Desperate tech dog Appen wants to latch onto new AI gold rush
Once upon a time, Appen was a star the ASX’s tech scene. But 10 downgrades later, its new CEO is raising capital to chase the new phase of the artificial intelligence boom.
May 16, 2023 – 11.58am
There’s more than a whiff of desperation about the $60 million equity raising announced by the fallen tech star of the ASX, Appen Group.
After about 10 profit downgrades in the last few years – the latest of which arrived on May 10 – the capital raising is designed to give vital breathing space to Appen’s new chief executive, Armughan Ahmad, so he can hitch a ride on the hottest trend in global business: generative artificial intelligence.
The capital raising will be priced at $1.85, an almost 20 per cent discount to Appen’s last closing price and light years away from the $40.08 that Appen shares peaked at in the heady days of the pandemic equity market boom.
Back then, Appen was part of the little gang of local tech companies known as the WAAAX stocks, alongside WiseTech, Altium, Afterpay and Xero.
The WAAAX gang was a pretty a lame attempt to develop a local equivalent to the FAANG stocks that were driving the US stock market at the time. But to be fair, most of these companies have delivered strong growth over the past five years: WiseTech is up 415 per cent, Xero is up 140 per cent, Altium is up 65 per cent and Afterpay was acquired by US giant Block in a $38 billion deal.
But Appen has proven to be the undisputed dog of the WAAAX pack. Under former chief executive Mark Brayan, Appen horribly underestimated how sticky its revenue from big tech clients really was and as underlying EBITDA fell from $101 million in 2020 to just $13.6 million in 2022, the trust of investors was lost.
Ironically, Appen does have a legitimate claim to the title of one of Australia’s AI pioneers. Its business was built on using an outsourced pool of workers to crunch data for the original AI models, including labelling data and testing its relevance.
But the never-ending profit downgrades has meant the company has been completely left behind by the generative AI revolution that started in late 2022 with the launch of ChatGPT.
But Ahmad, who was appointed four months ago, believes the group has turned the corner.
Not only has it slashed costs – including 300 of its 1500-person workforce – but the big clients who are driving the AI revolution are starting to tap Appen’s expertise to improve the large language models (LLMs) that underpin their generative AI technology.
Ahmad name-checked Microsoft, Apple, Meta, Google and Amazon, who he said account for about 80 per cent of Appen’s revenue, as firms that are starting to realise the role Appen can play.
Essentially, Appen believes it can be a sort of clean-up crew for AI developers and adopters. Human feedback is required to ensure that an AI model is providing relevant results without typical problems such as bias, the delivery of toxic content and what are called “hallucinations” – basically false statements presented as accurate ones.
Problems to solve
Appen’s pool of outsourced workers – what it refers to as its crowd – are now starting to be used by LLM model developers to test the relevance of its technology. Additionally, Ahmad says companies that are deploying AI systems from the developers like OpenAI or Nvidia, will find that systems don’t necessarily work in a call centre or a back office without the fine-tuning that only a human can provide.
“In generative AI, in order to do the fine-tuning, you need a human in the loop,” Ahmad says. “We are seeing the demand move very fast.”
The market, Appen says, can grow from just $US8 billion in 2021 to $US111 billion in 2030.
Ahmad certainly told a good story on Tuesday. He shared some of his background growing up in difficult circumstances in Pakistan, pointed out that his incentives are completely tied to getting the Appen share price back up – the first tranche will only kick in when the stock hits $7.63 – and all but promised Appen will be cash positive at an EBITDA level by the end of the year.
But Ahmad also pointed out some embarrassing problems he still needs to solve. Appen’s sales staff, he says, has traditionally waited for potential customers to contact them, rather than chasing new business. He bluntly admitted that he is still probably about six months away from providing the sort of visibility the market wants over revenue.
Appen is clearly very reliant on a concentrated group of customers, but exactly how important Appen is to those big tech names that Ahmad dropped isn’t really clear. As Ahmad said, he hadn’t even heard of Appen before he was approached for the job; that raises questions over the idea that investors have been sold over the last five years, that Appen is a key player in the tech development programs of these giants.
The capital raise, which has been underwritten by Barrenjoey, will at least keep the banks away for a while; Appen says lender Westpac has agreed to waive financial covenants for the June testing of its undrawn credit facility, conditional on completion of the raise.
How much more patience investors are prepared to show the company remains to be seen.
“We need to see evidence of a definitive turnaround in key metrics for a business which to date has had limited earnings visibility,” RBC analyst Garry Sherriff says.
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