Thank you, and hello, everybody. Welcome to our Full Year Results Conference Call for 2019. Thanks for taking the time to join us today, and thanks for your interest and support of Appen. My name is Mark Brayan. I'm the company's CEO, and I'm joined today by our CFO, Kevin Levine.
We'll step through the presentation that was provided to the ASX this morning, and then we'll allow some time for questions later in the call. So if you could please turn to Page three. So we're very pleased to report another high performance result for shareholders. Our total revenue of 5 and $36,000,000 is up 47% from last year. This is comprised of $67,700,000 of speech and image revenue, which is up 32%, 4 and 30,000,000 of relevance revenue, which is 37% higher than last year, and year end figure eight ARR of $33,700,000 and this returns figure eight to high growth and lifts its 56% CAGR over the last lifts it, sorry, to a 56% CAGR over the last four years.
Underlying EBITDA for the year was $101,000,000 an increase of 42% on last year and underlying EBITDA margins of 18.8% compared favorably to last year's 19.6%. And that's considering investments made in 2019, most notably in Figure eight, but also in technology in general. EBITDA margins were consistent with our commitment to keep margins in the mid to high teens concurrent with investments for scale and strength. Stripping out Figure eight reveals very strong organic growth highlighted on the right hand side of the page. Organic revenue, that is revenue excluding figure eight of $497,600,000 was up 37% on last year.
Organic underlying EBITDA of $107,300,000 was up 51%, outpacing the growth in organic revenue. And organic underlying EBITDA margins at 21.5% are well up on last year's margins of 19.6%. The organic results show the operating leverage of the business derived from our investments in technology and economies of scale. Turning to Page four, we can see that each of our core divisions contributed to the result. Speech and Image, formerly Language Resources includes the collection and annotation of audio speech recordings, text based natural language data as well as image and video data.
Revenue growth of 32% to $67,700,000 is a standout result considering a historic revenue CAGR of 17.9% since the company listed in 2015. The result came mainly from multiple projects across our major customers. Margins were impacted by a few large projects peaking in the first half and trade offs in gross margin for sales expansion. To the right hand side of the page and relevance continues to be the company's growth engine. Revenue of $430,000,000 was up 37% and its EBITDA up 66% to 110,500,000 delivering very pleasing year on year margin expansion from 21.3% to 25.7%.
It's also noteworthy that one of our largest customers recently updated their agreement with us to include a clause to hold prices for five years, mitigating margin pressure. Please turn to Page five. We're very pleased to report that Figure eight has rebounded to high growth. Year end ARR, that is annual recurring revenue, of US24.95 million dollars or AUD33.7 million lifts the business to 56% revenue CAGR from 2015 to 2019 sorry, that should be ARR CAGR from 2015 to 2019. The result benefited from a strong second half that included new customer wins, new expansion deals and improved churn management.
We also saw an increase in larger customer wins and this is important because large customers are less likely to churn than smaller ones. The path to profitability for Figure eight is ahead of plan due to prudent cost management of nonessential spend that has no impact on sales or growth. We estimate an earn out payment of $36,800,000 bringing the total price of the acquisition to $287,600,000 or 5.8x revenue. And this compares very favorably to similar acquisitions valued at double digit revenue multiples. To Page six now, and we have commenced the integration of Figure eight in earnest now that the earn out period is complete.
We are moving to a simpler unified product set, updated messaging and a fresh visual identity. We're going to market with a single sales and marketing team, consolidating our crowds and shifting work to Athens crowd and facilities. We're also combining teams, culture and back office functions. Synergies discussed at the time of the acquisition are on track and we expect the major components of the integration to be completed by the end of this year. Our customer cohort chart on Page seven benefits from the addition of Figure eight's customers and continues to show the strength in our customer relationships year on year.
For those unfamiliar with the chart, it shows revenue by cohort in year of origination and its successive year thereafter. We're also making good progress in our new growth markets. Please turn to Page eight. We're investing in two growth market sectors, government and China to add customers and strength to our business. Governments worldwide are investing in AI through their defense intelligence and civilian agencies for a variety of applications.
We added a new government customer in 2019 that's using AI to assist disaster relief, for example. We've participated in the government market for some years now, but deeper involvement requires us to be set up with appropriate clearances and capabilities. We're midway through this process and have leased an office in Washington DC. We expect the process to be complete soon and it will give us a significant differentiated capability. To Page nine now and our work in China is progressing at speed.
With 53 people in our corporate office and 154 data labelers in our facility in Wuxi. Our pipeline is growing predominantly with business with technology companies and we're delivering growing revenue, albeit off a small base. Thus far, we see negligible impact on our business from the coronavirus outbreak. All of our staff are safe and accounted for and we've implemented a work from home policy that will remain in place until conditions improve. We've also suspended all travel in and out of China.
Our projects with customers in China are currently ongoing and we don't foresee a let up in that work, but we are monitoring that situation carefully. Our twenty twenty domestic targets for China are modest and hence any impact will have a negligible impact on group revenue and earnings. Of our major U. S. Customers combined, they rely on China for less than 10% of their revenue.
So we don't expect their business with us to be materially impacted by any loss of their revenue from China. Some of our U. S. Customers rely on China for their hardware supply chain and have signaled supply challenges. We're not seeing any impact of this on our business, nor do we expect temporary hardware shortfalls to reduce their need to invest in AI.
It's fairly early in the situation and we're monitoring it closely. But overall, we maintain a view that the coronavirus will have a negligible impact on our 2020 group revenue and earnings based on currently available information. Please turn to Page 10. We continue to invest in technology to improve the interface with our customers, manage and communicate more effectively with our crowd workers and improve worker productivity through better annotation tools. We've released a number of new features during the year, including a secure workspace solution that improves security for at home workers, our automated checking of crowd applicants that reduces the time taken to validate a worker from up to twenty hours to a few minutes, and machine learning assist tools for transcription, data collection and other applications that are showing productivity improvements in pilot projects.
On Page 11, we're also pleased to announce significant enhancement to our capabilities in the autonomous vehicle market with the launch of our LiDAR annotation tool. LiDAR is similar to radar, but far more accurate. It generates three d models that are critical for AI applications that move in space, such as autonomous vehicles. Autonomous vehicles and other AI applications using LiDAR form a rapidly growing market that relies on vast datasets. Working with and labeling data in three d is complex and requires sophisticated tooling and a trained workforce.
We have a number of pilots ongoing in this space and are investing in business development to win more. Page 12 now and an update on our ESG work. As a people based business, we have a low environmental footprint. Our work from home model enhances this. That said, we aim to improve and are buying carbon credits to offset our 2019 travel and will continue to do so in the future.
We've made solid strides in our commitment to the ethical treatment of our crowd and social impact through our crowd code of ethics, membership of the Global Impact Sourcing Coalition and our work with Translators Without Borders. The latter is a not for profit organization that assists people in need at borders with interpretation and translation support. We've also implemented an internal development program to improve gender balance at the senior levels of the company. On governance, we are adding a U. S.-based independent nonexecutive director to our Board to improve Board independence and further our knowledge of U.
S. Markets. I'd now like to hand it over to Kevin to take you through our financial results commencing on Page 13.
Thank you, Mark. We are pleased to report that we continue to translate strong revenue growth into efficient and meaningful bottom line growth. Our revenue increase of 47% including figure eight has been driven largely by continued increase in demand from current projects with existing customers. Growth has also come from adding figure eight and new products new projects with existing customers as well as sales to new customers. Underlying EBITDA including figure eight losses is up 42% driven by delivering increased volumes and improved margins in relevance and achieving the benefits of scale process and technology.
Excluding figure eight, organic performance is strong with underlying EBITDA growth of 51% on organic revenue growth of 37%. Underlying NPAT is up 32% on the prior year, impacted by the investment in engineering and the result in higher levels of amortization. The effective tax rate for 2019 is slightly better than last year and it's impacted by tax deductions of employee performance rights and these can vary from year to year. If you can please turn over to Slide 14 and we'll talk through on the balance sheet. So the balance sheet is strong with increased activity translating to higher cash and receivables balances.
Intangibles have increased significantly with the acquisition of Figure eight. Impairment testing reveals there is significant headroom while using conservative inputs. Appen is debt free at year end and the robust balance sheet contributed $35,000,000 out of the total debt repayment of $57,000,000 during the year. An estimated earn out liability of $37,000,000 has been booked in respect of figure eight payable next month. Appen has declared a final dividend of $05 partially franked to 50% and this is up 25% from $04 in the prior year.
Over the page to Slide 15. Cash at year end has increased by £35,000,000 to 75,000,000 And in fact, the cash balance would have been higher if not impacted by some timing issues with receipts at year end. These issues were resolved in January. Strong performance this year has seen cash flow from operations increase by 47% to $83,000,000 Cash has been effectively deployed during the year to pay debt, dividends, CapEx and transaction costs for the Figure eight acquisition. Even with the receipt timing issues, cash conversion from EBITDA was strong at 88%.
Over the page, and we call out that we have currency translation exposure given that most of our transactions are in USD and we report in AUD. In 2019, we benefited in a meaningful way from a weaker Australian dollar. This contributed to 10% of the revenue growth and 11% of the underlying EBITDA growth. I'll now hand you back to Mark. Thank you.
Thanks, Kevin. On Page 17, we highlight some important market trends. Firstly, that AI continues to rely on large volumes of high quality training data. Quite simply, the more data, the better the AI performance. The availability of quality data continues to challenge AI developers.
Data supply is a large problem for those starting their AI journey and the largest problem for those in production. This mirrors our own research. It's only when developers and organizations move to production and deployment in the real world do they fully realize the need for high data volumes and data quality. The data supply challenge is exacerbated by the growth in AI and with it the growing demand for data. Organizations must invest in AI unless they fall behind their competitors.
So over the page, we're very well positioned to benefit from these trends and the need for large volumes of high quality training data. We are a proven provider. This is essential because our research also shows that companies that want to deploy AI in the real world want to partner with reliable and proven data providers. And we have the two essential assets to deliver training data, the global and diverse crowd the enabling technology that allows the sourcing and delivery of training data at scale. Page 19 and to our outlook statements.
Our work and investments in recent years have strengthened our position in the high growth AI training data market. 2019 saw substantial investments in technology that are now paying off. 2020 will be a year of investment in sales and marketing to grow our customer base and further cement our strong position. This investment will soften our first half margins to the mid teens. We expect margins to return to the high teens by the year end.
We reiterate that we expect a negligible impact from the coronavirus on 2020 group revenue and earnings based on currently available information. Our order book inclusive of year to date revenue and orders in hand is currently approximately $210,000,000 Our full year underlying EBITDA is expected to be in the range $125,000,000 to $130,000,000 and that's at $0.70 to the Australian dollar. The outlook is, of course, susceptible to upside or downside factors including timing of work from major customers and Australian dollar fluctuations. That ends the formal presentation. Thank you once again for your interest in and support of our company.
I will now hand it back to the moderator to manage questions. Thank you.
Thank Your first question today comes from Gary Sheriff with Royal Bank of Canada. Please go ahead.
Yes. A few questions, Mark and Kevin. Firstly, thank you for going through expectations on coronavirus for calendar year 'twenty. I get everything you're talking about in terms of your tech customers only having about 10% of their revenue out of China. I guess I'm just trying to get a sense of that those hidden indirect impacts.
And by that, I mean, have any of your larger tech customers in the last couple of weeks been in touch? And maybe just talk around their tech budgets should consumer or business sentiment become more negative? That's the first question.
Gary, we've canvassed all of our customers, and there's been no indication on current projects currently. As you suggest, if they suffer a material shortfall in hardware supply, for example, that may prompt some cost control in general. But at this point, we're not seeing any indications of that, but we're looking at it closely.
Another way of looking at it, calendar year 'twenty, your expectations, and I know you haven't disclosed revenue per se, but what portion of your calendar year 'twenty is underwritten or under contract?
So we disclosed the order book of $210,000,000 And you could look at order book numbers for prior periods to get a sense of what that may what percentage that may indicate for the full year.
Okay. EBITDA margins for Speech and Relevance going forward, again, could we just I noticed in your guidance, you've talked about first half being a little lower. Just trying to segregate that out by segment. If we can just get a little bit of color on what we should be thinking for margins for each of those major segments going forward?
Yes, Gary. Speech and Image, we would guide in terms of for 'twenty to be similar lines to 'nineteen. So I think for both of those divisions basically similar, but obviously overlaying impact for investment in sales and marketing and a bit of engineering. So flow that through in terms of from the overall total overall margin guidance.
Okay. And the last two questions, just on F8. It looked a really big improvement in Q3 and Q4. Two questions. One, is there any form of seasonality that we should be aware of in F8?
And if so, what drives that? And secondly, did you have to sacrifice price or margin to land some of those larger deals?
So no, there's no we look back over the last few years, there doesn't appear to be any meaningful seasonality or consistent seasonality. Clearly, some quarters do better than others, but there doesn't seem to be any pattern to it. And no, we didn't sacrifice price to deliver the Q3 and Q4 results. It was a combination of sort of better sales leadership. Our Head of Sales, John Condo, took a hands on approach with the figure eight sales team in Q3 and Q4.
And it was also due to much better management of existing customers and churn, we saw far less churn in Q3 and Q4 compared to Q2.
Thank you. Your next question comes from Quinn Pearson with Credit Suisse. Please go ahead.
Hi, good morning. I guess just firstly on the sales and marketing investment you flagged that will pull down the first half margins. Could you maybe just talk us through the timing of that investment deployment? Is the way to think about it that there's a step up occurring basically now, which will pull down the first half margins, but then the return on that investment can drive sales in the second half, which will, I guess, kind of bring the margins back up.
Is that the timing to think about? Yes, pretty much, Quinn. We're staggering the hiring throughout the year, but there's a lag obviously between hiring and return that plays out as you suggest. And by staggering the hiring, that does give us the opportunity to throttle the hiring if the returns are coming. But in general, what you suggest is correct.
We hire early in the year, and that delivers sales and a return on those hires in the second half of the year.
Yes. And then secondly, on Figure eight, could you just talk us through how much of the revenue growth is coming from existing customers versus new customers and what the pipeline of new customers looks like for Figure eight? And in particular, I'm just trying to understand how well Figure eight is being used as deployment to, I guess, sell the existing crowd to a new set of customers?
So to the first question, was pretty well balanced in terms of new customer wins and expansion deals in the second half, expansion being upsell of existing customers. So there was good flow of new customers and then good balance with upsells to existing customers. In terms of the platform as a platform for further sales growth, it opens up our addressable market quite considerably. Our largest customers have their own data labeling platforms, and we work on those platforms. The majority of companies worldwide do not have a data labeling platform, and they need one.
And this is what we have now with the acquisition of Figure eight. So we have a much greater addressable market. And so what you suggest is entirely correct. We'll now be able to access more customers, sell the platform, and that will have pulled through to our crowd resources.
Is that thesis already playing out? Or is it kind of the sales and marketing staff being hired now that can kind of take that to the next level?
So it's playing out, but it's early days. So we've had some joint customer wins, sale of the platform and sale of App and Crowd. But going forward, that's the focus of our sales and development efforts.
That's helpful. And then just lastly for me, just what you're seeing in terms of the competitive environment. We've seen a fair amount of, I guess, investment in various kind of data labeling solutions, especially kind of more on the platform or kind of tech heavy side of things. I guess, are you seeing some of these competitors as direct competitors to you? Or do you see them, I guess, playing in, I guess, different segments of the market?
Just any views on how you've seen the competitive landscape would be helpful, please.
So we see them variably in our sales campaigns, but we don't see them in the very largest accounts. We don't see them in our global customers. And we're told by our global customers that they rely on our size, our strength, our scale and our reliability to service them. But yes, we do see various competitors from time to time, not in our biggest customers.
That's helpful. Thank you very much.
Your next question comes from Friaj Ahman with Citigroup.
It's Friaj. Just a a few questions. Just first thing on sales and marketing investment. I mean, Kevin, if you could just talk to the quantum of the investment. And maybe, Mark, where are you targeting this as well?
Is it the sales and marketing investment? Is it Figure eight? Is it LiDAR?
So we're not disclosing the quantum of the investment other to say that it will have an impact in margins, which we've illustrated in the pack. In terms of where we're deploying that investment, we currently have good focus on our large customers. And so we want to strengthen that focus more broadly across the technology market in The U. S. We also want to tackle other market verticals in The U.
S, autonomous vehicles being one, financial services being another, health and pharmaceutical being another. And then we're also able to target midsized companies very effectively with the figure eight platform. So we're setting up sales teams to go after each of those broad segments. We're also investing in sales in The U. K.
And Europe and furthermore investing into sales presence in Asia Pacific outside of China. So it's fairly broad brush, Suraj, and we've balanced the resource with where we believe the opportunities are in terms of market size and market stage of maturity.
Got it. And just maybe just thinking through the margin, as you said, the first half margins at mid teens, full year margins at high teens. I mean, is the expectation that margins will be up year on year at the full year level? And two, just thinking should the second half margins be the base going forward because that sort of implies 22%, 23% margins in the second half. Should that be the base going forward?
How you want do
get margins in the 20s when we say high teens?
I'm sorry for the second half. No,
we maintain the practice Suraj of keeping margins in the mid to high teens whilst also investing in growth. So we're just calling out specifically that early in the year, in the first half, we'll have some sales resource that's going to cost money that will take a few months to deliver revenue. So there will be a softening in the first half. But for the full year, we will return to those mid to high teens.
And just confirming, is it just clarifying, do you expect margins to be up year on year for the full year? Or is it too early to say?
Too early to say.
Just last
Suraj, if you look at the guidance and you look at that numbers, I think you get the answer there. And then obviously, I think it's consistent with our theming. Certainly, we basically strive to get efficiency in our margins and then redeploy it back into the business. In 2019, we did that with engineering. We continue to do that in 2020 but to a lesser degree because we established that base.
2020 now is establishing our base in sales and marketing. We're doing that and obviously going to the future we'll identify other areas of growth we needed and obviously look to redeploy where appropriate.
Sure, very clear. Just lastly, on the renegotiated deal, I mean pretty positive keeping pricing flat for five years. But could you just talk to any commitments in volumes? I mean, have you have they consolidated the providers, as you said, for the large customers, haven't seen as a preferred supplier? So have they any commitment on volumes in that level in that deal, please?
No. There's no commitments to volumes. The only commitment is to keep prices flat over the next five years. And as you say, that is positive because it mitigates some margin pressure, but there's no commitment to volumes.
Your
next question comes from Josh Kanarkis from UBS.
Hi, Mark and Kevin. Can you hear
me okay?
Hi, Josh.
Hi, cool. First question, just a follow-up on that five year deal. Are you able to say whether that is your largest single customer, that deal or just a large customer?
No, we can't. We've made the statement, that's it.
Yes. Got it. And then just to clarify, so is that holding prices from FY 'nineteen levels moving forward? Yes. Right.
Perfect. And then just following on from the margin commentary before. So just to be 100% clear, think it was pretty clear in the outlook statement, but the high teens margin is for the full year 'twenty result, not necessarily just the second half? Yes. Got it.
And then just in terms of, I guess, moving forward, do you expect sort of that cadence in investment in sales and marketing to continue into 'twenty one, etcetera? Or is this a sort of more one off in nature?
Probably more one off. I mean we'll continue to invest in sales for growth. Like last year, we made a big investment in technology. This year, we're making a big investment in sales and marketing to build that base. There'll be ongoing investments that will be more incremental in nature going forward.
Perfect. And then just government contracts. Historically, we've talked about being a pretty significant opportunity. And I think you mentioned some help around disaster relief there. How are you going in the progress of getting a sort of prime contractor license in?
And do you think you'll have any progress on other departments like defense, for example, within this calendar year?
So we're close to getting things all set up and complete. We expect that to be finalized in Q2. And that will provide us with the opportunity to bid on business as a prime contractor. And we have a solid pipeline of opportunity, and we're optimistic that, that will play out and deliver meaningful revenue this year. But of course, we've got to win the business.
Yes. Of course. And is there many other prime contractors providing annotation services that you know about in the market at the moment?
Not specialists like us. We're working with a prime or we're a sub to somebody at the moment. So you could argue that they're providing labeling services, but we're actually doing it. But we're unaware of any other specialists.
Okay, perfect. And just one really quick final one for Kevin. Just around the AASB 16 impacts, Kevin, I think in the second half for the right of use depreciation and interest, it implies about sort of $3,000,000 for the second half. Is that and $5,000,000 was the full year. Is that sort of a run rate we should expect into the future?
Or can you guide us to any changes you expect from that?
Yes. So just to kind of link it through, when we released our twenty eighteen report, we talked about expected EBITDA impact of $1,500,000 for 2019. And so what happened, we were pretty close to that, but we actually brought on some new premises in 2019. And so that impact we've factored into our guidance. In addition to that, we had additional guess additional rental which obviously didn't flow into EBITDA and that was for new premises.
Obviously, it was new it wasn't factored into the guidance and obviously it wasn't factored into the numbers. Essentially your numbers are in the ballpark And yes, be a good proxy of going forwards.
Yes. So just to confirm, the second half run rate is a reasonable proxy for going forward.
Yes.
Great. Thanks very much guys.
Thank you.
Thank you. Your next question comes from Stella Wang, Private Investor. Please go ahead.
Hi guys. Thanks for taking my question. Just a couple of them. Firstly, following on the contract towards a big customer, are you looking to do similar agreements with your other top five customers? And has that pricing now set flat?
Has it been going up or down in the last two, three years?
Stella, we have regular conversations with customers to try and get assurance future assurance on a variety of levels. So we constantly try that. In this instance, what we were able to achieve is an agreement that held prices flat. The prices we had you may recall, I think 2017 or 2016, we had a lot of pricing pressure. Since then, prices across our customers have been more or less at a constant level.
We always are concerned about price pressure, so we were quite happy to strike this deal because as volumes go up, people are demanding of better prices. But in general, prices have been around this level, and this mitigates any future pricing pressure.
Second question, during the lockdown in China recently, did any of your global scale and technology advantage placed you in a better operational form compared to your Chinese competitors? I'm asking this because I want to see if any of your competitive advantage shines through that might benefit you going forward to get a stronger traction coming out of the virus lockdown?
So our sort of global capabilities have put us in a really strong position in China because we bring those capabilities such as different languages, etcetera, to bear in the Chinese market. We bring our know how into the Chinese market. We're not solely reliant on the Chinese market. So we can invest into China whereas other local companies may be impacted by or more much more by the virus situation. So in general, our global capabilities are to our advantage.
And as I said earlier, domestically, we'll I think we'll be able to weather the impact of the virus better than our local competitors.
Good to hear that. Nearly lastly, what's the retention rate for Figure eight? Rate of ARR going up, how's retention, though?
Pretty good. It's no worse than history. We did flag at the half that retention was an issue that we were focusing on. We see now through Q3 and Q4 much stronger engagement with staff. The integration plan is ongoing, that's combining teams and cultures and all of those other things.
So we're pretty pleased with how that's going at the moment. And we don't see any retention issues other than what the business has experienced through the course of its history.
Great. Last question from me. Can you give us some sense about the R and D CapEx going forward? You previously before F8, you guided around million dollars and then that's impacted or helped by FIGURATE acquisition. Going forward, how should we see this line?
Yes, Stella. So the best guidance to give you is to use the FY 2019 number as a proxy. So FY 2019 was around 2.9%, quarter 3%. Around that range is a good guide for 2020.
Great. Thank you. That's all from me.
Thank you.
Thank you. Your next question comes from Jonny Hoon with Evans and Partners. Please go ahead.
I just wanted to ask, it looks like you guys have called out some relevant contracts in Blocker Moen in the financials. Can you just talk more a little bit more about that?
Sorry, Johnny, your voice is quite low. Could you speak up, sorry?
Sorry, can you hear me now?
Yes, I can. Thank you.
Yes. So it looks like you guys have called out some relevant customer wins in the financials. Can you just talk a little bit more about that?
Some relevance wins?
Some relevance customers.
Yes, it's coming mainly from existing customers and existing projects with other existing customers. There has been growth in new customers as well, but obviously the size of the existing business is so large that dominates.
Okay. That's all from me. Thank you.
Thank you.
Thank you. Your next question comes from Tony Mitchell with Ord Minute. Please go ahead.
Hi, good morning. Kevin, can you tell us what was the dollar amount of those timing differences that came through in January?
Well, Tony, maybe probably best way to answer this is that basically the most of the analysts have cash balances of circa $100,000,000 and we reported 75,000,000 So essentially if you think about that as a range, mean, should help you with that answer.
All right. Thank you for that. And also, can you just by segment, can you tell us what percentage your largest customers represent of revenue and EBITDA?
We can tell you about revenue. We disclose that in terms of the top five. The top five make up 88%.
Top 88%. Okay. Thanks very much. Thank you.
Okay.
Thank you. Your next question comes from Chris Savage with Bell Potter. Please go ahead.
Just that comment in the pack figure eight passed the profitability ahead of plan. Does that just refer to the lower loss figure eight generated in 2019? Or do you expect to get to positive EBITDA quicker than you anticipated like when you flagged it at the acquisition last year? Both. So last year, you said you expected EBITDA positive contribution in the second half of twenty twenty.
Should we now think about it in the first half? So
yes. Having said that, the integration of Figure eight into Appen will make that sort of harder to see going forward.
Is it one of the reasons why you expect a stronger margin in the second half because it gets to EBITDA breakeven and positive in this half, but then next half, we get a better positive EBITDA contribution?
One off, but I think we'll get the bigger reason is the investment in sales and marketing in the first half.
Sure. Sure. And just that new U. S. Government customer you caught out in the pack, what area of the business was that in?
Was that figure eight?
Yes.
So you made that comment at the half that the Figure eight platform was being implemented behind government firewalls. Is that was that the preliminary work done and then that converted into a government contract?
So when we acquired the business, they had government customers and the platform was implemented on government or behind government firewalls. And this win is another installation of the platform behind government firewalls. So once you sort of get behind the firewall as it were, it makes it easier to win the next deal.
Your next question is a follow-up question from Suraj Ahmed. Please go ahead.
Thanks. Just on the government secure facility market, can you just clarify that? So is this I mean, I thought Figure It, as you
said, is a platform. So are you investing
in the secure facility ahead of potential work that could come in? Or just trying to understand that, please.
Yes. So we are investing in a commercial secure facility in The U. S. If you look, I think, on Page 18, we make mention of a facility in Dallas that we signed a lease for, and we'll be staffing up. And that gives us the opportunity to work with certain data types that can't be exported out of The U.
S, private and personal PII type information. But that's on the commercial side. We are looking at a government secured facility in The U. S, but it will be contingent upon growth from that market sector. So we're not actually doing anything at the moment, but it's a possibility.
So the Washington, D. C. Office is more from sales and marketing, right?
Yes, yes. Sorry, sorry, I missed it. Yes, that's a fairly small office, and it's to support the customers, yes, sales and marketingcorporate.
Got it. And secondly, you did mention, I mean, just the work in hand to the full year revenue conversion. I mean, last year, I think it was around 30%. Any reason why it should be different? Because I understand figure eight is a bit more recurring revenue, etcetera.
So just trying to understand, should that be different this year around or just assume similar conversion?
I think it's safe to assume similar, but also just be aware that the more customers we win, the different the billing cycle. So it's never going to play out exactly the same year on year, but it's a safe starting point.
Got it. And just on the Speech and Image revenue, Kevin, you did say that you expect margins to be flat year on year. But it looks like Speech and Image revenue declined in the second half year on year. How should we think about that going forward? Yes.
Have you won more
No, there's obviously sensitivity to either increasing or reducing revenue, right? We've got a stable base. We're investing in that base for delivery. And obviously, as you know, the life cycle of speech and image projects is a little bit different to relevance where it's much more susceptible to client investment cycles and product cycle. So depending on when is the concentration or lack of concentration of revenue activity in a given half that could impact the margins.
But if you obviously blend it over a period of time, it kind of evens
Your
next question comes from Curtis Larson with NORTH Capital.
Hi, guys. Just a couple of questions on outlook. You highlighted on your last point on your guidance page that you review capital management dividend policy. Is there any change in thoughts just given you've bedded down two transactions in the recent past? Have you put that there because you're thinking differently on M and A or
So hi, Curtis. We sort
of had that statement there in the
last few releases. And that's because as we get as the business gets more complex and demanding and there's M and A and debt and other things that might use the cash. We're just flagging to investors that we may choose to use that cash in other ways rather than paying it all out in or paying out large amounts in dividends. So we want to keep a bit of the cash or keep our powder dry to help with the growth of the business.
Okay. And one more question. Is there any numbers from China within your guidance? There's Are you factoring anything in, I guess?
Yes. It's bundled in. I mean, per the statement on the coronavirus, it's negligible in the scheme of things. It's early days in China for us, but it's included in the guidance.
Okay. Thank you.
Thank you.
Thank you. Your next question is a follow-up question from Quinn Pearson. Please go ahead.
Hi, guys. Just quickly one more. On Figure eight, one of the thesis of that acquisition was the synergies. One synergy component was cost savings by speeding up the annotation by using the Figure eight platform. Is that part playing out?
Are you, I guess, your crowd costs by using some technology in the annotation? And are you able to actually bank those savings? So
it's early days, Quinn, but it is playing out. So for example, we've introduced or we're piloting machine learning assisted transcription using speech recognition. And we're seeing efficiency gains, I think, in the early 30%, 33% or 35%. Mind you, these are in pilot projects. So if we can play that out over time into production work, it will be meaningful.
But overall, it's we are seeing the benefits, but it's early days.
Helpful. Thank you.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Brayan for closing remarks.
Thank you, and thank you, everybody, for joining us this morning. We look forward to meeting you or seeing you as we conduct our roadshow. And once again, we appreciate your interest in our company and your ongoing support.
Thank you
very much. I hope you all have a great day.
Thank you.