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Appen Enhances Scale With Figure Eight

Australia | Mar 12 2019

Appen is enhancing its data analytics technology with the acquisition of Figure Eight, which promises a recurring revenue base, increased scale and improved productivity.

-Automated annotation tools should improve Appen's operating leverage
-Appen well-placed for high-quality analytics
-Main risk is that 88% of Appen's revenue is derived from five customers


By Eva Brocklehurst

Data analytics and language technology provider, Appen ((APX)), is enhancing its reach and scale, acquiring Figure Eight, a machine learning platform that transforms unstructured text, image and audio data into customised training data.

The business is based in San Francisco and there are several aspects to the transaction, Citi observes. Whereas the previous LeapForce acquisition added scale, Figure Eight should open up a capability gap between Appen and its competitors. Figure Eight is a complementary business that will provide the technology, platform and expertise for material scale as well as improved productivity.

The automated annotation tools of Figure Eight should improve the company's operating leverage by increasing the efficiency of the "crowd". A 5% saving on the "crowd" cost approximates the entire Appen 2018 corporate cost, on the broker's calculations.

Platform revenue of around $25m should also increase revenue visibility over time. Appen will pay US$175m for Figure Eight with a placement and share purchase plan. There is an earn-out to a maximum of US$125m, which will be funded via a debt facility.

Citi calculates that long-term synergy savings of around $14m could equate to around 10% of 2021 earnings estimates. The broker expects the margin to be diluted in 2019 to 17.3% from 19.7% in 2018, and fully recover in 2021.

UBS considers the deal strategically positive but requires further analysis of the numbers before altering forecasts. Initial calculations indicate around -23% dilution to earnings per share in 2019, which reduces to around -8% in 2020.

Still, the acquisition makes sense as this is a high-quality, self-serviced platform. Appen was expected to invest in its own annotation tools, but with Figure Eight there is a recurring base of around 60% of 2018 revenue and a relatively low customer churn rate. UBS has a Neutral rating and $24 target.

Citi upgrades the stock to Buy from Neutral, with a $28.04 target. The broker still values Appen on a PE (price/earnings ratio) basis but, should its level of recurring revenue increase materially, then an EV/EBITDA (enterprise value/operating earnings) and/or EV/sales multiple will be used. On both these metrics Appen does not appear expensive, although it has far lower recurring revenue versus comparable companies.

Citi sums up the sector by stating that the winner will be one that can analyse the most amount of data, with the highest quality analytics, in the shortest amount of time, at a competitive price. In this analogy, Appen appears well-placed.

The risk is that 88% of the company's revenue is derived from its top five customers and the loss of one of them would have a substantial impact. Customers can also terminate existing projects with short notice.

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