Struggling AI group raises $60m to make it Appen

A Sydney-headquartered company providing the grunt work for the artificial intelligence (AI) revolution has fallen on hard times, but today Appen (ASX: APX) has locked in a $60 million capital raise for working capital, balance sheet flexibility and severance payments to fund an aggressive cost-cutting program.

With new CEO Armughan Ahmad at the helm since the start of 2023 and based out of Seattle, Appen has been in the thick of an operational review that has helped identify $46 million in annual cost savings to date, but the revelation of a soft start to the year sent shares plunging by 28 per cent last week.

The absolute drop in the share price was however miniscule in the context of how the fallen giant has fared on the ASX since August 2020 when its shares traded at more than $40. Today they are worth just $2.30.

Whilst other tech companies have stated staff numbers or the share of their workforces that will be let go under similar plans, Appen did not provide such specifics in its ASX announcements, noting instead that there would be a one-off cost of $4-5 million to implement the plan.

Today the group, which provides AI training data and model evaluation for some of the world’s largest tech companies, revealed that $4-5 million related to severance, in addition to $1.5-2 million in leave provision payouts provided for in the profit and loss statements of prior periods.

Appen has been approached by Business News Australia for clarification about how many staff are expected to be let go under the scheme.

The equity placement will be paid for through both a one-for-six pro rata entitlement offer valued at approximately $38 million, and an institutional placement to raise $21 million. The price of $1.85 per share represents almost a 20 per cent discount to the last trading price.

The new shares on offer are expected to dilute the current ownership by 26 per cent.

"Appen is committed to its strategy to unlock the value of generative AI for enterprise customers while running the business with operational rigour," says Appen’s CEO Armughan Ahmad.

"The equity raising is necessary to support the company as it delivers on identified cost out opportunities and returns to profitability."

The company believes its initiatives will result in Appen exiting FY23 with a return to underlying EBITDA profitability, with today's announced raise aimed at supporting that recovery as generative AI unlocks the next phase of growth for the sector.

"Appen provides large volumes of human feedback on AI models and believes it is well positioned to participate and gain share in the generative AI services market," Appen stated in today's announcement, noting estimates that the generative AI market will grow from $8 billion in 2021 to $110 billion by 2030.

"Appen is launching a new set of Large Language Model (“LLM”) fine tuning and assurance products that provide a comprehensive toolset for enterprise customers to capture value from generative AI models.

"Appen is focussing on increasing channels to market to increase access points to enterprise customers and broaden its target markets. Appen’s partnership program is an important component of this strategy and is anticipated to provide further access to enterprise clients."

Some of the key areas identified in the operational review for improvement include a leadership and company culture refresh, operational improvements to project delivery and crowd management, a cost reduction program and strengthening of sales and marketing functions.

"Appen is undertaking the steps that management believes are necessary to address these areas for improvement and to better realise its potential. On 10 May 2023, it announced a significant cost reduction program to better align costs to the revenue opportunity," Appen stated.

"Appen is also undertaking a strategic refresh under new leadership. Key focus areas of this refresh include driving operational efficiency, disciplined capital management, enabling enterprise adoption of generative AI, supporting the development of generative AI and increasing channels to market."