Appen Steps Up Product Development

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AI data provider Appen has expanded its product range and dismissed concerns regarding a step-up in competition

-Business reorganisation expected to provide more clarity on revenue sources
-Appen expects to generate growth from value adding to its AI products
-Change to reporting in US currency welcomed by brokers
 

By Eva Brocklehurst

Artificial intelligence data provider Appen ((APX)) is restructuring its operating segments, having maintained guidance for operating earnings of US$83-90m for 2021 and reiterated a product-led strategy.

Appen has underperformed materially over the past few months, Ord Minnett notes, because of uncertainty regarding the revenue trajectory and the risk of increasing competition.

Citi has been of the view for some time that Appen may need to step up investment in product development in order to compete and maintain its market share. Yet management believes competition issues will not have a material impact on the business and has emphasised sequential revenue growth from key customers as well as new projects.

Appen has signalled a larger skew to the second half as some previously deferred projects return to the work schedule and has recorded orders of US$260m at the end of April, up 8%. The move, in the revenue model, to committed expenditure by customers and away from project-based work will increase revenue visibility and reduce volatility, Wilsons assesses.

If Appen can continue to generate consistent growth from its core global customers and gain traction in emerging sectors such as enterprise, government and China then the diversification of revenue away from global technology firms should be a positive step, the broker adds.

Details on new products such as Appen Intelligence, Appen In-Platform Audit and Appen Mobile have been provided at an investor briefing and Macquarie notes the revenue contribution from products increased to 23% in the second half of 2020 from 17% in the first half of 2019.

The company's products are based on machine learning models and focus on producing high quality datasets that help customers remove biases in their data. These products may add limited value to the global customer base (large tech companies) yet longer term, the broker points out, they help gain new business at higher margins and achieve the goal of diversifying into new markets.

The company may have reiterated 2021 guidance but visibility remains limited and Macquarie calculates consensus numbers still require a downward adjustment.

Restructure

From August, the business will be reorganised under two segments – Global Services and New Markets – which will consolidate Relevance and Speech & Image into customer/regional designations within these two new segments.

Wilsons notes global customer data annotation demand been very consistent over the last two years and there is a strong skew to the second half. Segment reporting should prior more clarity on where the growth is occurring, Ord Minnett observes, and help allay concerns around stagnating revenue growth from the large technology customers.

The company expects both segments will grow in line with the broader artificial intelligence market, at around 25%. Redundancies are expected to save US$15m per annum and some benefit could be evident in the second half of 2021.

Wilsons emphasises the US$15m is a gross figure and before reinvestment so the actual realised saving will be less than US$15m. The broker, not one of the seven stockbrokers monitored daily on the FNArena database has an Overweight rating and $22.83 target, both of which are currently under review.

Currency

A change in accounting currency has also been announced – to US dollars. The change in reporting will begin from the first half of 2021. Macquarie believes this is a sensible move, as 90% of revenue is derived in US dollars and it will eliminate the high FX-related volatility in accounting.

Despite the update, Macquarie remains cautious and maintains a Neutral rating while Ord Minnett is more positive, with a Buy rating, believing the changes will lead to clarity on the underlying growth in the business.

FNArena's database has two Buy ratings and three Hold. The consensus target is $21.97, suggesting 62.4% upside to the last share price. Targets range from $14.70 (Macquarie) to $30.90 (Citi, yet to review the update).

See also, Could Competition Shake Up Appen? on February 26 2021.

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