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Results in: Appen (ASX:APX) share price continues to slide

Artificial intelligence and machine learning leader Appen Ltd (ASX: APX) has announced its full-year 2020 results to the market.

The market has reacted negatively to the update, with the Appen share price down more than 6% in late morning trade to just under $19.

This means that in the space of just one week, the Appen share price has suffered a steep 25% fall.

Unpacking Appen’s FY20 results 

Group revenue for the year was up 12% to $599.9 million, led by a 34% increase in the number of projects with top five customers and 136 new customer wins. Committed revenue increased to 31% in the second half, up from 12% in the first half, indicating higher quality revenues.

The Relevance division remained the growth engine, recording a revenue increase of 15% to $538.2 million. Speech & Image segment revenues fell 10% to $61.2 million due to the cyclicality of product life cycles.

Growth moderated in the second half of FY20 due to the impact of lower digital ad revenue, deferral or reprioritisation of projects, and restricted in-person sales.

Geographically, China recorded the strongest growth, with quarter-on-quarter sales growth of 60%.

Revenue translated into an underlying EBITDA of $108.6 million, up 8% on the prior year.

Underlying net profit marginally decreased by 1% to $64.4 million, which was impacted by growth investments in sales and marketing in addition to increased amortisation.

Management has declared a final dividend of 5.5 cents per share, 50% franked, up 10% on the final dividend in 2019.

2021 outlook 

At the time of reporting, Appen had received year-to-date revenue plus orders in hand of approximately $240 million.

Management noted first-half earnings growth will be impacted by short-term headwinds, including a strong Australian dollar, the focus on new product development, and uncertainty around the economic impacts of COVID-19. As a result, project delivery will be weighted more to the second-half.

Underlying EBITDA for FY21 is expected to be in the range of $120 million to $130 million, representing growth of 18-28% on FY20 underlying EBITDA. Additionally, full-year EBITDA margins are estimated to be in the high teens.

My take on Appen’s results

Appen operates in an industry with significant structural tailwinds and will benefit from a more ‘normal’ operating environment in FY21.

Disappointingly, growth in FY20 revenue outpaced EBITDA and NPAT growth, which indicates the business isn’t achieving operating leverage. This may be a one-off, but it’s something I’ll be keeping an eye on.

On a positive note, management has provided guidance inferring a strong year ahead. Appen remains on my watchlist, and I’ll be looking for signs of strong sales growth returning.

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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