Appen (ASX:APX) shares drop on half-year results

AI enabler Appen (ASX:APX) has seen shares drop over 3% lower in early trade after the group’s half-year results failed to excite the market. Not that the numbers were weak — far from it!

Revenue for the 6-months to June 30, 2019 was 60% higher than the previous corresponding period, coming in at $245.1 million. Underlying net profit — which excludes one-off costs associated with the Leapforce and Figure Eight acquisitions — rose 67% to $29.6 million.

An 85% jump in sales for the group’s speech & image segment (excluding the contribution from Figure Eight) helped drive the result, as did a solid improvement in Appen’s operating margins which grew from 16.8% to 18.9%. Importantly, a good part of the gain came from an increased spend from existing customers, which highlights the stickiness and value of the company’s service offering.

Management said that US based Figure Eight, which was acquired in April, is performing to plan with expected synergies and profitability pathway on track. Although the first half loss for this business came in less than expected, second quarter renewals were less than originally forecast and some larger deals had been delayed. As such the FY19 annual recurring revenue (ARR) target is now expected to come in between $30-$35 million, or around 26% below previous expectations.

This may be way we’ve seen an adverse reaction on the ASX this morning.

Nevertheless, Appen remains optimistic towards the future and sees big potential in China which has a fast growing AI industry. The company maintained full year guidance for between $85-90 million, but said it expected to report at the top end of this guidance. Given this is premised on a USD/AUD exchange rate of 74c, and the current rate is materially below this, we may in fact see a stronger result.

As for the balance sheet, Appen remains in rude good health, with the recent capital raise funding acquisitions and solid operating cash flows pushing the cash balance up to $70.8 million.

Annualising these first half numbers, Appen is on a PE of approximately 49 or a Price to sales ratio of 5.9. Given the rate of growth, that’s not actually too bad — especially in the context of current technology valuations.

Ranked #7 on Strawman, shares presently sit slightly below the community’s consensus valuation. Click below to learn more.

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