Appen Limited (APX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Appen Limited Investor Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Ryan Kolln, CEO. Please go ahead.

Thank you, Melanie. Good morning, everyone, and thanks for joining the call. Today, I'm joined by Appen's CFO, Justin Miles. Today, we are announcing a AUD 50 million fully underwritten institutional placement as well as a share purchase plan targeting AUD 5 million. Our customer environment continues to show signs of improvement, particularly in generative AI-related projects. Whilst we will only pursue profitable opportunities, delivering new projects typically requires an upfront investment in working capital as crowd costs are incurred in advance of customer receipts. We are well capitalized with USD 30 million of cash as at 30 September 2024. The additional capital from the raise will provide further liquidity to support working capital requirements, therefore enabling greater flexibility to pursue generative AI-related opportunities. Eligible existing shareholders will have the opportunity to participate by a non-underwritten share purchase plan. This is expected to raise a further AUD 5 million. As part of this announcement, we are pleased to provide a trading update for the quarter ended September '24. We've had a good quarter and the positive momentum observed in the first half of FY '24 has continued. For Q3, the group delivered 34.6% revenue growth on PCP, excluding Google. Importantly, following the successful implementation of cost initiatives, we have returned to underlying EBITDA and cash EBITDA positivity. We have generated an underlying cash EBITDA profit for 2 consecutive months in August and September. Profitability remains a key focus for Appen, and we remain committed to maintaining cash EBITDA profitability going forward. Further details of the results will be included in our quarterly activity report and Appendix 4C scheduled for release on or around the 31 October. That concludes the presentation. I will now hand back to Melanie for questions.

[Operator Instructions] Your first question comes from Josh Kannourakis with Barrenjoey.

Just a few questions. First question just around those working capital requirement flow. Can you maybe give us a bit of more context of what you're seeing in the pipeline? Obviously, you've got some cash already. So talk us through what you're seeing in your pipeline and maybe how the working cap structure works with some of these Gen AI projects and how it's maybe different from some of the more traditional Appen projects out there?

Yes, sure. So some of the projects that we -- kind of delivered so far, they can be quite short and intense for the generative AI-related work. And when you look at the month-on-month revenue, you see that in May and June, as an example, when there's a spike there. So what we can see is very high revenue volumes over a very concentrated amount of time. Now because we need to pay the crowd, like I mentioned, ahead of the customer receipts, if we were to see a few of those large projects back up, that could really put some pressure on our working capital. So the dynamic around short and intense projects, our customers are very competitive in demanding. So these can be on quite short notice. And we felt that it was prudent to make sure that we had sufficient working capital to support the nature of these growth opportunities that we're seeing.

Just on that, so are you seeing larger projects when they are coming through on these births than what you have been historically? And maybe just to give us a bit of context, I know you didn't split out the Gen AI percentage, but maybe directionally you can give us some -- more detail of more recently how that sort of mixes -- has happened in terms of either by segment or by Gen AI?

Yes. So we'll -- like we said, we didn't break it out. But it's more the nature of the type of projects that we're looking at. So again, it's quite experimental. There's a lot going on with our customers. They're moving very, very quickly. And we just want to make sure that we're prepared to support our customers across the full spectrum of work they want to be doing. Some of the work that we're seeing is steady state and ongoing month-on-month, some of the work we're doing is very short and very sharp and small. Some of the work that we're doing is very short and sharp and larger, like I called out in kind of May, June. So it is a full spectrum of different types of work. And again, we just want to make sure that we're prepared for -- to support our customers across all the different types of projects.

Got it. And a couple of quick ones. So seasonality, like obviously, if we go back and you provided the chart in the release today just around that even ex-Google, obviously, there was a reasonable kickup in seasonality, both into December last year. Do you still think in terms of those trends that are sort of present throughout that seasonality, do you think that's still likely to be the case? And maybe just to give us a bit of a feeling for if not, why not sort of thing.

Yes. So look, we have seen Q4 seasonality for many years in the business now, which is largely driven by the holiday market in the U.S. and increased advertising spend. The other factor that swings this year is it's the U.S. election cycle, which we have benefited from previously, but it's really dependent on the posture that some of our customers are going to take with respect to misinformation around the election cycle. So look, we don't have any guarantees that there's going to be seasonality. But if you look at the trend that we've seen for many years with that, we do see an uptick in Q4. So there's no reason why I think that would be any different for this year.

Got it. And then the final one, you sort of have answered it there, Ryan, but just on the election cycle. I think historically, that had been a reasonable contributor. Just -- can you maybe just give us a little bit more in terms of last cycle, what you saw, what types of work, how significant it was to the business?

Yes. So the work that we've typically done around the election cycle is to help identify misinformation that's being spread through [ certain ] social media. The extent of that work really depends, like I said on the posture that our customers want to take at a given time, and that can change. So it's to be determined whether that will be a growth driver for Q4.

[Operator Instructions] Your next question comes from Conor O'Prey with Canaccord.

Just a quick question on the cost base. So the numbers you presented there for July, August, September, so I guess, Q3, are they indicative of the sort of run rate cost base with all of the work that you've done on that going -- are we now seeing the full effect of that in that sort of Q3 set of figures there?

I'll let Justin handle that one, Conor.

Conor, look, it's in the ballpark, there is a few factors. So there's not going to be a lot of additional investment in our OpEx going forward. We think where we will need to invest is as we get more projects and revenue grows, our project delivery, meaning some additional investment, the size of that is still to be determined, but it definitely won't be in the same ratio as any new project or revenue growth. So that's 1 factor going forward. The other 1 is kind of STI as well. So we've got certain financial targets, which we may or may not be hitting this year, so there's a little bit of a swing factor there as well. So there are probably 2 components that might not be fully captured in that number, but I think it's there -- thereabouts.

There are no further questions at this time. And that does conclude our conference for today. Thank you for participating. You may now disconnect.