Appen Limited (APX) provided strong results yesterday and once again outperformed the most optimistic expectations after beating 2019 guidance…
As many clients may know, we released an overview of Appen Limited (APX) in January describing the high expectations we had for its upcoming report and its impressive ability to grow and exceed market expectations year-on-year.
As a result of the report, APX’s share price rose 6.50% to close at $25.40 despite the ASX200 slumping again and shedding more than $80 billion during a two-day selloff.
A key takeaway from an impressive report I think deserves attention, considering current global fears, is that, while APX is breaking into Chinese markets, operations in China are young and targets are modest, and as such, the impact from the Covid-19 coronavirus is expected to have a negligible effect on the company’s operations and strong growth is expected for years to come as the Chinese AI market grows to rival that in the US.
On the cash flow statement (which is an essential indicator of the underlying health of the core business), operating cash flow was $67.3 million, up $20.5 million (43.8%).
Similarly, despite a 0.24% decline in statutory net profit to $41.6 million, on an underlying level — meaning one-off items are ignored — net profit after tax rose to $64.7 million, up 32% over the prior corresponding period. Considering analysts surveyed by Bloomberg had expected a profit result of around $53 million, the results really do provide an example of a company that has been able to surpass all expectations. As indicated by Appen CEO, Mark Brayan, “the company’s ability to maintain this high level of growth in revenue and translate this into improving margins and earnings growth, while investing heavily in technology, is a testimony to the strength and durability that we’ve built into the business”.
Similarly, APX was also able to achieve underlying earnings before interest, taxes, depreciation and amortisation (EBITDA) of $101 million in FY19 despite a late-year upgrade in November 2019 in which earnings guidance was increased from between $85 million and $90 million to between $96 million and $99 million. 2020 guidance now shows APX expects to report an EBITDA result of between $125 million and $130 million in FY20. Expectations are that earnings margins in the first half of 2020 will soften, as a result of increased investment, but will still remain within the high teens in percentage terms for the full year.
APX reported a 47% increase in full-year revenue to $535.5 million from $364.3 million while its organic revenue rose 37% to $498 million. Furthermore, as voiced in last month’s review of APX, Figure Eight was an important component which had lagged other divisions. Yesterday’s report showed that Figure Eight had turned around and is now showing signs of high growth with annual recurring revenue (ARR) of $33.7 million, lifting it to a compound annual growth rate (CAGR) of 56% following a soft second quarter. Moreover, the integration of Figure Eight into Appen has been started with the majority of components likely to be completed by the end of 2020. The success of Figure Eight is an excellent example of APX’s ability to identify synergistic acquisition opportunities and then foster a healthy integration. With APX indicating that it intends to focus on expanding its customer base over the next few years and make significant investments in sales and marketing in 2020 as it becomes a more tech-driven business, it will be interesting to see if APX can sustain its current impeccable acquisition track record. While they have a more extensive customer base, APX is looking to strengthen its focus more broadly across the tech market, especially in the US where it wants to tackle other verticals like autonomous vehicles, healthcare and pharmaceuticals. Another highlight of APX’s results was the performance of its speech and image data division, with revenue leaping 32% on the previous corresponding period, compared to a historical three-year growth rate of 17.9%.
Finally, the APX board agreed to increase its full-year dividend by 25% from 4 to 5 cents per share with the final dividend being 50% franked and representing a 0.35% dividend yield (net). The total dividend represents a 26.19% payout ratio and, considering total debt stands at $22.69 million, its current dividend payment it relatively safe as the free cash flow to total debt stands at a safe ratio of 2.96. More to that point, the APX board did leave the door open to change its dividend policy in the future to accelerate growth via acquisitions or re-investment.
Overall, the future for APX is looking very promising and should it be able to sustain consistent growth and secure similar synergies through acquisition that are a part of its history and made it the company it is today, at which time it will undoubtedly become a globally recognised and dominant brand name.
