Machine intelligence company Appen (ASX: APX) must be having Covid flashbacks as its share price is tanking once again. Once an ASX dreamboat, falling demand for the Company’s products has left it to take on cost reduction initiatives.
In February 2023, in its annual report, Appen stated that it expects a soft start to FY23 carrying over from 2022. At the time, it also stated that it expects H1 FY23 underlying EBITDA to be materially lower than 1H FY22. The challenging external operating and macroeconomic conditions that were noted at the FY22 result have persisted into FY23.
Given that, Appen provided a less-than-satisfactory unaudited FY23 financial update for the four months ending 30 April 2023. Its year-to-date revenue for April was $95.7 million, 21.4% below pcp. Its gross profit fell by over 24% while its underlying EBITDA fell to a negative $12.4 million after witnessing an increase to $7.9 million in pcp.
In its annual report, Appen identified about $10 million of cost savings—mainly in reducing its real estate footprint and discretionary spend (i.e. less “travelling for work”)—that will be amplified in FY23. These measures are expected to deliver further annualised cost savings of approximately $36 million. The first full year impact of these measures is expected to be achieved in FY24.
Appen’s CEO, Armughan Ahmad, said, “Appen has tremendous potential. These important initiatives announced today represent a refresh of the business. We are highly focused on the areas that are within our control and have taken the necessary steps to align our cost structure with current revenue expectations and now expect to exit 2023 as an underlying EBITDA and cash EBITDA positive business. With this stronger foundation, we look to the future to fully capitalise on the exciting growth opportunities enabled by generative AI.”
With these initiatives, Appen expects to exit FY23 with an annualised run-rate cash operating cost base of approximately $113 million. This includes capitalised software development costs of approximately $11 million and excludes non-cash share-based payment expenses of approximately $7 million. The one-off costs associated with implementing the cost reduction program are expected to be approximately $4 – $5 million and will be reported as a non-recurring expense and excluded from underlying EBITDA for FY23.
Besides these, the Company is counting on generative AI opportunities—seeing the success of ChatGPT—to return to profitability. The generative AI market is expected to grow from $8 billion in 2021 to more than $110 billion by 2030, with 98% of global executives agreeing that AI foundation models will play an important role in their organisations’ strategies in the next three to five years. In keeping with that, it has teamed up with Reka to produce LLM (large language models) so that companies can create their own iterations of ChatGPT.
Still, shareholders aren’t convinced. Appen continues to face headwinds from the broader technology market slowdown. As a result, it expects revenue to decline materially in FY23 compared to FY22. Taking into account these factors, seasonal trends, consumer behaviour and its project pipeline, Appen expects an improvement in H2 FY23 revenue relative to revenue achieved in H1 FY23. Going forward, it will manage costs in line with the revenue opportunity and market conditions (a feat it should have considered from the get go).
This dynamic approach will better place Appen to adapt to ongoing changes in market demand. Appen’s cash balance at the end of April was $27 million.
Alinda is a Business Reporter for The Sentiment
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