APX.AXAPX.AXASX
Loading
Sam Wells: Good morning, everyone, and welcome to Appen's Full Year FY '25 Results Call. I'm Sam Wells from NWR, and I'm pleased to have joining me today from the company, CEO and Managing Director, Ryan Kolln; as well as Chief Financial Officer, Justin Miles. Following a brief summary of the results released to the ASX this morning, we will have some time for Q&A with the management team. There will be a choice of 2 options. First, research analysts will be able to raise your hand via Zoom, should you wish to ask a verbal question of the management team. and we'll also take written submitted questions via the Q&A function at the bottom of your screen from all investors. We will endeavor to get to the majority of questions asked; in some cases, combining questions on the same or similar topic. And thank you. Over to you, Ryan.
Ryan Kolln: Thanks, Sam, and hi, everyone. Thank you all for joining Appen's FY '25 full year results presentation. I'll start on Page 3 of the presentation, where I'll walk through some highlights before passing to Justin. FY '25 was a year of meaningful progress for Appen. At the group level, we delivered $230.8 million in revenue, up 4.5% on FY '24 when you exclude the impact of Google. Growth was driven predominantly by new project wins and expansions in generative AI. Generative AI is a clear growth driver for the market and a positive signal that we are executing well against our strategy. On profitability, we delivered $12.2 million in underlying EBITDA, excluding FX. The full year margin was 5.3% with a strong end to the year with Q4 coming in at 18.2% EBITDA margin. Gross margins are moving in the right direction, driven by wins in higher-value generative AI work. We also continue to capture operational efficiencies through technology, innovation and automation. Now looking at our 2 segments. On Appen Global, the full year revenue was $127.9 million, which was down year-on-year. However, we ended the year on a high note with Q4 revenue of $41.4 million, up 56% on Q3 and EBITDA of $10.2 million at a 24.6% margin. The Q4 growth was predominantly driven by new project wins, including a $10 million generative AI opportunity that grew faster than we anticipated and has carried into FY '26. We continue to focus on the operational turnaround and talent is a major part of the shift we are making across Appen Global. In the last 12 months, we have added over 20 experts to the team coming from either customers or direct competitors. Appen China had an exceptional year, delivering $102.9 million in revenue, up 75% year-on-year with EBITDA up 640% to $10.6 million. Growth was driven by both new and expanding generative AI-related projects and the momentum heading into FY '26 is strong. Across the group, 44.1% of Q4 revenue came from generative AI, up from 34.8% a year ago. Finally, we closed the year with USD 59.8 million in cash on hand. We continue to drive operational efficiencies across the business. In FY '25, we realized $10 million in annualized cost efficiencies through technology and automation. In summary, FY '25 was a year that demonstrated real progress. Revenue growth, improving margins, exceptional performance from Appen China and strong momentum as we head into FY '26. We've built a stronger team, and we're winning in the right parts of the market, and we have the balance sheet to continue executing on our strategy. I'm proud of what the team has delivered, and I'm confident in our trajectory. With that, I'll hand over to Justin, who will take you through our financials in more detail.
Justin Miles: Thank you, Ryan, and good morning, everyone. A reminder that we report in U.S. dollars and that all comparisons are to the year ended 31 December 2024, unless stated otherwise. Starting with the FY '25 profit and loss snapshot on Slide 5. As Ryan has already mentioned, revenue increased 4.5% to $230.8 million. This excludes the impact of Google. Within our operating segments, Appen China revenue grew by 74.8% to $102.9 million, with Appen Global down 21.1% to $127.9 million. Appen Global delivered a strong finish to the year, which was up 56% quarter-on-quarter. Growth in both segments is predominantly driven by new and expanding generative AI projects. Gross margin improved by 100 basis points to 40.3%, with the improvement driven by a greater mix of generative AI projects. Underlying EBITDA before FX grew 251% to $12.2 million. The increase was driven by gross margin improvement as well as the $10 million cost efficiencies achieved by technology and automation. The cost out is net of talent upgrades. I won't talk to Slide 6 as we've covered this data. So over to Appen Global revenue and EBITDA on Slide 7. The chart on the left shows quarterly revenue and on the right-hand side, it is underlying EBITDA. The chart shows strong momentum in Q4 for Appen Global. The Q4 growth was driven by new project wins and includes the $10 million-plus GenAI opportunity we previously announced. Gross margin improvement was achieved due to higher priority GenAI projects. In addition to the improved gross margins, the $10 million annualized cost efficiencies were achieved within the Appen Global segment. And as I just mentioned, the $10 million is net of talent upgrades, who along with the continued focus on data quality were a vital factor in winning and delivering new projects. It was a strong finish to the year with good momentum going into FY '26. However, the full year was impacted by lower volumes than expected in Q1 to Q3. Full year revenue was $127.9 million, down 21%, excluding the impact of Google, and underlying EBITDA was $5.8 million, down from $9.2 million in FY '24. Over to Slide 8, which shows quarterly revenue and underlying EBITDA for Appen China and reflects the strong market position Appen China continues to hold. Revenue grew each quarter with Appen China achieving $102.9 million in revenue for FY '25, which was 75% growth on FY '24. Growth was driven by new and expanding LLM-related projects. Appen China exited the year with annualized revenue exceeding $135 million. Pleasingly, in addition to revenue growth, profitability improved throughout the year with improved gross margins due to a greater mix of GenAI projects and increased revenue from high-margin prebuilt data sets. Appen China is also capturing scaling efficiencies due to tight OpEx controls as revenue expands. Turning to Slide 9 for the profit and loss summary. I won't talk to all the line items. However, there are a few additional points to highlight. The decrease in employee expenses reflects the benefit of cost-out efficiencies achieved in the Appen Global segment. It was partially offset by some incremental OpEx in Appen China to enable China's delivery of the strong revenue growth. Underlying NPAT improvement was minimal despite the EBITDA improvement due to an increase in noncash amortization. Statutory NPAT was impacted by an additional $5 million acceleration of noncash amortization in relation to acquired platforms. I'll finish up with the cash flow summary on Slide 10. The cash balance at the end of the period was $59.8 million, up $5 million from December 2024. The Australian dollar equivalent of the cash balance is AUD 89.5 million. Cash flow from operations improved by $23.4 million to $22.4 million. The year was positively impacted by the receipt of a payment from a major customer in the first week of January versus December 2024 as scheduled. However, adjusting for this still results in approximately 100% conversion of EBITDA to cash flow from operations. Cash flow used in investing activities was $3.5 million higher compared to FY '24 due to a slightly higher investment in product development and new facilities for the Appen China business. Cash used in financing activities of $4.9 million reflects lease payments. Cash was used to fund operations and CapEx. That concludes the financial performance slides. I'll now hand back to Ryan.
Ryan Kolln: Thanks, Justin. I'll now provide an update about the market opportunity and our strategy. I'll start on Page 12 and explain why we're confident about the market that we're operating in. There are 3 structural trends that are driving demand for the kind of work that Appen does. And importantly, all 3 are linked to major economic drivers. The first is the globalization of consumer AI. As AI products are deployed across different countries and cultures, you need human data that reflects the cultural nuance. This is also directly linked to the digital advertising market. As AI powers more personalized, localized advertising experiences across global platforms, the demand for culturally and linguistically accurate data grows with it. That creates a sustained need for the kind of multilingual, multicultural data that sits at the core of what Appen has been doing for a very long time. The second is enterprise AI adoption. McKinsey estimates $2.6 trillion to $4.4 trillion of economic value as its stake across enterprise use cases. As companies move from experimentation to deployment, they need AI models that understand their industry and that requires expert-generated data. And layered on top of that, we're seeing real momentum in agentic AI. These are the systems that don't just answer questions, they take action autonomously. The model builders we work with are focusing heavily on agentic AI right now. It's still very early and moving very quickly, and these labs are actively experimenting and figuring out what good looks like. What's exciting for Appen is that we're in the room with them as they experiment, working closely alongside some of the leading AI labs as they explore and build out these capabilities. We have high expectation that this work will continue to evolve and be a major growth driver for Appen. The third is new form factors, particularly humanoid and industrial robotics. Models that interact with the physical world need data grounded in real-world examples. This is an area where we're already active in with projects covering robotic simulation and real-world data collection. The work we're doing now positions us well as this market develops and investment in robotics continues to grow. Moving on to Page 13. The market opportunity is clear, but what matters is whether we're actually winning projects in the right areas. This slide gives you a concrete view of where we're competing and where we're winning. These are examples of projects that either started in Q4 FY '25 or are commencing in Q1 FY '26. A few things stand out. We're landing projects with new frontier lab customers. That's meaningful because these relationships tend to expand over time. We're also expanding within existing relationships, winning new data modalities and new capabilities like coding with customers that we already work with. The previously announced $10 million-plus opportunity is worth highlighting. It grew faster than we anticipated, driven by the quality of our delivery. The customer expanded the project specifically because we exceeded their quality goals. This is the kind of outcome that builds long-term relationships and is currently ongoing with potential for continued expansion. We're also moving into more advanced projects, including domain-specific coding, robotic data simulation, multispeaker voice model training. These aren't commodity data tasks. They require specialist capabilities, and that's where Appen is increasingly competing and winning. On to Page 14. Winning the kind of work described on the prior page requires the right people with the right technical expertise. And over the last 12 months, we've made deliberate investments in our team. We've added more than 20 industry experts across go-to-market, operations and workforce management. On the go-to-market side, Brian Jenkins leads our sales team and bring experience from Scale AI and Snorkel, and a track record in enterprise sales at Salesforce and Oracle. On the operations side, Jeanine Sinanan-Singh brings a background in AI research from Surge AI and Microsoft with a computer science degree from Harvard. Francisco Rivera leads workforce operations, with experience scaling complex marketplace operations at Uber and Angi. We continue to grow the capability of the team to complement our historical strength at Appen. Moving on to Page 15. Underpinning our ability to deliver high-quality data to our clients is an asset that is difficult to replicate, our global workforce. This is no longer just a generic crowdsourced workforce. It's increasingly a verified pool of domain experts in fields ranging from computer science and law to finance, health science and engineering. When a customer needs domain-specific expertise at scale and with global reach, there are very few organizations that can deliver it. That's a structural advantage and it deepens as our workforce grows and our domain coverage expands. Bringing this together on Page 16, I want to be clear about why we think Appen is structurally well positioned and it comes down to 4 things. First, the next wave of AI data is squarely in our area of expertise. The shift towards generative AI, multimodal models and enterprise AI deployment requires exactly the type of complex domain-specific human-generated data that Appen specializes in. Second is our track record. 30 years of delivering complex large-scale data projects for the world's leading technology companies is not something that the newer competitors can replicate quickly. Particularly as the demand for AI globalization grows, our experiences operating across languages, cultures and regions at scale is a genuine differentiator. Third, our position in China. Appen China's revenue is now significantly larger than our nearest established local competitor. We're the top vendor of choice for Chinese technology companies and model builders. And as that market continues to grow, we are very well placed to grow with it. Fourth is technology. Our platforms and processes are built to scale and adapt with customer requirements. Technology is not just an efficiency lever for us. It's what allows us to take on more complex workflows, deliver them consistently and continue to improve our cost base. I'll now describe our 2026 focus areas and provide an outlook statement. On to Page 18. Our FY '26 priorities are focused and deliberate. There are 4 areas where we believe execution will drive the most value. Data quality is first and it sits above everything else. The reason customers choose Appen and expand with us is because we deliver quality. That doesn't happen by accident. It requires consistent investment in our processes, technology and people. Second is customer growth. We're directing our go-to-market effort towards the segment with the highest spend potential, hyperscalers and foundation model builders. These are the organizations driving the next wave of AI investment and deepening those relationships is where we see the greatest opportunity. Third is new data segments. We're actively co-innovating with our customers to expand into new data modalities and techniques. Working closely with our customers ensures we have close visibility into new growth vectors. And fourth is operational efficiency. We'll continue to drive technology-led efficiencies across the business, building on the $10 million in annualized cost savings we achieved in FY '25. We head into FY '26 with strong Q4 momentum, a clear strategy and a balance sheet that gives us the flexibility to execute. We're focused on building our trajectory and continuing to grow our position in the market. I'll close on Page 19 with an outlook statement. As shared throughout the presentation, we remain highly confident on the AI data market and the potential for Appen to meaningfully contribute to the development of leading foundation models. We continue to see positive signals on LLM-related growth, including from Appen Global and Appen China customers. Tight cost controls remain in place in keeping with the company's focus on managing costs in line with the revenue opportunity. As in previous years, Appen Global revenue continues to be mostly derived from project-based work and seasonality skews revenue to H2. Considering this, we provide the following FY '26 group guidance. Revenue of $270 million to $300 million and underlying EBITDA before FX margin of 5% to 10%. That finalizes our presentation today. I'll now hand back to Sam, who will moderate the Q&A.
Sam Wells: Great. Thanks very much, Ryan, and thank you, Justin. [Operator Instructions] Our first question comes from Josh Kannourakis at Barrenjoey.
Josh Kannourakis: First question, just with regard to talent. It's obviously been a big focus for you guys, and you have capitalized on some of the disruption at some of the other peers in the market. That obviously translated through to some good deals that have happened towards the end of last year. But can we talk about into '27 as you think to the pipeline, how much of these talent hires really opened up the pipeline and some of the customer relationships you've been able to do?
Ryan Kolln: Yes. Thanks, Josh. Good question. The talent that we've brought into the business has enabled us to do far more technical work with our customers. So what it means is that we're really at the bleeding edge of the work and a lot of that work is very early with the customers. And how the LLM development cycles work at the moment, there's a lot of experimentation when we see a model technique that has a positive impact, those projects can expand really, really quickly. So what we're seeing at the moment is a lot more activity across the business in terms of the projects that we're doing, particularly in some of the more advanced types like we laid out in the presentation. And we're really confident that those early relationships we're building with the researchers, getting in on the ground floor on these new modeling techniques, will evolve into much, much larger projects over time.
Josh Kannourakis: Perfect. And then just with regard to guidance, like obviously, you have stayed away in more recent times from doing it. So bringing a guidance range out there suggests a heightened level of confidence in this year. But can you talk us through a little bit more just around what needs to happen at maybe the upper and lower end of that guidance? And if there is continued development of some of these new customer relationships, what that means in terms of when there's upside risk to that as well?
Ryan Kolln: Yes, sure. So look, we are feeling more confident and there's a few factors there. One is as China becomes a larger portion of our revenue, that is less variable to quarter-on-quarter shifts because it's -- in China, our customers come to us and ask more for an allocation of resources rather than a specific project base. So that gives us a lot more confidence in putting guidance. But in terms of the swings, we just need to be executing well against the projects that we have and making sure that we're catching the next wave of growth in the market that comes through these, like I said earlier, more innovative projects in areas that we know that there's market opportunity that we need to be breaking into. So with the team that we've got, with the projects that we're seeing at the moment, we feel really confident about the opportunity.
Josh Kannourakis: Got it. The final one for me, just on the ad side of the business, like obviously, that's going to be a big focus, OpenAI specifically have noted that, you guys have a lot of specific expertise. Can we just flesh that out? I think it's worth fleshing out a little bit more around exactly how you would play into that and what you think that ecosystem might end up looking like effectively where you end up being able to be in that value chain going forward?
Ryan Kolln: We're super bullish on continuing to support the digital advertising market. And there's 2 factors to it. Right now, my take is that there's going to be a pretty strong arms race in major U.S.-based technology companies. So I think Meta and Google, who have the dominant position in the market, but also OpenAI and X, formerly known as Twitter as an outsider. There's 2 real things that these companies are going to be focusing on. So one is building great consumer experiences and products, so people are spending their time on the platforms. And the second is building out a really effective digital advertising ecosystem, which makes it easier for advertisers to place ads on the systems, but they're also more effective and targeted. This is very similar to the search and ad relevance that Appen has been doing for a very long time. And what becomes really important to get these models to work, both on the experience side and the digital advertising side is making sure that they work at a global scale because what many of kind of the engineers and researchers would consider works well in the West Coast of the U.S. is very different to what's going to happen in Pakistan and India, in Southeast Asia. So getting the models to work at a global scale requires a lot of feedback about cultural nuance and specific training to make sure that the models are working in those geographical areas. Appen has got a tremendous amount of strength there, and we're already seeing some customers really lean into that. So we're super bullish on this next phase of the digital advertising arms race.
Sam Wells: Next question comes from Conor O'Prey at Canaccord.
Conor OPrey: Just -- maybe just a question on the -- how you see the unit economics stacking up for this year. China business, strong revenue trajectory, the ex China, the global business, less so. So would you expect a lower gross margin this year? And then with the sort of 23% revenue growth approximately at the midpoint of the range, do you need to invest in the cost base, the OpEx base to support that growth?
Ryan Kolln: So I'll start with the second one. We don't see any requirement for any investment in the OpEx base to support the growth. So we're really confident in our OpEx base at the moment. In terms of the gross margin, look, it will play out on the mix between China and non-China, but also the gross margins that we see within the global business unit. But we're pretty comfortable when you look at the FY '25 gross margins, that that's something that we can achieve in FY '26.
Sam Wells: Next question, we've got a couple coming through around the China business. Firstly, can you just elaborate on what's driven this growth, please? And specifically what type of customer?
Ryan Kolln: Yes. So good question. We work with almost all of the major technology companies in China, which includes companies that are building the foundation models and incorporating them into their applications. So a big driver of growth has been the development and the implementation of generative AI models on 2 horizons. One is for the domestic China use, but it's also for Chinese companies that have international operations where we're helping them expand through data that represents the international markets that they operate in. So very heavily focused on generative AI, both for domestic applications in China and the international expansion.
Sam Wells: And just in terms of concentration, specifically within that app in China business, can you elaborate on that at all with respect to top customer?
Ryan Kolln: I can talk at a high level. It's a reasonably diversified mix of customers that make up our app in China revenue. Like I said, we work with many of the large players over there. So we're very comfortable with the composition of revenue, and we'll continue to look to drive revenue from those customers.
Sam Wells: And with respect to, I think, the relative valuation you pointed out against the domestic peer, what's the company doing to realize this value discount?
Ryan Kolln: So we point out the peer in terms of the relative market share that we're getting. We just continue to focus on operating the business. We think we've got a great asset in China. There's a great market opportunity. So it's heads down on focusing on the potential for China.
Sam Wells: And just one final question on China. When you think about the performance of the China business versus the, I guess, the contrast this financial year with the Appen Global business, how do you think about allocation of resources into the Appen Global business versus Appen China?
Ryan Kolln: Yes. So we do look at a divisional standpoint, and we look at the needs of both of the business units and what we consider appropriate investment, and we make our decisions appropriately. We've been investing in growing China for a while now. We're starting to see the payoff now, which is great. We look to get operational leverage. China -- sorry, Appen Global, we have, as seen through last year, a bit more of a lumpy profile, which is driven by the project nature, but we're confident that the spend levels that we've got at the moment that we can deliver meaningful growth in Appen Global.
Sam Wells: Okay. Great. And just on seasonality, can you elaborate on historical seasonality, including first half, second half skew, both on a revenue and EBITDA perspective? And in relation to EBITDA, what specific initiatives have you got in place to drive EBITDA margins through the balance of [ FY '26 ]?
Ryan Kolln: Yes. I'll start on the EBITDA margin. Look, we are focused on revenue growth in the business. And as I said, we don't need to add any cost to the business from an OpEx standpoint. Clearly, our crowd costs flex up and down, but we feel really strong about the operating leverage that we can get in the business, which will drive EBITDA as revenue grows. In terms of the first half, second half skew, look, traditionally, as a business, we have seen a skew towards the second half, typically what we see in January and February from some of our customers that run a calendar year planning cycle that there is a bit of replanning that can occur, and that's kind of one of the main factors that drives the skew.
Sam Wells: Next question is coming from Jennifer at Jefferies.
Jennifer Xu: Just a couple from me. Probably you already touched on some already. So the first one is still about the skew. What you're talking about is traditionally in line with previous. But how do we look at the global and China 2 segments individually?
Ryan Kolln: Yes. So China is a little bit harder to call out because it has been driving in the right direction. I would think of it more of an Appen Global skew where we see the mix -- we see more of a H2 being a bit heavier than H1.
Jennifer Xu: All right. And on the margins, could you also give us a bit more color on China margin going forward, like financial year '26 and beyond given the customers and the product mix dynamics?
Ryan Kolln: Like I said, we're starting to see some operating leverage in the China business, which is really good, and we see that through the kind of improving EBITDA lines. So we feel really confident about kind of that margin trend continuing as revenue grows.
Sam Wells: Next question just on cash balance. Do you expect your cash balance to continue to grow further by the end of this calendar and financial?
Justin Miles: I'll take that one, Ryan. So the cash on the balance sheet is there to support the working capital requirements. Obviously, it's a decent amount of working capital required as we grow quickly. And that's because we pay the crowd ahead of getting customer receipts in the door. So there is some working capital needed. Obviously, timing impacts it, too, when we're looking at it as at date, at the end of the year or whatever. But as we've kind of called out, we're very confident in the year, we're driving towards profitability. So naturally, you would expect the cash balance to go up over time.
Sam Wells: Great. Thank you. How is Appen adapting to the rise of synthetic data and automation? And specifically, is there any second order impact of these observations or trends?
Ryan Kolln: Yes, great question. So synthetic data is a really important part of the market. And we're incorporating that into a lot of the projects that we're delivering for our customers, where there's a mix of synthetic data and human data. So it really comes through the solutioning that we're bringing, which is far more, as I called out in the presentation, far more consultative, much more tech-led in the solutioning. So we're definitely incorporating all of the techniques that we can to deliver data for our customers that are high quality, good unit economics, which definitely includes synthetic data.
Sam Wells: Thank you. And maybe just time for one more question, more around the longer term. How does Appen -- what areas does Appen see the biggest growth opportunities over the next few years? And how do you think about long-term margins for the business once fully scaled and automated?
Ryan Kolln: I think I'll refer back to the presentation where we called out 3 areas that we see really significant growth potential. So first is the B2C market, which is fueled by the digital advertising spend. So we think there's huge opportunity for the globalization of consumer-based AI models. Secondly is the enterprise focus with a real steer towards agentic AI. We are seeing agentica has been around for a while, but we're seeing huge focus from the foundation model builders on domain and expert-specific agentic AI models. We think that's a real area of growth. And then new form factors like robotics, like new language models, AR/VR. I think there's many things that will continue to evolve in the AI market that we don't have great visibility of at the moment, which is really exciting for us as we look towards the future. In terms of margin, we're looking to build a high-growth business with sustainable margins and supporting our customers, delivering high quality. We've put out a longer-term end of FY '27 target of 10%. So I'll leave that point out there now. But over the longer period, again, just driving a healthy business is the focus.
Sam Wells: Great. Thank you. I think that's all the time we have for questions today. If you do have any follow-ups, please feel free to e-mail them through, and we'll endeavor to come back to you. And maybe with that, Ryan, I'll just pass it back to yourself and/or Justin for any closing comments.
Ryan Kolln: Yes. Thanks, Sam. So thanks, everyone, for joining the call today. We really appreciate the support. I'll just summarize FY '25. Look, it was a year where we demonstrated real progress at Appen and strong momentum heading into FY '26. We're highly confident on the AI data market and the potential to meaningfully contribute to the development of leading foundation models. We've built a stronger team, and we're winning in the right parts of the market, which gives us huge confidence in both FY '26 and beyond. I'm super proud of what the team has delivered and really confident in our trajectory. So thanks again for your support. We really appreciate it and looking forward to seeing you at our next market update.
Sam Wells: Great. Thank you very much for joining today's Appen FY '26 results call. Thank you, and enjoy the rest of your day. Goodbye.