The Appen Ltd (ASX: APX) share price is having a very difficult day on Thursday.
In morning trade, the artificial intelligence (AI) data services company's shares are down 18% to a multi-year low of $2.73.
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Why is the Appen share price crashing?
Investors have been selling down the Appen share price this morning following the release of the company's trading update for FY 2022.
According to the release, there has been no improvement in trading conditions since the end of a difficult first half. As a result, the company is not expecting to deliver on its full year guidance.
In August, Appen advised that it expected its FY 2022 revenue skew to be weighted to the latter part of the second half, with revenue down year over year due to a slowdown of Global customers.
It also stated that its FY 2022 EBITDA and EBITDA margin was expected to be materially lower than FY 2021. This is mainly due to lower revenue, as well as its investment in product, technology, and transformation.
So how bad is it?
This morning Appen warned that there are significant challenges in providing guidance at this time. This is due to "ongoing uncertainty" in relation to global customer spend and the impact of economic conditions on new business.
Nevertheless, it has provided investors with an idea of what it is now expecting for the full year.
Appen is now expecting:
- FY 2022 revenue in the range of US$375 million to US$395 million (down 11.7% to 16.2%)
- Constant currency EBITDA of US$13 million to US$18 million (down 77.2% to 83.5%)
In respect to its earnings, management advised that this decline is largely due to lower gross profit from lower revenue, and an unfavourable change in its revenue mix. This revenue mix change reflects a reduction in some large higher margin projects and an increase in smaller lower margin projects.
Will things get better soon?
Worryingly for Appen, business is actually booming despite what you might think from the above guidance.
But despite its Global division continuing to win new projects and its project count sitting at an all-time high, the size and stage of these projects is insufficient to offset the reduction in revenue from higher margin core programs.
In addition, management revealed that its non-global business continues to grow. In fact, momentum in the Enterprise business is building with year to date bookings up 22% since this time last year. However, non-global revenues are typically at lower margins compared to its core programs.
In response to these challenges, Appen advised that it is focused on high impact initiatives. These include accelerating productivity improvements, increasing the use of offshore facilities for project delivery, engineering, and business support, and right sizing investments to market opportunities.
Appen's CEO, Mark Brayan, commented:
Despite the challenging operating conditions, we remain committed to our long-term strategy including investments in New Markets to diversify revenue and products to improve productivity. While our plans to increase the use of offshore facilities are gathering pace as well as our actions to reduce costs, the full benefits of these programs will not be evident in FY2022.
Appen has a strong balance sheet with no debt. Additionally, the business has solid cash conversion, and we remain confident in our ability to invest and implement our strategy during this transitional period.
