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Upgrades Happening Again At Appen

Australia | Nov 19 2019

Appen has upgraded guidance for 2019, underpinned by its core Relevance revenue and largely from existing customers. Figure Eight provides the extra potential in 2020.

-Figure Eight revenue guidance confirmed
-Appen likely to be net cash by 2021
-Revenue model remains unpredictable


By Eva Brocklehurst

For the third time in 2019, language technology data provider Appen ((APX)) has upgraded guidance for operating earnings, to $97-100.5m from $85-90m, implying an increase of around 7% at the mid point.

The increase was driven by Relevance revenue and margins, largely from existing projects and customers. The company has also reiterated its conviction in the Figure Eight artificial intelligence acquisition and confirmed the annual recurring revenue (ARR) expectations in 2019 of $30-35m.

This suggests to Credit Suisse Figure Eight business has stabilised, after ARR expectations were revised down at the first half result because of the distraction in bedding down the transaction.

UBS had upgraded its investment opinion based on the strength of the core Relevance business, which should become clearer at the 2019 results and support a re-rating on multiples.

Bell Potter now forecasts operating earnings of $100.7m, slightly above the top end of guidance. Strong underlying growth is also expected in 2020 and 2021, at 19% and 21% respectively. Positive underlying operating earnings are expected from 2021 as losses from Figure Eight diminish.

The broker assesses there is potential upside to distribution forecasts as these assume a pay-out ratio of just 20%, and the company should be net cash even after the payment in 2020 of the deferred consideration for Figure Eight.

Bell Potter, not one of the seven stockbrokers monitored daily on the FNArena database, reduces the weighted average cost of capital applied in its valuation to 9.7% from 10.1%, because of a reduction in the risk-free rate.

The net result is an increase in the target to $28.00 from $27.50 although, as the total expected return at this level is 6% and below the required 15% threshold for a Buy rating, the recommendation is reduced to Hold.

Credit Suisse suggests the next catalyst is likely to be 2020 guidance at the February result and retains some concerns about the earnings bridge, such as the isolated earnings improvement from Figure Eight and capture of the synergy benefits.

Still, the broker remains upbeat about demand and envisages Figure Eight as a tool to broaden the customer base. Bell Potter notes the acquisition requires integration of software platforms and the migration of customers, carries some risk.

Moreover, the company's revenue model is unpredictable, as most is generated from purchase orders rather than recurring subscription fees. This means there can be a lack of visibility or certainty beyond the short term.

Appen, established in 1996, has a track record of revenue growth and strong margins. The two divisions include Relevance and Speech & Image. The former provides annotated data used in search technology while the latter provides data used in speech & image recognition, machine translation and speech synthesisers.

FNArena's database has two Buy ratings (Citi is one and yet to comment on the update) and one Hold (Credit Suisse). The consensus target is $29.66, suggesting 11.1% upside to the last share price.

See also, Demand For Appen Intelligence Escalates on August 6, 2019.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

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