Appen Limited

Thank you for standing by and welcome to the Appen Limited fiscal year 23 results release conference call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Ryan Colan CEO and Managing Director. Please go ahead.

Thank you very much, Andrea, and good morning, everyone. Welcome to Appen's FY23 results presentation. Today I'm here with Justin Miles, our CFO, and Rosalie Duff, our Head of Investor Relations. Turning to the agenda on slide three, there are four sections to our presentation today. First, I'll provide an introduction to our FY23 performance. Following my intro, Justin will share further detail on our financial performance, then I'll present our strategy and priorities before discussing our FY24 outlook. Turning to slide five, where I'll highlight three key elements of our performance in FY23. First, revenue was materially down in FY23. In response, we adjusted our cost base to reset the business. Although full year revenue was down, we did see some positive trends in Q4. Third, we had good traction in generative AI-related project wins, particularly in the second half of the year. Now we'll go into more detail on each of these. On to slide six. At a group level, our FY23 revenue was down 30% year-on-year. This reduction was mainly driven by a large customer and was influenced by the tech spending slowdown and uncertainty related to generative AI. This is clearly a very disappointing result. In response, we reduced our annualized OPEX by $60 million. Because of the timing, we did not capture the full benefit of the cost reductions in FY23, which impacted our profitability. In December, we realized the benefit of our actions as we exited the year cash EBITDA positive. Turning now to page seven, where we have a quarterly revenue breakdown. In global services, we saw typical Q4 seasonality. We acknowledge that for global services, Q4 was materially down year on year. However, it's a positive signal that revenue declines had stabilized after a challenging year. China delivered a record quarter in Q4 of $11.1 million, signaling a strong return to growth for China. This is mostly due to the return to normal following COVID-19. Finally, new markets excluding China also experienced growth in Q4 when compared to Q3. These results are encouraging, particularly as we look for revenue stabilization across the business. On page eight, I'd like to share some highlights on our generative AI progress. FY23 was an exploratory year for generative AI. At the start of the year, many customers were testing different approaches to building LLMs, and this resulted in a lot of pilot projects wrapping. As the year progressed, our customers scaled their data needs. Because of this, existing customers increased their spend on data, and we added new customers who were looking for more established data vendors. As a result, we saw a 410% half-on-half revenue increase from LLM-related work. We now have several projects that annualized run rate revenue is well above $1 million. What's very encouraging is that we're now working with roughly 80% of the leading LLM model builders globally. We expect many LLM companies to further scale their data operations in FY24, particularly into international markets. One of Appen's strengths is scaling AI data internationally, and therefore we're very bullish on LLM-related growth in FY24. Moving to slide nine, I'd like to address the disappointing decision from Google to end their contract with Appen. While Google's decision did not impact our FY23 performance, it's an unfortunate outcome that I'd like to address. We responded swiftly to the news by reducing our cost base. The key focus areas of cost reductions were the direct and indirect costs related to Google. As previously announced, we identified $13.5 million in cost out. The work that we did for Google was a challenging thing, particularly related to the onboarding and management of the crowd workers to the Google platform. A significant number of internal resources were dedicated to this account, hence why we have been able to identify and reduce costs quickly. So while the news was very disappointing, we have taken the opportunity to streamline our operations, which will benefit other areas of the business. I'll now ask Justin to go further into our FY23 performance, but before I hand it over, I'd like to take a minute to congratulate Justin on his appointment as CFO. Justin has been with Appen for over eight years and has done a tremendous job throughout that time, specifically during the last eight months as interim CFO. I've worked very closely with Justin throughout my time at Appen and couldn't be happier that he is our CFO going forward. I'll now hand over to Justin.

Thank you, Ryan. Good morning, everyone. A reminder that we report in US dollars and that all comparisons are to the full year ended 31 December 22, unless stated otherwise. starting with a financial summary on slide 11. Total revenue decreased 30% to $273 million. This is mainly due to a lower contribution from our global customers, reflecting lower volumes as our customers optimize their spend and reduce costs in response to the challenging external environment. The lower contribution from our global customers also flows through to the new markets business, where we saw a decrease in global product revenue. Our gross margin percentage, which is revenue less crowd expenses, was down 130 basis points to 36.3%. The decrease was largely due to a shift in the customer and project mix during the year. Underlying EBITDA and associated margins were significantly impacted by lower than expected revenue and gross margin, as well as a proportionally higher cost base coming out of FY22. Also, the first full-year benefit from our cost-out programs executed during FY23 will be in FY24. Primarily due to the decrease in EBITDA, we reported an underlying net loss of $52.8 million. We recorded a statutory net loss after tax of $118.1 million, which includes a non-cash impairment charge of $69.2 million pre-tax. The impairment relates to global services. Turning to revenue on slide 12. At the group level, revenue is down 30%. Most of this decline can be attributed to global services as well as the impact from global products. Global services revenue declined 36% impacted by reduced volumes as customers looked to optimize and reduce their costs. Most of the revenue decline was due to a large customer However, we saw encouraging growth in LLM-related work across global services in the second half of FY23. In new markets, revenue declined to 8%, primarily impacted by lower contribution from global products. Excluding global product, new markets revenue grew 2.2%, and pleasingly, 2H23 was 19% higher than 1H23, where we saw strong momentum in China. Additional commentary on revenue is provided in later slides. Over to slide 13. Group underlying EBITDA before the impact of FX was a loss of $20.4 million, impacted by lower gross margin and a proportionally high cost base coming out of FY22. Our operating expenses decreased 11.3% compared to FY22. The decrease predominantly reflects the cost out programs completed during FY23. However, as expected, the first full year benefit of these cost out programs will be realized in FY24. Global Services Division reported EBITDA of $17.5 million, down 68% on the prior corresponding periods. The primary driver was the impact of reduced customer spend on revenue and gross margin that I mentioned previously. New markets reported an EBITDA loss of $32.7 million compared to an EBITDA loss of $36.5 million in FY22. The improvement is due to a higher margin project mix in FY23 compared to FY22 and some of the benefits of the cost out programs implemented during FY23. Slide 14 shows monthly group revenue underlying EBITDA and underlying cash EBITDA both before FX. The return to profitability in December, the milestone that was flagged during the recent equity raise, reflects the stabilisation of revenue in Q4 and the benefit of cost out programs completed during FY23. Turning to slide 15. This slide shows global revenue by quarter where we saw stabilization in spend in the second half of FY23. This was primarily driven by stabilization in spend from a large customer. We benefited from some seasonality in Q4, but not to the extent as previous years. We also saw encouraging growth in LLM-related work in the second half of FY23. Over to slide 16. Our China business returned to growth. This follows a protracted impact of COVID, which has now subsided. Pleasingly, the China business had a quarterly record revenue in Q4 with revenue of 11.1 million. China demonstrated significant success winning many LLM projects and is now supporting many leading LLM builders. Total, the China business, which includes Japan and Korea, recorded 82 new customers in FY23, including eight customers with multiple LLM deals. Turning to slide 17. This slide details revenue by quarter for the balance of new markets, being enterprise, government, and quadrant. Pleasingly, there were 89 new customer wins across this group during FY23, with the average deal size up 5% for enterprise, to 147,000 compared to FY22. There is solid traction in LLM-related work, with work ramping up in the second half of FY23. This includes a $4 million-plus revenue run-rank project with a leading generative AI model builder. This is an example of a project being delivered through our ADAP platform. We saw growth both across both quadrant and government, albeit from a small base. The balance sheet on slide 18. Cash balance at 31 December 23 was $32.1 million and included the net proceeds from equity raised during the year. The cash balance at the end of January was $34.2 million. The decrease in net assets to $92.8 million was due to trading performance and the 69.2 million pre-tax impairment charge that I mentioned earlier. This is non-cash and relates to global services. Non-current assets include 38 million intangible assets relating to ATHM platforms, including ADAT. Current liabilities were 17.4 million lower and reflected lower cost of sales and operating expenses. Current liabilities include a $3.8 million earn-out liability relating to the quadrant acquisition. This was settled in January 24 by the issue of ordinary shares. Non-current liabilities have decreased due to the quadrant earn-out liability becoming current and a decrease in deferred tax liabilities. Turning to the cash flow summary on slide 19. As just mentioned, the cash balance at the end of the period was $32.1 million and included the net proceeds from equity raised during the year. Cash outflow from operations of $23 million reflects the trading performance during the period. Cash has primarily been used to fund operations while the turnaround is in progress, some capex and one-off costs associated with cost reduction programs. That concludes the financial performance slides. I'll now hand back to Ryan.