After losing a major customer contract with Google, machine intelligence and data company Appen (ASX: APX) has been taking proactive steps to address its financial impact.
On January 20, 2024, Appen received notice from Google LLC that, as part of a strategic review process, Google would be terminating its global inbound services contract with Appen. This decision will result in the conclusion of all projects with Appen by March 19, 2024. It will also significantly impact the Company’s revenue. In FY23, Appen generated $82.8 million in revenue from Google, with a gross margin of 26%. After all, Appen’s contribution to Google was not a small one.
Appen played a significant role in training Google’s ChatGPT competitor, Bard, which is now Gemini, and Google Search. Google told The Verge, “Our decision to end the contract was made as part of our ongoing effort to evaluate and adjust many of our supplier partnerships across Alphabet to ensure our vendor operations are as efficient as possible.”
Appen dubbed the news “unexpected and disappointing”, especially considering the progress made in its transformation and performance in November and December 2023. Appen observed quarter-on-quarter growth in both Global Services and New Markets, including China. However, compared to the previous year, while Global Services revenue for Q4 CY23 decreased, New Markets, including China, showed improvement. Notably, China achieved a record quarterly revenue of $11.1 million in Q4 CY23 within the New Markets division.
Apart from Google, Appen has also assisted in training AI models for Microsoft, Amazon, and Meta. Despite having such major clients, the departure of Google has left a significant dent.
Now, Appen is committed to restoring profitability and aligning costs with revenue opportunities. To this end, the Company will enact measures aimed at achieving $13.5 million in annualised cost savings. These initiatives target both direct and indirect costs related to the execution of Google projects.
Appen anticipates completing 80% of the cost initiatives by March 2024, with the remaining 20% to be finalised by June 2024. While the majority of the costs are direct, careful examination of indirect expenses has led to the decision to close the Toronto and Bellevue offices in North America.
The full benefits of these cost-saving measures are projected to materialise in FY25. The one-time expenses associated with implementing these initiatives are estimated to range between $1.5 million and $2.5 million. These costs will be treated as non-recurring expenses and will not be included in the underlying EBITDA for FY24.
The above initiatives are in addition to the total annualised cost savings of $60 million from initiatives completed over the course of FY23, which enabled Appen to achieve its cash EBITDA profitability objective in December 2023.
This news follows Appen’s recent appointment of Ryan Kolln as Chief Executive Officer (CEO) and Managing Director of the company, effective from February 5, 2024. He replaces Appen’s current CEO and Managing Director, Armughan Ahmad, who has stepped down from Appen.
The attainment of cash EBITDA profitability in FY24 will largely hinge on the revenue expansion derived from the Company’s non-global clientele, the timing of which remains uncertain.
Alinda is a Business Reporter for The Sentiment
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