With its big clients like Facebook and Google seeing revenues slide as online advertising slows, another downgrade for artificial intelligence data services company Appen shouldn’t have been that big a surprise.
But that’s what we saw on Thursday – a cut in revenue and earnings forecasts for 2022 in the third downgrade since late July and in turn another selloff for its shares, which slumped 16% at one stage.
Weak market conditions for its tech clients are leading to weak revenue and earnings.so so disappointed investors sold the shares down, again.
But as explained below, Appen, like Facebook and Meta, two of its bigger customers – are feeling the impact of Apple’s major iPhone software change last year which makes it harder to target mobile ads to users.
That looks as though it is hurting the entire online ad sector, one way or another and forcing cutbacks just at a time when fears of a looming downturn in the economy has seen companies start cutting marketing budgets.
The Apple app feature will be a negative for the likes of Facebook, Google and other online ad groups (even Apple) and suppliers like Appen, for some time to come.
Appen’s shares slumped 15% at the open to a fresh five year low of $2.83, fell to a low of $2.73 for the day and the past five years before edging back to close at $2.94, still down more than 11%.
Appen said there has been no improvement in trading conditions in August and September, contrary to its half-year results commentary where the company said “we still expect to see higher volumes in the latter part of 2H.”
“As noted at the half year, challenging external operating and macro conditions have resulted in weaker digital advertising revenue and a slowdown in spending by some of our major customers,” the company said in a statement to the ASX before trading yesterday.
“The Global Division continues to win new projects and the project count is at an all-time high, however the size and stage of these projects is insufficient to offset the reduction in revenue from some of our higher margin core programs.”
Appen retained its full-year revenue outlook of US$375 million to US$395 million but expects earnings and margins to be “materially lower than FY21.”
And Appen expects full-year earnings to be in the range of $US13 million to $US18 million reflecting a reduction in large, higher margin projects and an increase in smaller, lower margin projects.
The earnings downgrade was a substantial drop of between 77% and nearly 84% under 2021’s level.
It’s no wonder Appen’s revenue and earnings are weak and falling – its top clients like Facebook-parent Meta and Google (owned by Alphabet) have seen a fall in online ad revenues in recent months, rising costs and have reacted according with job losses and threats of more cuts to come.
A big driver of the slide in ad revenues has been the increasing influence of Apple’s App Tracking Transparency iPhone privacy feature which first appeared in 2021.
In February this year Facebook claimed the new feature would cost it $US10 billion this year in lost ad revenues.
Apple’s privacy feature disrupts the behind-the-scenes mechanics of many mobile ads, especially those that confirm whether a purchase or download was made. It reduces targeting capabilities by limiting advertisers from accessing an iPhone user identifier and that has had a direct impact on Appen’s business model.
A key part of their cost cutting, especially Facebook and meta has been closing or downsizing office space around the world – especially in cities like New York and on the West Coast in and around Silicon Valley.
Appen shares are down -74% year-to-date. But things aren’t looking that much better for its clients, with Meta shares down -57% this year. Alphabet (Google) shares are down 30%.
Apple has a fast-growing online ad business but its shares are off more than 17% this year (Apple’s share price is driven more by sales of iPhones and various other products than ads).
Amazon shares have also lost a lot of ground – down more than 27%. It, too, has a growing online ad business – much of it built around the businesses it hosts.
