Appen shares slump 41 per cent after Google terminates US$83m contract

The financial hits keep coming for Appen (ASX: APX) with the artificial intelligence (AI) annotation and services company revealing today that Google is terminating its US$82.8 million (US$125.6 million) contract leading to a wipeout of more than 40 per cent from its share price.

Appen, which was informed of the decision on Saturday, describes the development as both ‘unexpected’ and ‘disappointing’.

Today’s announcement to the ASX sent shareholders to the exits with Appen’s shares falling to a low of 27c, down as much as 41 per cent from Friday’s close.

The share price slumped to more than half the 55c at which the company offered its stock during a $30 million capital raising in November – and it is now a world away from the $42 peak reached during the 2021 tech boom which had the company valued at $5 billion.

The Sydney-based Appen says Google informed the company that it will be terminating its global inbound services contract and ceasing all projects by 19 March 2024. The move is part of a ‘strategic review process’ by Google.

Based on Appen’s unaudited full-year revenue of US$273 million in calendar 2023 announced today, the Google contract represents more than 30 per cent of annual turnover.

It comes after a challenging 2023 when Appen posted a 24 per cent fall in revenue to US$138.9 million for the June half and news today that its full year revenue is tracking close to 30 per cent lower.

In FY23, Appen’s revenue from Google was US$82.8 million at a gross margin of 26 per cent. 

“Appen had no prior knowledge of Google’s decision to terminate the contract,” the company says.

“The news is unexpected and disappointing, particularly considering the progress made against Appen’s transformation and performance in November and December 2023.”

Appen collects and labels images, text, speech, audio, video and other data used to build and continuously improve artificial intelligence systems.

The company last year implemented a cost-cutting strategy in the wake of falling revenue, with Appen telling shareholders in August that it ‘continues to face headwinds from the broader technology market slowdown and as customers evaluate their AI strategies’.

Historically, Appen’s revenue has been concentrated among a handful of big tech customers and its vulnerability to tech companies tightening their belts was reflected in its global services revenue falling 27.4 per cent to US$100.1 million in the June half-year.

However, Appen today reports that it recorded growth in the fourth quarter for both its global services and new markets divisions, including China, compared to the third quarter.

On a year-on-year basis, Appen says fourth-quarter revenue for global services is still down compared to FY22, while new markets revenue has risen.

The new markets division has been aided by record quarterly revenue from China of US$11.1 million.

Appen says unaudited revenue of US$24.1 million and US$25.9 million in November and December respectively have combined with the cost-cutting announced last year to deliver on its break-even cash EBITDA objectives. 

Appen says that based on unaudited accounts, it has recorded revenue of US$273 million in 2023, down from US$388.5 million in 2022, and an underlying EBITDA loss of US$20.4 million – excluding foreign exchange impacts.

“Appen continues to focus on cost management, business turnaround and delivery of high-quality AI data for its customers,” says the company. 

“Appen will immediately adjust its strategic priorities following the notification of the Google contract termination and provide further details in its FY23 full year results on 27 February 2024.”