Is the Appen Ltd (ASX: APX) share price a buy after announcing the acquisition of Figure Eight in the US.
Appen provides data for machine learning and artificial intelligence. Basically, it provides and improves data for the development of artificial intelligence and machine learning products. With more than 20 years of experience in over 130 countries, Appen has firmly established itself as a global leader in this space.
Appen’s Acquisition Announcement
Appen has entered into a binding agreement to acquire San Francisco-based Figure Eight Technologies.
Figure Eight is described by Appen as the best in class machine learning software platform which uses “highly automated annotation tools to transform unstructured text, imagine, audio and video data into customised high quality artificial intelligence training data.”
Appen was pleased to make this acquisition because it will materially increase the quality of Appen’s revenue and the breadth of its customer base via high growth, high-gross margin recurring revenue from annual platform subscription fees earned from its 200 or so customers.
The acquisition will cost Appen US$175 million, it’s priced at 5.7x FY18 revenue, as well as an earn-out that would be payable in March 2020 that is expected to be US$60 million to US$80 million, although it could be up to US$125 million.
Appen Capital Raising
Appen will fund this acquisition through a $285 million fully underwritten institutional capital raising at a price of $21.50 per share, which is a 11.8% discount to the last closing price.
After that, Appen will then conduct a non-underwritten share purchase plan to existing regular shareholders capped at $15 million.
The earn-out payment of up to US$125 million will be paid via new debt facilities which are expected to be utilised at the time of payment next year.
Is Appen A Buy?
The acquisition seems quite reasonably priced at 5.7x FY18 revenue for a business in a high-growth industry.
Appen recently reported very impressive profit growth in its FY18 result and it’s trading at 63 times FY18’s earnings. This is expensive on conventional metrics but if it keeps doubling profit then it could be a decent buy today.