The Appen Ltd (ASX: APX) share price could push higher today after the global leader in the development of high-quality, human annotated datasets for machine learning and artificial intelligence released its full year results which smashed its upgraded guidance.
Here's how Appen performed in FY 2018 compared to the previous year:
- Revenue up 119% to $364.3 million.
- Underlying EBITDA increased 153% to $71.3 million.
- Underlying EBITDA margins improved from 16.9% to 19.6%.
- Underlying net profit after tax increased 148% to $49 million.
- Strong cash conversion (92% of underlying EBITDA).
- Underlying diluted earnings per share of 45.3 cents.
- Guidance: FY 2019 underlying EBITDA in the range $85 million to $90 million.
What were the drivers of this strong result?
The company's Content Relevance division was the star of the show during FY 2018. On a statutory basis, the segment delivered a 148% increase in revenue to $312.8 million.
Appen chief executive officer, Mark Brayan, advised that the division had a strong finish to the year.
He said: "Our Content Relevance division, including Leapforce, continues to be the growth engine for Appen and performed particularly strongly in Q4. The inclusion of Leapforce, customer expansion and economies of scale have all contributed to growth and margin expansion."
Supporting this growth was the Language Resources division which posted a 27% increase in revenue to $51.4 million. This was driven by increasing demand for speech and natural language data, resulting in a record revenue year for the division.
One slight disappointment was that the Language Resources division saw its margins decline during the year due to its mix of work.
What's next?
Management remains confident on the company's future and pointed to the booming artificial intelligence market as a reason to be positive.
According to the release, the AI market is expected to be worth $191 billion by 2025. The McKinsey Global Institute estimates that up to 10% of this is labelled data, which means Appen's addressable market is expected to grow to $19 billion by 2025.
In order to capture as much as this market as possible, the company is building out its team, customer base, and operations in Shanghai. As China is the next biggest AI market after the United States, it certainly is a lucrative opportunity for the company over the coming years.
In the near term, management has provided underlying EBITDA guidance in the range $85 million to $90 million for FY 2019. This will mean year on year growth of 19.2% to 26.2%.
I suspect that this guidance is conservative and wouldn't be surprised to see it upgraded as the year goes on.
Especially after Appen smashed expectations in FY 2018. Its original underlying EBITDA guidance was in the range of $54 million to $59 million, before being upgraded to between $62 million and $65 million in November. The company ultimately delivered underlying EBITDA of $71.3 million, almost 10% higher than the top end of its upgraded guidance range.
Should you invest?
I believe this result demonstrates why Appen is one of the best tech shares on the Australian share market alongside Afterpay Touch Group Ltd (ASX: APT) and Altium Limited (ASX: ALU). I continue to believe it would be a fantastic buy and hold option.
