Appen (ASX:APX) downgrades earnings guidance as growth stutters

• Machine learning and AI specialist Appen (APX) has downgraded its 2020 earnings guidance due to the COVID-19 pandemic downturn
• The company’s previous guidance for earnings before interest, tax, depreciation and amortisation (EBITDA) was for between $125 million and $130 million
• A stronger Australian dollar and the pandemic downturn have combined to force a downgrade, with revised EBITDA in the range of $106 million to $109 million
• While the short-term news may be discouraging, the company remains positive about the future and is proactively evolving to meet changing market imperatives
• The company anticipates a return to strong growth in 2021 by diversifying its clientele and capitalising on post-pandemic opportunities
• Appen is down 11.50 per cent and trading at $26.48

Machine learning and AI specialist Appen (APX) has downgraded its 2020 earnings guidance due to the COVID-19 pandemic downturn.

Substantial downgrade

Appen had a solid start to 2020 despite the early impacts of the pandemic.

The company’s half-yearly report outlined strong growth despite a predicted slowdown in new business development, deferred contract renewals and clients’ lower online advertising spends.

Appen didn’t change its earnings guidance after a solid showing in the September quarter as advertising revenues bounced back.

But the traditionally busy — and lucrative — December quarter has been lagging so far. The company’s biggest market is in California where new lockdown measures have put up huge challenges for Appen and its largest customers.

Normally the last three months of the year account for almost a third of the company’s earnings, but the November results have shown the usual uptick hasn’t materialised this year.

Appen’s previous guidance for earnings before interest, tax, depreciation and amortisation (EBITDA) was for between $125 million and $130 million.

A stronger Australian dollar and the pandemic downturn have combined to force a serious downgrade, with Appen now predicting EBITDA in the range of $106 million to $109 million.

The company is quick to point out second half performance will still outstrip that of the first half of the year by over 30 per cent — but only if first half exchange rates are applied to second half performance. Original projections used an exchange rate of A$1 being worth US$0.70, where the rate is currently at US$0.74.

The exchange-adjusted EBITDA of $108 million to $111 million is still a far cry from the company’s original projections.

Outlook

While the short-term news may be discouraging, the company remains positive about the future and is proactively evolving to meet changing market imperatives.

The company has been onboarding new clients in previously untouched markets including shipping, automotive, education and health care — all sectors which have suffered lesser pandemic impacts than Appen’s traditional clientele.

Existing customers are also working on new projects to provide commercial resilience through the pandemic and its after-effects — providing further potential need for Appen’s services, even if that need is still a little way in the future.

The company remains bullish about its prospects going forward, citing the rapid growth of AI spending as a cornerstone of future growth in the pandemic recovery.

Appen believes those trends will support a return to strong growth in 2021.

Appen is down 11.5 per cent and trading at $26.48 at 12:33 pm AEDT.