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Global AI Boom Boosts Appen’s Potential

Australia | Mar 06 2018

Impressive growth achieved in 2017 leaves analysts positive and enthusiastic about Appen's growth potential on the back of a global boom in artificial intelligence.

-20 years of private growth delivers bonanza for public investors
-Business needs to diversify client base for broad-based growth
-US buy positions Appen to dominate global market for content relevance services

By Nicki Bourlioufas

ASX-listed Appen Ltd ((APX)) is a major player in the global language services industry, selling annotated data sets for use in e-commerce and machine-learning applications.

One of its claims to fame is that the annotation is done by actual humans – about 400,000 linguistics experts and content evaluators working, largely from home, in 130 countries and using more than 180 languages and dialects. Appen has two operating divisions – its foundation business in Language Resources and the rapidly growing area of Content Relevance.

Language Resources provides training data for speech-recognition technologies in devices such as mobile phones, computer games and TV consoles. Content relevance provides smart data to improve online discovery by search engines and social media platforms.

As Artificial Intelligence technologies explode, Appen is also expanding into fields such as fraud detection, risk management, medical imaging and in-car navigation.

From spare room to much more than spare change

Appen was established in 1996 by linguist Dr Julie Vonwiller, a researcher at the University of Sydney, and her engineer husband Chris Vonwiller, who was inaugural chairman of Telstra’s Bigpond before he retired to join the family business in 1999.

Starting in the spare room of their home in Gordon, Sydney, the Vonwillers expanded the business privately, developing long-term relationships with clients including Microsoft and the US government. The company now employs 374 staff in seven offices across the US, UK, Australia, China and Philippines.

Appen went public in January 2015 at 50 cents a share, and quadrupled its share price in two years. Since early 2017, the company’s impressive record of revenue growth and strong margins has pushed the stock from $2 to a high of $10.60, which it hit after the release of full-year results on February 21.

At the end of November, the company announced the US$80m acquisition of Leapforce Inc, a Silicon Valley provider of search relevance services with what Appen describes as “a highly automated and proprietary end-to-end technology platform”.

Acquisition and organic growth augur well for 2018

Brokers are positive on Appen's prospects for the current financial year. Canaccord Genuity, UBS and Citi all maintain their Buy recommendation, with price targets of $10.80, $12 and $12.19 respectively.

Bell Potter sets a middle course, raising its 12-month price target by 22% to $11, post the financial report release in February, but also downgrading its recommendation to Hold from Buy as the new target is only about 5% above the share price.

Overall, the broad based enthusiasm is based on Appen’s "impressive results" for the year ending December 2017, in which it posted 50% growth in revenue to $166.6m and 62% growth in EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) to $28.1m.

Canaccord Genuity says Leapforce is expected to contribute around one-third of group revenue. According to the analysts, the acquisition of Leapforce highlights Appen’s increasing focus on its Content Relevance division, where revenue grew by 75% in the second half of 2017, including a one-month contribution of $6m from Leapforce.

Language Resources revenue was softer than expected, growing only 7% over the year, but the division is expanding into image and video annotation, which is expected to accelerate growth at higher margins.

Appen stakes claim to global leadership in its field

Bell Potter sees Appen’s key competitive advantage as its long-standing relationships with customers such as Microsoft Research, with which the company has been working with for more than 21 years. Further, the majority of revenue is from repeat customers as they update and upgrade their products.

Bell Potter concedes this strength could also be a weakness, saying Appen’s customer base is relatively concentrated, with the largest five clients representing more than 75% of revenue. Canaccord Genuity is more optimistic, saying the concentration of revenue is easing and a full year contribution from Leapforce should assist this diversification further.

Bell Potter also points out that Appen generates most of its revenue from individual projects rather than long-term contracts, which can be lumpy and unpredictable. Moreover, the global Language Services industry is fragmented, with around 18,000 service providers, and consolidation or vertical integration could increase competition.

But Citi backs up its confident call of $12.19 by saying that the acquisition of Leapforce makes Appen the clear global leader in development of high-quality, human annotated data for machine learning programs.

Citi says the winner in Content Relevance will likely be the company that can analyse the "most amount of data", with the "highest quality of analytics", in the "shortest amount of time" at a "competitive price". The broker believes Appen is well placed to be that winner over the near term.

FNArena's database shows two Buy ratings from two covering brokers, UBS and Citi. The consensus target is $12.10, suggesting 24.7% upside to the last share price. On current forecasts, updated post FY17 financials, earnings per share are projected to grow by 92% this year and by 39% in 2019. Dividends are expected to increase by 70% and 37% respectively.

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