Reporting Season

Perfection is tough. Only Nadia Comaneci could pull it off consistently. Appen (APX) has come close with its results today but there are some negatives which the market has focused on; hence the fall today. 

There is no doubt the numbers are impressive. Revenue up 60% to $245.1m. Underlying EBITDA of $46.3m up 81%. Margins increasing from 16.8% to 18.9%. Guidance too was positive at a full year underlying EBITDA for the year ending Dec 31st, 2019 trending to the upper end of $85m - $90m. We would have liked to see a bit more of an upgrade and this was disappointing in itself.

Sometimes it is hard to beat perfection, but these numbers point to a growing and very successful business. What impressed us was the integration of recent acquisitions, Figure Eight is now delivering, albeit after a disappointing start and Leapfrog is fully integrated. This company is at the cutting edge of the AI revolution. We were expecting to see some commentary surrounding privacy issues that the US behemoths have faced with recorded conversations, and how they are used, but nothing from APX, so suspect it is not an issue.

Some of the key takeouts include:

  • This is a truly global business at the cutting edge with a crowd workforce of over 1m people (easy to scale up or down).

  • The company is not resting on its laurels with a big jump in ‘future proofing’ its business model with $13.3m due to be spent. Big jump from $1.4m last year and a sign that the company is expanding fast.

  • There are big barriers to entry into the market as recruiting human assets to work the data is clearly not easy and the company prides itself on a near 95% retention rate for its independent assets. It is also looking to drive down these costs over time as the AI itself takes over. Machines learning form machines. A brave new world.

  • The other positive is the opportunity in China. The AI market is growing at 55% annually and forecast to be $14.3bn in 2020.

  • The company also bills in USD, so a lower Australian dollar will just add to the appeal.

Some of the positives

We all know that AI is the next big thing. We witness it every day even if we are unaware of it. APX is one of the few established ways for local investors to get a piece of the action.

  • The business is growing quickly.

  • Has made sensible acquisitions and is not resting on its technology. It has forecast that technology will drive down costs associated with the human workforce as more AI takes over.

  • It has a massive opportunity in China.

  • The government market is also substantial which is where Figure Eight comes in. It has the protocols and the platform. Does need to deliver though.

  • The company even alluded to capital management after paying an unchanged 4c dividend partially franked.

Figure Eight seems to have taken longer to get on track and only now are the tech teams working together. It has too missed out on some contracts as it was distracted by the acquisition. The benefit though is that it has allowed APX to buy the technology platform instead of spending millions developing it in house with the associated costs and time involved.

Long-term opportunity in the making

The stock has had a wild ride this morning, opening up close to $30 before falling to $23.85. Extreme volatility for sure and it seems to have disappointed on the conference call. But bear in mind that it has rallied hard into the results, so some pricing to perfection was built in.

For long term investors looking for exposure to AI and government contracts, together with Chinese AI growth, APX is a buy in the low $20’s - this could be a great opportunity in the making as the share price reacts to the short-term drivers. 

It’s not cheap and it’s clearly not perfect, but then few things in life are. 



Comments

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Laurence Giddings

Hi Henry. Some mention of their Cash/Debt position and how that's trending would have helped to round out what was otherwise an interesting/informative article. Rgds Laurence

GUY DE BYL

From a technical point of view: i have noticed that a lot of shares that go down, have a dead cat bounce, then settle further down then go sideways go on to rise from that support base. APX did this in August, September, October last year.

Henry Jennings

Net cash at 30 June was around $59m but there is an anticipated $35m to pay on the earn out to Figure Eight. This has been reduced from $85m-115m after lower revenue numbers from the acquisition. Hopefully the problems are sorted and are temporary. It seems so according to the company.

Henry Jennings

Very sound observation Guy. I was heartened though to see a number of broker upgrades this morning too. 5% bounce on a solid day like today looks like a dead cat I grant you. But think it could kick higher over time

SR V

A lot of the bull case is well known. Do you have a view on the valuation though? It still looks pricey.