Ann: FY19 Half Year Results, page-124

Appen Limited (ASX:APX; AUD 24.27)
Go Figure? CY19 EBITDA Now Guiding to Top End of the Range

August 29, 2019

Royal Bank of Canada - Sydney Branch

Rating: Outperform
Price Target: AUD 34.00
Our view:
Strong 1H19 overshadowed by Figure 8 performing below plan and confusion on implied 2H19 growth. Now guiding towards the upper end of EBITDA $85-90m range. Organic sales growth +53% and CY19 guidance appears conservative as assumes 0.74 AUD/USD vs spot rate 0.67 AUD/USD. RBCe EBITDA estimates +5%/-1% in CY19/20. Focus on the core. Retain Outperform with $34.00/share price target, on continued strong demand and organic growth.

Key points:
Strip Out the Noise & Organic Growth Was Very Strong. Total 1H19 revenue growth +60% on pcp with strong organic growth +53% and Figure 8 only contributing +7% growth. Total underlying EBITDA $46.3m, +81% or +63% on constant currency basis. Group EBITDA margins expanded +210 bps to 18.9%, even with the -$2.6m drag from Figure 8 loss.

Figuring Out Figure 8. No one likes an acquisition contributing less than forecast. ARR for CY19 appears to be ~20% lower than previously stated. Getting under the bonnet and the miss is driven by: 1) a few staff changes; and 2) shifting the sales strategy to larger deals with longer lead times vs smaller deals with shorter lead times prior.

So What Gives? The core underlying business is performing better than we expected and represents ~85% of sales when annualising Figure 8's contribution. Figure 8 had $11m sales and -$2.6m EBITDA loss for 3 months. We believe Figure 8 is likely to normalise over time. APX is on track to deliver ~$120m EBITDA RBCe in CY20, even with Figure 8 contributing EBITDA losses through to 2H20.

RBC Forecasts CY19 Guidance Beat & Lift Estimates. We forecast a CY19 beat to guidance with RBCe ~$95m EBITDA vs $85-90m guidance. We detail our EBITDA bridge in this note and cross-check with the YTD work in hand to revenue conversion ratio. Lifting our EBITDA estimates +5%/-1% in CY19/20 on stronger organic growth than previously forecast.

Relevance Sales +48% and Margins Expanded ~550bps. Margin expanded ~550bps to 24% vs 19% pcp, driven by Leapforce, technology and economies of scale. Speech & Images +85% and Margins Expanded ~150bps. Strong sales growth and purely organic with an increase in use cases and existing customers asking for more data to develop new AI products and to improve their existing offerings. Margins expanded ~150bps to 37% vs 35% pcp.