The Appen Ltd (ASX: APX) share price is rising strongly in reaction to a trading update as well as a new business structure.
Trading update
The company said that its year-to-date revenue plus orders in hand for delivery in FY21 is approximately US$260 million at the end of April 2021, consistent with the methodology and timing used for the update provided at the annual general meeting (AGM) in May 2020.
Underlying EBITDA (EBITDA explained) for the 2021 financial year ending 31 December 2021 is expected to be in a range of US$83 million to US$90 million, as per the guidance provided to the market at its FY20 result in February.
Restructuring
Appen explained that it has evolved from a language data service provider to become a AI data annotation services provider. It has been trying to unlock new markets and drive growth with a product-led strategy, delivering better training data, faster, at larger scale with better unit economics.
Through recent acquisitions and engineering investment, it has developed its own product suite of market-leading platforms and tools. Its products are increasing its addressable market and enable it to support a wide array of clients that are investing in AI, not just the US tech giants.
The company also said that its global customers are also now using Appen training data products due to rising annotation complexity and new use cases. Appen said increasing the adoption of its products by global customers is a key priority as it enables project expansion.
There are going to be two segments for reporting:
Global services – where services are provided for global customers on their data annotation tools.
New markets – which includes global customer revenue through Appen products and Enterprise, Government and China.
The new markets segment represents its high growth markets and delivered an annualised compound annual growth rate of revenue of 41% from the first half of FY19 to the second half of FY20.
Appen said this strong growth in new markets revenue shows the value of its product suite and the foundation it provides for further growth and productivity gains as it adds more automation and value-adding functionality.
In terms of its operations, it’s aligning its internal structure to focus on the different needs of customer groups and markets to enable a differentiated approaches to sales, customer experience and delivery models.
There are going to be four units – global, enterprise, China and government. A new leadership structure, together with profit and loss responsibility will increase the visibility and accountability for performance across the four business units.
It’s also changing its reporting currency to US dollars as more than 90% of revenue and assets are in US dollars. It will remove the currency volatility that occurs when earnings are translated into Australian dollars.
Summary thoughts on the Appen share price
The market seems to like what Appen is doing, as well as the trading update. It sounds like the new structure will help growth and combat higher competition.
However, I’m not sure it can command such a high earnings multiple as it used to, particularly if competition continues to increase. It might be cheap enough to consider now, but there are other ASX growth shares I have a greater conviction in.
