How big cost-cutting is hoisting the Appen share price 10% today

The Appen Ltd (ASX: APX) share price has increased 10% after the business revealed plans to cut millions of dollars of costs after a recent major contract loss.

Cost cuts to mitigate the loss of Google

A few weeks ago, Appen told the market that Google, part of Alphabet, was terminating its global inbound services contract with Appen, resulting in the end of all projects with Appen by 19 March 2023. In FY23, Appen’s revenue from Google was $82.8 million at a gross profit margin of 26%.

Appen revealed it’s going to implement measures to achieve $13.5 million of annualised cost savings. The ASX tech share is still focused on returning to profit and managing costs. The costs it’s planning to cut are direct and indirect costs relating to the Google projects.

The company is expecting to complete 80% of the cost initiatives by March 2024, with the rest to be completed by June 2024. An improved bottom line is helpful for Appen shares.

Most of the costs identified to be cut are direct costs, but some indirect costs have also been found which will lead to the eventual closure of the Toronto and Bellvue offices in North America.

Appen is expecting FY25 to be the first full-year benefit of these cost savings to be realised.

However, these savings will come with one-off implementation costs, which are currently estimated at between $1.5 million to $2.5 million. Appen plans to report these as a non-recurring expense and excluded from its underlying earnings before interest, tax, depreciation and amortisation (EBITDA) for FY24.

This adds to Appen’s recent cost-cutting

These cost cuts announced today are on top of the total annualised cost savings of $60 million from initiatives completed over FY23. That cost-cutting allowed Appen to achieve its cash EBITDA profitability objective in December 2023.

Will it be able to achieve FY24 cash EBITDA profitability? Appen said it will “largely depend” on revenue growth from non-global customers, with the timing of that remaining “uncertain”.

Appen share price snapshot

While today is positive for the ASX tech share, Appen shares are still down by around 50% in 2024 to date. It’s down 99% since August 2020.  

It is expecting to report FY23 revenue of $273 million and an underlying EBITDA loss of $20.4 million for FY23.

The post How big cost-cutting is hoisting the Appen share price 10% today appeared first on The Motley Fool Australia.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet and Appen. The Motley Fool Australia has recommended Alphabet. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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