Appen to slash costs, close North American offices in wake of Google deal termination

Struggling Australian data services company Appen (ASX: APX) has introduced US$13.5 million in cost-cutting initiatives to offset the loss last month of a US$82.8m contract with Google.

The initiatives represent direct and indirect costs associated with the delivery of Google projects and include a closure of the company’s North American offices in Toronto and Bellevue.

The company expects 80% of the cuts to be implemented by March with the remainder achieved by mid-year.

The first full-year benefit is expected to be realised in the 2025 financial year.

Appen estimated one-off expenses associated with introducing the cost reductions to be up to $2.5m.

They will be reported as a non-recurring expense and excluded from underlying earnings before interest, taxation, depreciation and amortisation (EBITDA) for the 2024 financial year.

The new cost cuts are in addition to total annualised savings of $60m from initiatives completed in 2023 that enabled Appen to achieve its cash EBITDA profitability objective at the end of that year.

Achieving the same profitability in the current financial year will largely depend on revenue growth from non-global customers.

Google termination

In January, Google announced the termination of its global inbound services contract with Appen from March which ultimately wiped more than 40% from the company’s share price.

At the time, Appen said it had no prior knowledge of Google’s decision and described the move as “unexpected and disappointing”.

“Appen continues to focus on cost management, business turnaround and delivery of high-quality AI data for its customers,” it said.

“[We] will immediately adjust our strategic priorities following the notification of the Google contract termination and provide further details in our FY23 full year results on 27 February 2024.”

Share price slump

Following the termination, Appen’s share price slumped to more than half of the $0.55 value offered during a $30m capital raising in November.

It is now a world away from the $42 peak reached during the 2021 tech boom which had the company valued at $5 billion.

In the 2023 financial year, Appen’s revenue from Google was US$82.8m at a gross margin of 26%.

Google’s account is believed to have represented more than 30% of Appen’s annual turnover.