Appen shares plunge 29% on unexpected first-half loss

Appen (ASX: APX) shares plummeted as much as -29% on Tuesday after posting an unexpected loss in the first-half as major customers like Facebook and Google reign in advertising spend.

Bloomberg estimates expected Appen to deliver a first-half profit of US$4.5m.

At a glance

Source: Appen | Table: Market Index

Macro and ad spend

“The first half of the financial year has been characterised by challenging external operating and macro conditions, which has resulted in weaker digital advertising demand, and a slowdown in spending by some of our major customers," said CEO Mark Brayan in a statement.

“This has especially impacted our Global division, particularly those customers with a high exposure to digital advertising," added Brayan.

In recent years, the Global division has accounted for approximately 70-80% of Group revenues, with clients highly concentrated towards a handful of big US tech giants like Google, Facebook, Amazon and Microsoft.

Margins plummet

Appen warned in February about higher costs in the first half, primarily driven by transformation and investment costs, resulting in higher employee expenses, recruitment and IT costs.

Still, margins declined at an alarming rate from 17.6% to 5.2%.

Hindsight is a beautiful thing

In hindsight, the downgrade is not surprising taking into context the trend in US quarterly earnings.

Social media companies like Meta, Twitter, Snapchat, Youtube (owned by Alphabet) and Pinterest all missed second quarter earnings expectations, and all attributed the underperformance to a weak online advertising market.

Outlook

Appen said it expects to achieve higher volumes in the second half due to the delivery of seasonal projects and ramp up in existing projects.

This might be wishful thinking given its warning that there has so far been "no improvement in July trading" and continued uncertainty for advertising demand.

Appen share price chart