$1.2bn bid for Appen coincides with slowing performance: Further details at AGM tomorrow

Despite revelations this morning that Appen’s (ASX: APX) first half FY22 earnings will be materially lower than the previous period, the midcap artificial intelligence data services company was up 28.13% an hour out from the open based on accompanying news of a $1.2bn bid from Canadian firm Telus.

News of an approach by the suitor today is a welcome kicker for the share price which is down -52% for the year, after falling from around $11.60 since mid-November last year.

Given the magnitude of Appen’s share price slide, finishing yesterday’s session at $6.40, shareholders are going to want to think twice about rejecting the Canadian customer experience IT services company’s bid for 100% of the shares, at $9.50 per share.

It’s understood Appen’s board has kicked off discussions with Telus by offering to provide, on a non-exclusive basis, some business and financial information, in exchange for a confidentiality and standstill agreement.

Further detail can be expected during Appen’s AGM, which ironically is scheduled for tomorrow (Friday 27 May 2022).

What’s on the board’s mind

In light of the following considerations, it’s likely the board will argue tomorrow that the Telus bid, which is 48% higher than yesterday’s closing price, simply isn’t enough to get the former tech darling across the line.

To put the Telus bid in context, Morningstar's fair value on Appen is $12.67, while the target price from the three brokers covering the stock (as reported on by FN Arena) is $7.28.

Key considerations for the board tomorrow include:

• Appen’s global market leading position in the AI data lifecycle sector, with a world-class annotation technology platform.

• Appen’s delivery of long-term revenue growth, including 40% annualised revenue growth from 2016 to 2021.

• Appen’s strong customer base across leading US tech companies, as well as its growing global Enterprise customer base and ongoing opportunities with government partners.

• Top-line growth in new markets, up 21% in FY21, supported by 422% FY21 revenue growth in China and strong China growth in first half FY22.

• Significant investments underway in the transformation of Appen and diversifying revenues.

• The strong growth forecast for the AI data labelling industry.

Sneak peek: Slowing performance

Meantime, within a details-light note this morning, the market has been given a sneak peek into what to expect when the company provides a more comprehensive trading update at the AGM tomorrow.

What we know so far is that at 30 April 2022, the company’s year-to-date revenue plus orders in hand for delivery was approximately US$297m, up approximately 14% compared to the same time last year.

Other noteworthy revelations today included:

• FY22 revenue to exhibit a greater skew to 2H than FY21, supported by the strong level of current orders in hand.

• As at 30 April 2022, Appen’s year-to-date revenue is lower than it was at this time last year.

• The company expects 1H FY22 earnings to be materially lower than the prior corresponding period due to lower than expected revenue, investment in the company's transformation office, product and technology and lower share-based payments in the previous period.

• FY22 earnings to be significantly weighted to 2H reflecting the revenue skew and fixed cost operating leverage.

• The company continues to experience solid earnings to cash flow conversion and free cash flow generation.

Appen share price over 12 months.