TEP - I agree broadly with your thoughts on valuation vs true...

TEP - I agree broadly with your thoughts on valuation vs true SaaS players but would like to add my view on this. True SaaS players (like Xero) have the majority of their revenues coming from long term contracts - these revenues are robust and provide significant forward visibility. In addition, for the highest SaaS multiples, the product / service is heavily engrained in a customer’s business and transitioning away from it would be complex and present high operational risk.

In comparison, Appen’s revenues have mostly been re-occurring / repeat - and as you point out with a ‘surprisingly high retention’ - this shows it is a much loved and a necessary product / service for their customers. This is a good foundation but would not consider these revenues to be robust (like Xero). I have been pleased to see Appen switching to a long term contract model, foregoing some margin, and clearly creating much stronger contracted revenue visibility like a SaaS player (this has been a key metric highlighted in recent investor presentations). As the business continues this transition I think we will see the multiple go higher - albeit this transition can take time and will forego short term margin.

Another point around robustness is customer concentration - clearly Appen is strongly reliant on a handful of customers vs hundreds of thousands for other SaaS businesses such as Xero. But the move into China and focusing on government entities is a good move to help diversify the risk - the success of this diversification will also be a key driver of valuation uplift.

For me, the pandemic has driven an increased consideration of ‘robustness’ of business models and it is this which has been hurting valuation metrics for companies which people think are robust but actually aren’t. This is why (in my opinion) Appen’s valuation has been impacted by covid, despite it’s operations and customers not necessarily being hit that badly. In a post pandemic world investors will have scarred memories of the pandemic, but in a growth environment I think the attention of robustness will be diluted a little, and hopefully remove the current down-marking of Appen’s valuation.

In my view I like the direction management is taking the business and look forward to seeing how this business is viewed in 18months after the SaaS transition is complete and the customer base is more diversified. I’m holding my long-term conviction on both the business and the market it is in.

Keen to hear other people’s views...in particular if anyone has insight into the quality of Appen’s products / services vs it’s competitors (for me this is where Appen needs to create its moat).