Appen Limited

Good morning, everyone, and welcome to Appen's first half FY25 results webinar. My name is Sam Wells from NWR, and joining me from the company today is CEO and Managing Director Ryan Colm, as well as Chief Financial Officer Justin Miles. Following a brief summary of their results released to the ASX this morning, we will have some time for Q&A from the management team. There will be a choice of two options. First, research analysts will be able to raise your hand via Zoom should you wish to ask a verbal question, or we'll take written submitted questions via the Q&A function at the bottom of your screen. We will endeavour to get to the majority of questions asked, in some cases combining questions on the same or similar topic. And with that, I'll pass it over to you, Ryan.

Thank you, Sam. Hello, everyone, and welcome to Append's Half Year Results. I'm joined today by our CFO, Justin Miles. I'll now start with the presentation. So turning to page three, I'll start with an overview of the agenda for today. There'll be four sections to the presentation. First, I'll share some highlights of our H1 results. Second, Justin will provide greater detail on our financial performance. Third, I'll provide an update on our progress against our strategic initiatives. And finally, I'll provide a FY25 outlook and guidance statement. Turning now to slide five. I'm pleased to report that Appen delivered continued momentum in the half. We recorded revenue of US $102.1 million, representing 2% year-on-year growth when excluding the impact of Google. 24% of our revenue for the half was from generative AI-related projects, demonstrating our continued success in supporting foundation model builders. Our performance in China was a standout. Revenue grew 67% year on year, and we exited the half with an annualized run rate revenue exceeding $100 million. This highlights the consistency and strength of our momentum in China. The turnaround in our core business is progressing well. We're deepening customer relationships, successfully entering new target accounts and improving our operations. We're also seeing green shoots and recently secured a new generative AI engagement with potential annual revenue exceeding $10 million. Our technology transformation is delivering tangible operational benefits. In our non-China business, we have identified approximately $10 million in annualized cost efficiencies. Around 70% of these will be realized by the end of Q3 FY25, with the balance to be executed by the end of the year. In terms of the market, we're seeing customers' data requirements shift to areas where Appen has clear market differentiation. Demand is increasing for large multilingual speech training data, a domain where Appen has deep expertise. We are also seeing positive market signals for LLM model evaluation, which is very similar to the search relevance projects we have been performing at scale for many years. China remains a key sector of the market, supported by growing demand for domestic and international operations. Finally, our balance sheet remains strong. We ended the half with a cash position of $60.9 US million or $92.9 million Australian dollars. We remain focused on delivering EBITDA positivity and are well capitalized to support our growth objectives. In summary, the first half of FY25 shows encouraging momentum across the business. We're executing against our strategic priorities, diversifying revenue sources, and leveraging our technology and expertise to capture opportunities in the evolving AI ecosystem. We enter the second half with confidence and strong foundation to build on. I'll now hand over to Justin, who will walk through the H1 financials in greater detail.

Thank you, Ryan. Good morning, everyone. A reminder that we report in US dollars and that all comparisons are to the half year ended 30 June, 2024, unless stated otherwise. Starting with the H1 snapshot on slide seven. Revenue increased 2% to 102.1 million. This excludes the impact of Google. Within our operating segments, new markets revenue grew by 20% to 59.6 million due to strong growth in China, which was 67% up on the prior corresponding period. The remainder of the new market segment was impacted by short-term volatility due to the dynamic nature of the US AI market. Global services was also impacted by the short-term volatility, as well as the termination of the Google contract in H1FY24. The decrease in gross margin percentage reflects a change in customer project mix compared to H1FY24. It is noted that China margins are traditionally lower versus the rest of the group. Due to prudent cost management, there was an improvement in underlying EBITDA before FX, despite lower gross margin. I won't talk to slide eight as we cover revenue in further detail at later slides. Over to underlying EBITDA on slide nine. Group underlying EBITDA before FX improved 0.1 million to a loss of 2.2 million. As just mentioned, there was an improvement despite lower gross margin due to prudent cost management. New markets EBITDA improved by 4 million to a loss of 4 million. The improvement reflects a positive EBITDA contribution from the China business. The Global Services Division reported EBITDA of $2.1 million, down $4.7 million on the prior corresponding period. The decrease reflects lower revenue and gross margin, driven by short-term volatility due to the dynamic nature of the US AI market. Over to slide 10. Ryan has already talked about China's strong revenue growth. revenue grew 67% compared to H1 FY24. Pleasingly, the China business exited the half with an annualized run rate for June exceeding $100 million. This is a great milestone for the business. China customers include leading LLM model builders, along with leading technology and auto customers. And there are revenue opportunities in both China domestically, as well as China customers expanding internationally. It is important to note that the China business has a more predictable revenue profile compared to the remainder of the business due to the engagement and delivery model. Turning to slide 11. Pleasingly, there has been a positive EBITDA contribution from the China business for the last five quarters. China contributed 2.9 million underlying EBITDA to H1FY25, a $2.8 million improvement compared to H1FY24. Over to slide 12. This slide shows quarterly global revenue with Google excluded. As already mentioned, global revenue was impacted by short-term volatility due to the dynamic nature of the US AI market. Despite the short-term volatility, our customer relationships and conviction in the revenue opportunity remain strong. However, it is important to note the timing is uncertain in relation to the resumption of large volume LLM projects. The uncertainty comes from customer LLM teams planning and going through multiple reorganizations, as well as the nature of the work, being large volume, short-term projects. As well as the strong customer relationships, our quality metrics with our largest customer are at an all-time high. We continue to win new projects, albeit at a low volume of data during the half compared to PCP. And a recent win with a $10 million plus annual revenue potential are all signals that support the progress we are making and conviction in the revenue opportunity. Slide 13 has revenue for the balance of the new market segment, being enterprise and government. The decrease in revenue was driven by lower volumes within some existing large enterprise projects, including some projects coming to an end. There is a healthy enterprise pipeline and conviction remains in the revenue opportunity, although timing of revenue conversion remains unclear. US policy uncertainty has meant generating meaningful short-term revenue opportunities within the US government division is challenging. Given this challenge for the US government division, a decision has been made to wind back investment. This will result in approximately $4 million in annualised OPEC savings. The majority will be executed by the end of Q3 FY25 and the balance by the end of the year. This decision does not have a material impact on existing revenue. It is important to note the $4 million cost savings are in addition to the 10 million cost efficiency gains from the technology strategy that Ryan spoke to at the start of the presentation. Turning to slide 14. This is a summary of the profit and loss, and we've already covered most of the line items. However, it is worth noting the expense lines. Employee expenses are down 9% and all other expenses are down 11% compared to H1 FY24. This is due to the cost out programs that were executed in H1 24, as well as continued prudent cost management. The cashflow summary is on slide 15. The cash balance at the end of the period was 60.9 million up 6.1 million from December 24. The Australian dollar equivalent of the cash balance is 92.9 million. Cash flow from operations improved by 2.3 million to 12.9 million. The period was positively impacted by the receipt of a payment from a major customer in the first week of January 25 versus December 24 as scheduled. Cashflow used in investing activities was $0.8 million higher compared to H1FY24 due to a higher investment in product development and new facilities for the China business. The new facilities also impacted financing activities with cash used $0.3 million higher due to lease payments. Cash was used to fund operations and CapEx. Now, before I hand back to Ryan, I would like to pull out a potential change to the reporting segments. With the strong growth in China and the wind down of investment in the US government division, we are exploring whether to simplify the reporting segments as we head in to the end of the year reporting. That concludes the financial performance section. Back to you, Ryan.