The Appen Ltd (ASX: APX) share price has sunk 16% after announcing an impairment charge and weak guidance for its FY22 result.
Appen describes itself as a leader of data sourcing, data annotation and model evaluation by humans. It says that it enables organisations to launch the world’s “most innovative artificial intelligence systems.”
Impairment charge
After reviewing the values of its business segments and assets, it said that it expects to recognise an impairment charge on the goodwill of $204.3 million.
In other words, Appen and its accountants think that the company is worth $204 million less than the value of what was previously stated on the balance sheet.
The impairment charge of goodwill and certain intangible assets are associated with the new markets segment (excluding China), comprising the global product, enterprise, government and quadrant business units.
This assessment of the carrying value of Appen’s new markets (excluding China) unit reflects its FY22 performance.
Management said they still have a high conviction in the future growth prospects of the new markets division, however because of the FY22 performance, future revenue growth assumptions have been reduced to reflect lower growth rates, which caused the impairment charge. That’s not a promising sign for the company or the Appen share price.
How will this affect Appen’s FY22 result?
Appen said that the impairment charge is non-cash and is a non-operating item. Therefore, the underlying EBITDA (EBITDA explained) and underlying net profit after tax (NPAT) are not impacted.
The technology company also said that there are no lending covenant related impacts or change in the company’s ability to draw on its debt facilities.
Appen said the review confirmed there are no indicators of impairment and “significant headroom remains in its larger, more established global services unit.
Management said that Appen expects to report FY22 revenue “at the higher end” of its guidance range of between US$375 million and US$395 million.
FY22 EBITDA is expected to be at the low end of the guidance range of between US$13 million to US$18 million.
Final thoughts on the Appen share price
Appen has suffered significantly. It’s down 66% over the last 12 months. I’m not sure whether this is just a medium-term dip or if Appen has permanently lost its sparkle.
While it’s possible that it could turn things around, there are many other ASX growth shares that I’d rather buy first with clearer paths to success.
