Appen to shut two offices in cost cutting drive as it reels from Google contract fallout

Struggling artificial intelligence (AI) annotator Appen (ASX: APX) eventually plans to shutter two North American offices including its US headquarters as part of a cost cutting drive following the collapse of a major contract with Google last month, which prompted its share price to plummet and CEO to jump ship.

Appen provides much of the grunt work that has powered the explosion of AI, utilising contractors around the globe known as search quality raters who cross-check and label data that trains AI systems. The company currently draws on a crowd of more than one million skilled contractors across 170 countries who speak more than 235 languages. 

Last month Google announced a re-evaluation of its supplier partnerships including with search quality raters. This came shortly after protests from the Alphabet Workers' Union (AWU) representing Appen contractors led to a significant pay rise to US$14-14.50 an hour, which Forbes reported was an increase of up to 45 per cent for some workers who had been living on "poverty wages" beforehand.

The contract terminated by the tech giant represents roughly 30 per cent of Appen's annual revenue. Two weeks after the announcement the Sydney-founded company's CEO Armughan Ahmad stepped down with immediate effect, replaced by former chief operating officer Ryan Kolln who has stepped into the CEO role.

Appen has announced immediate plans to deliver $13.5 million in annualised cost savings as part of a focus on returning to profitability and managing costs "in line with the revenue opportunity".

"The cost initiatives represent direct and indirect costs associated with the delivery of Google projects," the company says.

"Appen expects to complete 80 per cent of the cost initiatives by March 2024 and the remainder by June 2024.

"The bulk of the costs are direct costs, however indirect costs have been further scrutinised resulting in the eventual closure of the Toronto and Bellevue offices in North America."

Bellevue is currently the home of Appen's global headquarters according to its website, and sits within a tech hub 15 minutes drive from downtown Seattle across Lake Washington.

An Appen spokesperson confirmed this is the office that will be closed, but with other offices in the country here will still be a US footprint.

The first full-year benefit of the cost savings are expected to be realised in FY25, with one off costs of between $1.5-2.5 million in the current financial year.

"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," the company adds.

"Achieving cash EBITDA profitability in FY24 will largely depend on revenue growth from our non-global customers, the timing of which remains uncertain."