What is Appening? Google terminates contract with Aussie AI without warning

Upon entering January 2024, Google employees likely felt an eerie sense of deja vu as they received emails from their CEO Sundar Pichai, warning them of impending layoffs. Last year, during the same period, Pichai sent out an email informing employees about the “difficult decision” to reduce headcount. Big tech companies have become synonymous with layoffs since the pandemic peak started flattening. 

What’s more, employees are not the only ones getting the pink slip; vendors are, too, including machine intelligence company Appen (ASX: APX). On Saturday, January 20, 2024, Google informed Appen that it intends to terminate its worldwide inbound services agreement with the Company as part of a strategic review. Now, Appen must wrap up all of its projects with Google by March 19, 2024. 

Similarly to many employees who had their access cut off out of nowhere, Appen had no idea Google was about to terminate its contract. This comes as Appen suffers a major decline in its share price, going from over $30 in 2020 to only about 40 cents now. Its market cap has also declined from over $1 billion to only $100 million in recent years. 

The news is even more concerning when you realise that Google had a major role in keeping Appen afloat. In CY23, Appen generated $82.8 million in revenue from Google, with a gross margin of 26%.

The announcement came as a shock for the Company, which dubbed it as “unexpected and disappointing”, especially in light of recent advancements in its performance during November and December 2023. Notably, Q4 exhibited growth compared to Q3 in both Global Services and New Markets (including China). In Q4 2023, China achieved a quarterly revenue record of $11.1 million within the New Markets division. 

Appen recorded revenues of $24.1 million and $25.9 million in November and December 2023, respectively. In April 2023, revenue 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.

Overall, in CY23, Appen recorded $273 million in revenue, with an Underlying EBITDA loss of $20.4 million. The Company had $32.1 million in cash on hand as of December 31, 2023.

Appen has been facing headwinds from the broader technology market slowdown. Now, the sudden Google ordeal has made things worse, making it difficult for Appen to come back to form even in the new financial year. 

Appen is now focusing on cost management, business turnaround and delivery of high-quality AI data for its customers. In response to the termination of the Google contract, Appen said it will adjust its strategic priorities and provide more details in its CY23 full-year results on February 27, 2024.

APX shares plunged 40% on market open following the Google news announcement.