AI data annotator Appen to book impairment charge worth half its market value

AI data annotator Appen to book impairment charge worth half its market value

Photo: Christopher Gower, via Unsplash.

If you were to ask ChatGPT if Appen's (ASX: APX) foray into new markets has been a success, the AI-driven chatbot wouldn't be able to tell you. Its knowledge is currently limited to information from 2021.

Artificial intelligence requires training and data inputs, as well as the management of that data and the evaluation of models. One company that has been providing this grunt work behind the magic with human input from more than one million flexible workers has been Sydney-headquartered Appen, once a darling of the ASX that was worth more than $5 billion in 2020 but today is valued at less than $350 million.

With customers including Airbus, Bloomberg, Oracle, Microsoft, Amazon and more, Appen has helped to power massive advances in AI technology behind the scenes but has sought to play a more prominent role, diversifying away from traditional annotation services into more sophisticated proprietary technology and software, all aimed at unlocking growth in new markets.

In 2021 this new segment had grown to become almost a quarter of Appen's total revenue, up 21 per cent in that year and driven by "break out" growth in China. Over those 12 months the division won 133 new customers, 11 of which were autonomous vehicle companies, offsetting the sting of losing a large government contract.

It was in that same year though that Apple introduced new features on its iPhone that restricted access to the kinds of data that third parties such as advertisers could access, which had flow-on ramifications for the spending patterns of customers that use Appen. 

For a company that had recorded at least double-digit if not much higher annual revenue growth every year since it "handsomely exceeded" its 2015 prospectus forecast, in August 2022 that trend was abruptly broken as Appen reported a 7 per cent year-on-year drop in half-yearly group revenue due to weaker digital advertising spend from customers, impacting some of the group's large global programs.

New markets revenue was also down 6 per cent at $45 million for the June half, although it would have been up 35 per cent had it not been for a disappointing performance in the 'global product' part of the division.

Under new management after Armughan Ahmad took the reins as CEO and president in January, Appen has today bitten the bullet - at least from an accounting perspective - on the struggling new markets segment (excluding China), announcing expectations it would record a non-cash, pre-tax impairment charge of $204.3 million.

This is significant for a company that is forecasting revenue of less than $400 million and EBITDA of $13-18 million for the 2023 calendar year, which is the financial year Appen operates on. When the market opened today, Appen's valuation stood at $409.8 million, but following the impairment news shares have plunged by almost 16 per cent.

"The assessment of the carrying value of Appen's New Markets (excluding China) CGU (cash generating units) reflects Appen's FY22 financial performance," the company said.

"There remains high conviction in the future growth prospects of the New Markets (excluding China) business, however given the FY22 performance, future revenue growth assumptions have been reduced to reflect lower growth rates, resulting in an impairment loss.

"The impairment charge is non-cash related and is a non-operating item. Therefore underlying EBITDA and underlying NPAT is not impacted. Additionally, there are no covenant related impacts or change in the company's ability to draw on its debt facilities."

Appen clarifies there are no indicators of impairment and "significant headroom" remains in the company's larger, more established Global Services segment.

After starting out in his leadership role at the beginning of 2023, Seattle-based Ahmad - an industry veteran who has worked at KPMG, Dell Technologies and Hewlett Packard - noted his excitement about Appen's opportunities.

"The pace of AI is accelerating with new innovation in generative AI like ChatGPT and DALL.E from Open AI," he said last month.

"As a fast-growing AI industry leader generating more than $440 million revenue in FY21, Appen is well positioned to evolve with the changing needs of AI, and I believe we have a unique opportunity to deliver an ethical, trusted AI for good.

"AI is here to augment our tasks, not our purpose. They are just tools. We are the magic ingredient. It accelerates human and machine collaboration while keeping our essence and adding some fantastical elements for fun and work, while empowering us to contribute to the rise of a new era for human achievement. There is a significant opportunity for Appen to capture the next wave of growth in AI by leveraging our technology and globally diverse crowd."

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