% by FY 2026.

Though, it has warned that its pursuit of these targets could impact its earnings and dividends in the near term.

Management commented: "We are highly focused on these targets and will invest for growth in new products, sales and marketing, partnerships and explore M&A opportunities with a focus on long-term revenue growth. Our long-term revenue focus may impact EBITDA margins in the near term and future dividend payouts."

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Appen Ltd. The Motley Fool Australia owns 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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