Earnings Transcript for APXYY - Q4 Fiscal Year 2020

Operator: Thank you for standing by and welcome to the Appen Limited FY 2020 full year results conference call. All participants are in a listen-only mode. Today's all will be one hour in duration. There will be a presentation followed by a question-and-session. [Operator Instructions]. I would now like to hand the conference over to Mr. Mark Brayan, CEO. Please go ahead.

Mark Brayan: Yes. Thank you very much and hello everybody. Welcome to conference call for Appen's results for the full year ending December 31, 2020. My name is Mark Brayan. I am the Chief Executive and I am joined today by our Chief Financial Officer, Kevin Levine and Head of Investor Relations, Linda Carroll. Our results presentation was loaded this morning and is available on the ASX website and I will be referring to that throughout and we will take questions after the presentation. So to page three to commence. Appen makes artificial intelligence work in the real world. Products that use AI are developed using a process called machine learning in which an algorithm learns by looking at countless examples to find patterns that enable it to mimic human functions such as reading, speech, vision and making choices. The examples are known as training data. And the more data, the better the AI performs. Importantly, the training data must match the use case and the real world situation. The AI won't function correctly if the data doesn't represent the real world. Appen is the world's largest provider of A I training data. We leverage our unique technology and are proud of over one million global workers to collect and prepare large volumes of high quality training data for the world's leading technology, automotive, financial services, retail and healthcare companies as well as government agencies. And we do this across a variety of use cases, some of which are on page four. We provide human relevance data to search engine providers to ensure they serve out relevant and advertisements and do so consistently and importantly without bias. We provide 2-dimensional and 3-dimensional image training data to autonomous vehicle companies for their self-driving car initiatives as well as speech data so drivers can safely access technology hands-free. We are providing image data for augmented and virtual reality that will train the systems to recognize the actions of the user. This is an exciting new area for us that opens up markets such as gaming. We have a long track record and considerably expertise in speech and natural language data and we continue to support the development of chatbots and other customer experience technologies. Finally, e-commerce, a growth area in the recent pandemic required our expertise in search and natural language processing. If you could turn to page five for our 2020 full-year results. We are very pleased to deliver another solid year of growth for shareholders. The growth is not to our usual standards for reasons we will get to but we are nonetheless very pleased to deliver this result given all the challenges in 2020. To borrow a sporting metaphor, 2020 was a year of two halves. We had a very strong first half with revenue up 25% on the back of relevance revenue growth and an FX tailwind. The second half was a different story, as we know from the December trading update. Revenue was slightly down on the first half due to factors that I will go into. And we also faced a stiff FX headwind. Overall, though, 2020 growth was solid on 2019 and our long term prospects remains very strong. Revenue in 2020 was up 12% percent to $599.9 million. Underlying EBITDA of $196 million was up 8% at a margin of 18.1%. And we are pleased to announce a full year dividend of $0.10 per share, up 11% on the 2019 dividend. In addition to the FX headwind and you can see the effect of that on slide 17, the second half was impacted by a number of pandemic-related factors including COVID-19 resulted in an unsurprising slowdown in online advertising in the middle of the year. Our major customers rely on advertising, their major source of revenue and hence they reacted by deferring some projects and reallocating resources to new product developments to lessen their reliance on advertising. This in turn impacted our revenue to the extent that we did not see the uplift in revenue from our major customers in Q4 that we have seen in other years. Further, our B2B selling motion was impacted by the shift to working from home caused by the pandemic. Our sales teams and our customers took a quarter or two to move from survival mode including setting up at-home offices and technology to business as close as possible to usual mode and a return to pre-pandemic deal cadence. Finally, many of our small customers were and continue to be impacted by the pandemic, although the overall impact of them on us is not material in the scheme of things. If you could turn to page six. 2020 was a breakout year for new customers wins. We added 136 new customers last year and you can clearly see the slowdown caused by the pandemic and a strong uplift in Q4 as the sales motion recovered. These wins were across all data modalities and many use cases. I will share some of them later in the presentation. These wins were enabled by our investments in sales and marketing as well as our annotation platform which we acquired with Figure Eight in 2019. These customers are small and/or early in their AI journey and hence they won't have a material impact on our revenue in the near term but they provide a foundation to build on and give us confidence that our offerings are attractive and competitive in the market. We also had a substantial increase in new projects across our top five customers. Many of these were enabled by the customers' use of our annotation platform. They can cover more use cases and more data types using our platform than their own technology and the platform integrates with their operations, improving productivity and quality as well as increasing customer retention. These new projects are doubly important because these are projects that customers our investing in to reduce their reliance on advertising. That is the projects where resources were reallocated to late last year. These products are early in their life cycle and haven't replaced the revenue impact we saw in the second half but they will grow in time. We are also very pleased to report high growth in China. Revenue was up 60% quarter-on-quarter and we count China's major technology companies as our customers as well as many others in autonomous vehicles, health and education. Page seven and we are also pleased to report a material increase in committed revenue to 31% of our total revenue in the second half, up from 12% in the first. The increase in committed revenue is significant because it gives us more revenue visibility and predictability over time. Chart on the left shows annual contract value or ACV at the end of each half as well as at February 1. Clearly, we had some substantial renewals early in 2021 but a dip from the first half to the second half 2020 shows the impact of the pandemic on our smaller customers, many of whom have committed contracts us. While we continue to grow our committed revenue, our cohort chart on page eight shows a high degree of revenue repeatability year-on-year regardless of the contract type. This is because our customers rely on us for an ongoing supply of training data to ensure their products stay relevant and improve in quality and utility. Yet clearly they have some flexibility in their data needs as we experienced in the second half but the long term training gives us confidence. In regards to our major customers and projects that were deferred or impacted by resource reallocation, we are seeing most of the material projects that were deferred in second half recommence in the first half of 2021 and present indications suggests a steady return of the projects that were impacted late in 2021. On page nine now and relevance continues to be the bedrock of the business. Revenue was up 15% and EBITDA up 8% with the second half impacted as already explained. I should also point out at this stage that our work from home delivery model remained resilient through the pandemic, ensuring that we were always able to support our customer requirements. The chart on the right shows healthy year-on-year growth to relevance and this is due to a few factors. Firstly, AI that relies on relevance data requires constant refresh to stay relevant to uses and unbiased. Secondly, delivering relevance data at scale requires a highly specialized set of capabilities that we have developed over many years. These include our crowd management technology, our annotation platform and our multinational, multilingual crowd of over a million people in over 170 countries. The crowd is especially important. Our customers require data that is culturally and linguistically accurate and only available from in-country workers. It's not amenable to delivery from a single low-cost location nor is it practical or cost effective to in-source relevance work, especially when you consider that we paid relevance workers in 87 countries last year. The crowd also provides the necessary human aspect to the relevance data, which is essentially a human's judgment between choices, making it near impossible to automate. Our relevance customers are some of the smartest data scientists on the planet and they would have automated it already if they could have. We can improve productivity with our crowd however. We are using AI, for example, to automatically allocate tasks to workers based on their skills and track record, not unlike a product recommendation that you get in an online store. I will have more on this later. Finally, the specialized nature of delivering relevance data at scale means there's two meaningful players in this space, us and one other. We don't see a change to the competitive environment, especially in relevance. And the general hype around our space is amongst companies we know well and have known for some time. Page 10 and speech and image which was down on a breakout year last year but still on an upward trend which is clearly visible in the chart on the right hand side of the page. AI products that mimic the speech and image capabilities of humans share some data requirements with relevance. The data must fit the use case, representative overall and be of high quality, but the refresh rate is lower. An AI a product that, for example, automatically recognizes speech in a particular language requires modest amounts of data to account for changes like new words or accents or acoustic the condition and only needs a lot of data when it needs to support a new language. As such, data needs are more cyclical and tied to the product development lifecycle. Hence, we have seen some ups and downs in the almost 25 years that we have been providing training data but the long term trend has always been positive. It's worth noting also that we are doing more image and video work including in augmented and virtual reality. This is very exciting and could be a growth area with applications in many markets including gaming. On page 11, we have outlined our growth investments for 2020 which were dominated by sales and marketing, most of which was in the first half as we ramped up our go-to-market capabilities. The chart also shows a tidy FX gain from resetting U.S. denominated debt in our hedge book. Page 12 and our China business. We are pleased to report rapid revenue growth in China at 60% quarter-on-quarter and our gross margins are improving. This progress validates how our marketing and strategy. We count China's major technology companies as customers across multiple projects and we have won other customers in the autonomous vehicle, health and education technology sectors. We are working at all data modalities, speech, relevance, image, video and LiDAR. It's also very pleasing to win speech work in local dialects against local competitors. On page 13, we highlight some sales and marketing successes including 136 new customers and we increased the number of projects in our top five customers by 34%. Both outcomes are significant. The high number of new customers, although small and/or early stage, validate the effectiveness and competitiveness about products and services and provide a solid foundation for future growth. The new product wins in our major customers are the very projects that drew resources from our major programs late in the year and while early stage they are exciting new areas and some could be substantial. They are also driving more volume through our annotation platform, validating the value that our customers derive from it and strengthening our relationship with them. The use cases on the rise are rich and varied and all new from the ones presented at the half. Along with more speech and natural language customers in automotive, air traffic control and financial services, we are doing more image work in AR, VR, autonomous vehicles and as well as a lot of document-based OCR, optical character recognition work for applications that expect information from scanned documents, such as invoices or expense receipts. Page 14 includes some technology highlights Appen Connect is maturing in its security, scalability and feature set. We now have an AI engine that automatically matches workers with tasks and greatly accelerates project ramp up time to value. We are also using AI to catch fraudulent and mischievous workers which saves us money and improves data quality, which is both good for our customer and for us. The resulting efficiencies improve our productivity and will, over time, improve margins. Our annotation platform is also benefiting from AI. We have AI assisted annotation or pre-labeling for multiple data modalities such as text, speech, image, video and LiDAR. And they increase the speed of annotation buy up to six times. We are also using AI for some labor intensive data process such as splitting larger datasets into the discrete data points that our customers require. This lowers our unit cost yielding high margins and enabling more competitive pricing, should we need it. And we have recently launched a mobile app enabling crowd workers to engage with us on their phones and tablets which greatly improves their utility and experience. Our government team, on page 15, is doing well having faced multiple challenges in 2020, including the pandemic, the U. S. presidential election and Brexit. Growth was a little slower than hoped in 2020 but we are optimistic that 2021 in the government market is still fundamentally attractive. I would now like to hand it over to Kevin to talk you through the financial slides.

Kevin Levine: Thank you Mark and hello to everyone. Total revenue was up 12% than the prior corresponding period, driven by continued strong growth in relevance which is up 15%. Relevance benefited from increased amounts of data annotation in both existing and new projects with existing customers. Our normal historical revenue growth pattern which sees a skew to the end of the year was impacted by the strong AUD in the second half as well as our major customers response to COVID-19 and the changes to their activities and priorities. Overall, though, our major customers have been solid and a source of strength during the pandemic. Speech and image revenue was down 10%. Speech and image projects are cyclical in nature heavily dependent on customer timing, investment and product lifecycle and require less ongoing data refresh than relevance projects. As a result, this can significantly influence performance at a half-and-half, year-on-year basis. This was evidenced by some significant project completions and maturations in FY 2019 who are waiting the next product and investment ramp-up cycle. In addition, COVID caused some project cancellations and delays, impacted new business activity and data collection projects. This was somewhat offset by growth in China and continued growth in a large transcription project that started in 2019 and continued to ramp up in 2020. Underlying EBITDA of $108.6 million represents an 8% increase over the prior corresponding period.. This was also impacted by investments mainly in sales and marketing and China in order to drive long term sustainable growth performance. The incremental increase in sales and marketing expense of 50% and increase in China of 117% was somewhat offset by strong expense control in the second half of the year. Other expenses reduced by 11.6% half-on-half and any employee expense increased 6.9% half-on-half compared with 37.9% growth for the full year. Management remains committed to prudent management of the cost base and the prioritization of investments to drive future growth and efficiency. As a result, the underlying EBITDA margin of 18.1% was down from 18.8% in the prior corresponding period. Underlying EBITDA includes an FX gain of $6.8 million comprising a realized gain of $4.7 million and restatement of U.S. dollar denominated debt drawn to fund the Figure Eight earnout payments. This accounted for most of the first half FX gain of $3.6 million. It is also comprised of a $2.1 million unrealized gain and the restatement of the hedge book. Excluding the impact of the FX gain and the investments mentioned previously of $12.7 million, there's also an underlying EBITDA of $114.5 million is up 13% from the prior year results with a margin of 19.1%. And just a very important point of clarification on this FX gain. To explain how we are thinking about this, as we feel some people may not be thinking about this in the same way or maybe in the correct way. The strong AUD hit our performance in H2 as our revenue was impacted by $15.8 million and our underlying of $4.2 million. This impact is included in our EBITDA result of $108.6 million. On the flip side, because of our hedge position, we were able to achieve a hedging profit of $6.8 million. So as we include negative translation impact, so too should we include the positive hedging impact. Alternative treatment would be to exclude the negative translation earnings impact of $4.2 million and the FX gain of $3.2 million in the second half which would see a second half underlying EBITDA increase by $1 million. Underlying NPAT of $64.4 million represents 1% decrease from the prior corresponding period. This was also impacted by the after-tax cost of the investments as well as increased amortization resulting from more development work done from more engineers. The effective tax rate for the period has reduced to 20.5% from 24.4%. The effective tax rate is subject to overseas tax rate differential and fluctuations from the tax effects of movements from expensing and vesting of employee performance shares. Excluding these performance share related movements, the normalized tax rate is circa 28%. Please follow me on to page 17 where we talk a bit more about the currency impact. We do have a currency impact when we report and that is because almost all revenue and earnings are generated offshore and mainly in U.S. dollars. And as a result, we always show the constant currency impacts. The full year AU/U.S. rates of $0.6904 was close to our forecast rate of $0.70, resulting in an overall increase to revenue of $6 million and a reduction to underlying EBITDA of $0.6 million. However, the half-on-half swings were very significant. In the first half, FX tailwinds increased revenue by $21.8 million or 7.1% and underlying EBITDA by $3.6 million or 7.3%. And as we discussed earlier, in H2 the strong Aussie dollar resulted in reductions to revenue of $15.8 million or 5.4% and to underlying EBITDA of $4.2 million or 7.1%. Over the page, on to the balance sheet. And through solid operating performance and effective working capital management, the balance sheet continues to strengthen. Cash on hand at year-end increased by $3.1 million to $78.4 million. The decrease in trade receivables of $51.7 million should be viewed in conjunction with the increasing contract assets of $33 million as the relevant invoices in respect of completed work at year-end are pending satisfaction of customers' billing milestones or billing period. A majority of the contract assets were subsequently invoiced on January, 1 2021. And as of February 16, 80% of these invoices have been paid. Receivables also reduced due to delays experienced with customer fees around the end of 2019, subsequently receiving in early 2020. Non-current assets comprised many goodwill and identifiable intangible assets, mostly arising through acquisition. Following a detailed full year review, we reported significant headroom in the carrying value of these intangibles. There was no debt at year-end as debt drawn to fund the Figure Eight earnout payment was repaid in August from cash reserves. Final dividend payment has increased to $0.055, up 10% from the 2019 final dividend and is franked 50%. Over to the page with the cash flow. The cash balance of $78.4 million was negatively impacted by the year-end conversion of cash held in USD at strong AUD levels. There was positive impact from the receipt timing at the beginning of the year, as mentioned above. Cash flow from operations is strong and has increased by 39%, driven by effective working capital management. Cash has been effectively deployed for debt repayments, tax, dividends, CapEx, operating expenses and growth investments. Cash conversion remained strong at 104%. And I will now hand you hand you back to Mark for the rest of the presentation.

Mark Brayan: Thanks Kevin. On slide 20, we have made good progress on our ESG initiatives in 2020. Our crowd NPS score is strong at 48 and we are implementing out crowd code of ethics that provides fair pay and open communication and protects privacy. We tackle issues as they arise and enter 2021 with a much improved process than the year before. Our employees are understandably a large focus of our attention this year as we tackled the pandemic together. I am proud to say that we lived our values, grit in particular and worked hard, stayed healthy and saw improved employee engagement despite the challenges of COVID.. We continue to focus on material, social and environmental issues including our work with the World Economic Forum and Translators without Borders and we have released a new environment position statement. In conclusion, the market opportunity for us to remains strong. The chart on page 21 shows ongoing high growth and this is due to the expansion of use cases, projects and data refresh. We feel fortunate and privileged to contribute to such a dynamic and expanding market. To page 22 and the outlook. It is an uniquely challenging year to provide guidance as the paucity of guidance from other companies shows, but we are trying to be as transparent as we can despite this. Our order book is solid at $240 million and this is expressed in constant currency to allow comparison to last year and it excludes the large recently resigned ACV contract also to allow comparison to last year. Underlying EBITDA for the year is expected to be in the range of $120 million to $130 million, a gain expressed in constant currency and that's 18% to 28% up on last year. In USD, that's $83 million to $90 million and that's growth in the business of 17% to 27% and we are providing the USD figures to assist year-on-year comparisons. Finally, we anticipate EBITDA margins in the high-teens. The outlook reflects some near term certainty due to the pace of the economic recovery, the evolving regulatory environment facing our major customers that could necessitate some changes in their priorities. The pace of these changes may weigh on our first half growth. That said, we are happy to be closely aligned with our customers now and in the future. They are some of the world's most forward thinking and dynamic businesses and along with old and new customers and projects, the AI industry tailwinds, our position as the largest player in the market, more committed revenue at crowd and our technology, all put us in an enviable position of strength for continued growth. To the final slide and thank you for your attendance on the call and on going support and interest in our business. Before we open the call for questions, I would like to thank all of my teammates at Appen for the hard work and dedication and for delivering this result to all of you. And now back to the moderator for questions. Thank you.

Operator: [Operator Instructions]. The first question comes from Michael Aspinall with Jeffries. Please go ahead.

Michael Aspinall: Good morning Mark, Kevin and Linda. Thanks for taking my question. So just to start off, you mentioned that some of the large mature our projects that impacted the latter half of FY 2020 are recommencing. Has this started in earnest yet? Or is that still to come over the next few months?

Mark Brayan: Hi Mike. It's more the latter. As I stated, steady return to these projects. So we are monitoring how that improves through the years. But we are absolutely seeing a return to some of that work.

Michael Aspinall: Okay. Just thinking about the timing of that in FY 2021 and FY 2022. So that's helpful. Thanks. And so some of that impact was customers reprioritizing resource. Do you have a sense of how your large customers are progressing in terms of increasing the total available resources for them?

Mark Brayan: So we do know that our large customers are busily ramping up technical resources, engineers and the like and there's been some public statements to that effect. We also know though that companies that used to work very collaboratively and closely in an in-office environment, it's taking a while for systems and processes and cultures and everything to be replicated in the current at-home environment. So that is to say that they are actively ramping up resources but it's taking that a little longer under the current working conditions than hoped.

Michael Aspinall: Okay. That does makes sense. And the new product areas that they are investing in, is it safe to assume that you are working on pilots across majority of those at the moment?

Mark Brayan: I don't know whether we are across. I don't know all of the things they are working on. So it's hard to say what percentage of those things that we are working on. But the 34% increase in projects is an indication that we are working on a bunch of new areas.

Michael Aspinall: Yes. And then just the last one for me. On some of those new product areas for those large customers, can we just think about how they might progress in terms of just growing into the larger projects like [indiscernible]?

Mark Brayan: It's hard to know for sure, Michael, because a lot of the growth or the growth in data requirements can depend upon the rollout of the product. For example, it might work in one country and they want to roll it out in country-by-country or 10 countries at once. And that changes the data dynamic. However the nature of the products, some of the products that we are aware of that we working on, they are data heavy. So there is potential there. But it's a little early to know for sure. I think over, Michael, we are pleased that we are involved in so many new projects rather than just being, which shows from our customers' perspective, that they regard us an important contributor to their growth. Rather than just pushing us to one side as they reprioritize, they are actively including us in these developments.

Michael Aspinall: Okay. Great. And then just the last one for me. You are debt free again. Are you seeing plenty of options for value-added acquisitions at the moment? And how would you prioritize something that may add capability or access to news verticals?

Mark Brayan: So probably the latter. We are pretty pleased with the capabilities we have got and particularly the technical capabilities we have got. And many of the companies that are highly technical in our space are very early stage and then probably not of interest or are probably not financially attractive. So getting into new areas with businesses that are growing well and profitable is the focus for us.

Michael Aspinall: Okay. Great. Thanks for that.

Mark Brayan: Thank you.

Operator: Thank you. The next question comes from a Garry Sherriff with RBC. Please go ahead.

Garry Sherriff: Yes. Hi Mark, Kevin and Linda. A few questions. The first one, just on your calendar year 2021 EBITDA guidance. That's at spot rates of $0.69. I just wanted to clarify or confirm your FY 2021 at current spot rate price, if that's possible.

Kevin Levine: Garry, hi. No, we have specifically provided guidance at constant currency in U.S. dollar rates Essentially, the volatility in the FX makes it very difficult to reach a comparison. And so therefore, Mark called that that the U.S. dollar numbers and those growth rates 17% to 27% is a really good barometer. It gets rid of all the noise, I guess, in terms of spot cut and whatever view that's been taken. So spot changes day-by-day. Therefore the view we have taken just around that guidance is constant currency but also a barometer used to help analysts, I guess, compare. And what we are saying is a growth rate compared to what growth rates they had in terms of what they had year-on-year for growth.

Garry Sherriff: Okay. Yes, just because I was just looking that you seem to exclude FX gain from underlying EBITDA when you are calculating the implied calendar year 2021 growth. Yet you have included, so yes, I was just trying to get some clarity there. But that's fine. We can do that offline.

Kevin Levine: Thanks. No offense, really. I think we would love to address that. So we have talked about obviously what the newest wins in 2020 was just a restatement of performance obviously at spot. And then we had the hedge position which then accounted to that. When you think about 2021, essentially from a 2021 point of view, there is no assessment in terms of what the future FX is. There is no obviously impact in terms of what that restatement is relative to what was expected. And so therefore, in order to get like-for-like, certainly there is no evidence assumed anything from an epic gain or loss into 2021. At the same time, we haven't seen any type of movement from the translation in terms of how the currency should move. Essentially, the difference there is, in order to get that like-for-like, because there is no restatement factored in and there is no FX assumption, then we take out the FX because essentially that only there as a result of, I guess, hedging around the translation. There is no impact or assumption of the translation in 2021, therefore there is no room or not relevant in terms of having the one-off FX position included in there.

Garry Sherriff: For calendar year 2021 EBITDA margin then in the high-teens. Could you maybe just clarify? Do you expect them to be flat or grow? And I guess the second question around that is, what sort of first half, second half spend skew should we be thinking about because I did note that you do flag, I guess, it sounds like quite a weak first half and a big second half? So I just wanted to get some sort of sense around margins and also that skew, if possible?

Mark Brayan: Yes. Hi Gary. So we are planning for margin growth in the year. However, due to the uncertainty that we flag in the first half, we still think it will be in the high-teen levels. In terms of the first half, second half split, again, uncertainty in the first half you can probably see it skew to the second half. But time will tell if we get through the first half as to exactly what that is.

Kevin Levine: I think the point we are calling out in terms of what you would normally have seen for us in terms of those split vis-à-vis is it will be quite different than last year for the reasons we have mentioned.

Garry Sherriff: Okay. And the last question. Just in terms of the content relevance revenue, just what portion of that advertising related? I imagine the vast majority, but I just wanted to clarify that first.

Mark Brayan: It's substantial. We don't split it out like that. But it is substantial portion.

Garry Sherriff: And are you, I guess, looking forward back in December, is it fair to assume that now when you look at advertising related revenue growth or the profile growth, do you think that's now materially different or more permanent maybe might be a bit more accurate? I mean should we be thinking that the growth topped the content relevance growth is maybe lower from advertising revenue specifically? Any guide on that would be interesting.

Mark Brayan: Yes. It's a good question and it's one that we ask and hence flagging uncertainty in the first half. The thing that's impacting it, Garry, is the speed with which the customers sort of set there overall product priorities. Do they go hard into these new areas and potentially under invest in current areas like advertising? Or do they ramp them both up but at a similar pace? Or do they moderate investment into new areas and get hard in advertising? So that's the nature of the uncertainty that we are flagging. It's the customer's decisions around how they invest in their product portfolio which is giving us some pause for the first half.

Garry Sherriff: Okay. And last one just around the change for the identifiers for advertisers that Apple's proposing for their next iOS update, effectively allowing users to opt out or not share their data. Again, interested to get your views as to how you think this could affect your customers' ability to generate ad revenue and how it might impact you guys once those updates start to roll through in the near future?

Mark Brayan: Yes. Interesting question. And clearly, our customers benefit from a lot of data that enables them to build highly personalized ad targeting engines. And if that data source or if a source of data is troubled is some way, they will either have to change the way they do things or look for another source of data. Some of the projects that we work on is about providing representative data sets of different demographies. So for example, our customer may want some enhanced relevance work in a particular country amongst a particular age group of people and we provide that for them. So overall, this is an interesting area that will cause or may cause or may provide some opportunities for us, if that makes sense, as the customer looks to sources of representative data or if they can't get highly personalized data due to changes in technology.

Garry Sherriff: Okay. Thanks. I will step back in the queue. Thank you.

Operator: Thank you. The next question comes from Siraj Ahmed with Citi. Please go ahead.

Siraj Ahmed: Thanks. Two questions. Mark, just this first thing. Are you seeing any -- if you could just break down the growth into price and volumes? Just keen to see if you are seeing any pricing or price per data point pressures?

Mark Brayan: Hi Siraj. Not overly. It's, I would say, regular pricing pressure. Through the year, we have an agreement with one of our major customers with good floor on pricing. We also have strategic agreements with our customers that keep pricing where it is. We do see pricing pressures in some of the new work and new customers that we do. And it falls into two camps. It's kind of there or thereabout, as to where our pricing is or sometimes it's just wildly different and we don't understand how that pricing comes about. But those instances are amongst, they are very few and very small projects. So overall, there's no sort of material price pressure in the business.

Siraj Ahmed: Got it. And secondly, just on the work in hand number, can you just clarify, do you say that does not include the committed ACV?

Mark Brayan: Yes. We took that out because it messes up the like-for-like comparison. So it's the same methodology, the order book is comprised in the same way that we did it last year.

Kevin Levine: Yes. That contract was basically found after we announced in February last year. So like-for-like, second half.

Siraj Ahmed: Got it. Yes, okay. So like-for-like. But in the year-to-date revenue number, there will be some pickup in work but the work in hand number you haven't put the ACV in? Is that the way to think about it?

Mark Brayan: So the large ACV contract has got a February date on it. So it doesn't feature in the January year-to-date number.

Siraj Ahmed: Got it. And maybe I am just trying to understand this, because if you think on a constant currency terms, the number has grown 14% year-on-year I think the second half growth in constant currency was 6%. So it looks like you are seeing a pickup in growth. Is that fair? Where is it coming from? And also are you assuming the same fourth quarter skew this year in your guidance?

Kevin Levine: Sorry. Sorry Siraj. I didn't hear the last. But just to answer your question here, so what you are talking about is increase in the order book, 14% at constant currency, correct. I would just caution you, obviously that's what we are seeing data points on for the rest of the year and obviously the timing of receipting those orders could have a dramatic impact for guide. But you need to just understand things that can impact that. And sorry, can you just repeat that last point in your question?

Mark Brayan: Yes. I heard it. In regard to the Q4 skew, Siraj, I think what we are calling out this year is a period of uncertainty in the first half that will most likely will cause a skew to the second half. And we are sort of moderating our view on Q4, given what we experienced in 2020. But there's definitely a half-on-half skew due to some uncertainty in the first half.

Siraj Ahmed: Got it. And just last one for me. Just looking at the cohort chart that you into slide eight, Mark. It looks like the new customer that you had, of course that had a bit of slowdown looking at the chart. Can you just talk to that because the dark red one tends to grow but the other one has slowed down a bit, from the looks of it?

Mark Brayan: Yes. The general theme last year, Siraj, was advertising revenue or advertising related programs being impacted by the slowdown in ad revenue. And as I said earlier, our present indication is that there is a steady return to most of those programs. So you are correct in that that customer was impacted and it's because of that general ad related thing.

Siraj Ahmed: All right. Great. Thanks. I will jump back in the queue. Thank you.

Mark Brayan: Thank you.

Operator: Thank you. The next question comes from Lucy Huang from Bank of America. Please go ahead.

Lucy Huang: Good morning, Mark and Kevin. Thanks for taking questions. I have just two. So firstly in this speech and image division, so revenue had declined. So I was just wondering whether you are seeing this, I know you noted that there is just a bit more cancellation of orders and deferral of projects. So what do you think on the competition front? Has there been any change in any of the dynamics there? And then just secondly, is there any way to extract further efficiencies from the business to kind of over time potentially lift that mid-teen EBITDA margin a bit higher? Just wondering whether there is an aspiration and maybe what kind of initiatives or investments are in place to try and achieve that? Thanks.

Mark Brayan: Yes. Hi Lucy. In terms of competition, there's no material change in the competitive landscape in terms of the companies we see. I know there has been some attention on that recently but we have been monitoring these companies for some time. Some of them have picked up funding recently. But that builds on other funding they go have got and in some ways, that validates that the market we are in. So and the competition, it's also helpful to break it out into the various data lines that we work in. Most of the competitors are in the image space. That's the, I guess, the easiest problem to solve. And it's also an attractive area for new entrants because of things like autonomous vehicles, et cetera. Speech and natural language has far fewer competitors. It's a much more specialized spice. And some of the competitors that are getting all the press just don't feature in that space and/or struggle in that space. And then to relevance, which is the most specialized overall because of the scale of the operation and the competitive dynamic remains the same with us and our major competitor. So overall, there is no sort of material shift in the name and number of competitor in the space. To efficiencies, yes, we can absolutely extract more out of the business and that's the plan to lift margins permanently beyond the teens. We ran into a small problem called COVID in 2020 that necessitated us to hunker down on some of our major change programs and focus on our staff and our crowd and our customers. So we haven't progressed some of those initiatives to the extent that we had hoped but they are underway and we are going to double our efforts into 2021 to grow those margins.

Kevin Levine: Yes. Just I think the other point, just to note, that's important here is that given that the revenue can move around is largely tied to product and investment life cycle. It's not really that we lose customers. It's just that we need to wait for the next cycle to come through. So as a result of that, we don't take significant dynamic changes to our expense base as a result of that. And so what that means is that you actually you have a lot of transitivity in terms of revenue to bottomline. And so less revenue with largely unadjusted base, we are not saying we don't look at it, but we need to be aware because we are positioned well for the next cycle that we need to have the support base. So that will obviously still be a big factor in terms of what exactly those margins are on a period-to-period basis.

Lucy Huang: Wonderful. Thanks. May I just follow-up with one last question. So I think you mentioned image is quite competitive, but from a entrants for that space has fewer competitive. I am just wondering, is there are ways to incremental investments, will there be incremental investment in image and speech? And are there some capability gaps in those two areas which may need to be plugged over time? Or do you think you know the focus will shift away from image into speech or just more into relevance more broadly?

Mark Brayan: So I think, our focus area of that capability for us is in automating the speech and image areas with AI. And I mentioned a couple of examples in the presentation and they are still out there for you reference. But the more we can automate the work using AI and that's not just the actual would but the preparation of the data, et cetera, the more we can win, the more we can do, the better our margins, the higher our revenue. So the focus and I wouldn't call it a gap in the sense that our competitors are ahead of us in this area but it's definitely an area that we are focusing on to enable greater provision of data at higher speed and higher quality for our customers.

Lucy Huang: Wonderful. Thank you.

Operator: Thank you. The next question comes from Bob Chen with JPMorgan. Please go ahead.

Bob Chen: Hi. Good morning guys. Two, three questions from me. I was just looking at the full year guidance and you are still calling out some first half uncertainty. I mean what give you sort of that comfort to provide that full year guidance? Are these discussions that you are having with your key customers that are just providing you better look into their pipeline into the second half?

Mark Brayan: So, hi, Bob. The order book includes work that is to be delivered this year and the customer is calling out some uncertainty in the first half but they are placing the order. And so that gives us some confidence that that revenue is there and will be delivered. And I would also point out that all the way through the pandemic, our at-home crowd model continued to deliver into the customer requirements. So we don't have a supply side problem at all. So, yes, it is compensation for the customers. Obviously, we are being very closely in touch with them throughout the year. It's also the fact that we have got many more customers. It's also the fact that we have got many more projects. So there's a lot of optimism in the system and that give us confidence in the forecast and notwithstanding just the general trend around AI continues to be positive.

Bob Chen: Yes. Okay. And then looking at some of the U. S. results such as Q4 advertising results, they came out pretty strongly. How do we sort of reconcile that to the softness that you guys saw into Q4? Is there typically a bit of a delay into timing from the key customers? How does that all work?

Mark Brayan: So lag is part of it but it also goes back to this point that we are making around the uncertainty in the first half as our customers look at their product development portfolio. Keep in mind the history here is, there a lot of large tech players has seen, for want of a better word, unbridled growth, right. They have just gone ahead and they have done what they needed to do. The pandemic was a material sort of event for these companies and in doing so they are looking at their product strategies and what they are doing going forward. And that's not to also discount the regulatory environment that they face. So they have got some headwinds to navigate. Having said that, they are very smart, they are very dynamic, they are very clever and resilient companies and now find solutions and are part of helping them find solutions for these things.

Bob Chen: Okay. Great. And then just touching on the cost base. So you obviously called out that $10 million investment in sales and marketing over FY 2020. I mean what the outlook into 2021? Do you sort of expect another step up in sales and marketing? Or are you going to see how your existing sales and marketing investment goes?

Mark Brayan: Yes. It's the latter, Bob. We will see the cost base normalized through 2021. We go into the year with a full cost base which is another weight on the first half result. But we don't anticipate nor have we budgeted for any big step ups in investment in areas like sales and marketing or technology. And just to remind you, a lot of investment in tech in 2019 and then a lot of investment in sales and marketing in 2020. And more of a normalized spending patent through 2021.

Bob Chen: All right. Thanks guys.

Operator: Thank you. The next question comes from the Quinn Pierson with Credit Suisse. Please go ahead.

Quinn Pierson: Hi. Good morning. I was hoping to talk a little about new customer acquisition. You have a chart in there showing that there is some growth there which is great to see. I was hoping you could talk us through your sales and marketing efforts and how you feel those are progressing and how you feel that sales and marketing program to new customers is evolving? This is obviously a very different go-to-market strategy than the historical highly concentrated customer base. So I guess any learnings if you feel like you are making good traction and progress and if you think we should be expecting any kind of acceleration in new customer acquisition or if you are finding that more challenging than had previously thought? Thanks.

Mark Brayan: So, hi, Quinn. We have some success in 2020 with new business development and a lot of lessons. And you we did a review about go-to-market work early in this year. And some of the findings that we are starting to implement were quite interesting. First of all, the customers highly value our expertise and our scale and we need to make more of that. Our tagline of confidence to deploy AI in the real world speaks to that. If you want to deploy your AI and not have any problems in the real world, then we have experience and scale to do that. So we need to leverage that message a lot more. We also need to ensure that we have the right technical expertise in front of our customers because that's what wins the day when we put out project managers for example or our linguist that have actually done work similar to the customer or similar to what the customer wants to do. That gives the customer an enormous amount of confidence. We found that selling outside of the major tech companies required more of this technical expertise. The enterprise customers, for want of a better word, not the technology customers, didn't understand how to prepare data sets as well as our major customers. And that added a bit of a burden to the sales motion. And then finally and going back to the point on price, we found and our go-to-market study included a lot of customer interviews, we found that our customers said pricing isn't an issue. Quality and durability of data, quality and data accuracy is what's most important. Price is a factor big but it's not the most important factor. So a lot of good lessons and we will leverage that into 2021 and I anticipate we will maintain our trajectory of new customer wins and at the same time we are going to grow the projects that we have one and increase the revenue out of those new customers as well.

Quinn Pierson: That's helpful color. Thanks. And just to confirm, did I hear you correctly that some of these new customers you are seeing very large variances in pricing where some is in line with where you previously expected and some outliers are much lower? Is that correct with new customers or was that more just with new projects with existing customers?

Mark Brayan: That was definitely the new customers. And we couldn't see a pattern in the outliers. So for example, we have been on a project and if there was a conversation around price, it was single digit percentage points. But then we would have a customer saying, well, we have got a price on this that's one-tenth of what you are telling us. And we are like, well, how does that work? And you know, in those situations they were small projects. They could have been exploratory. It seems just too random to be a sort of a genuine opportunity. So in response to questions on pricing, I guess I am just being transparent in what we are hearing and we hear to fairly polarized things. Most of the time, we are on market and then occasionally there is this absolutely bizarre type things.

Quinn Pierson: That's helpful color and transparency. In general, you have been transitioning to business more towards a scalable platform. But I guess what I am hearing is, it sounds like some of these new customers don't have quite the same types of internal capabilities. Is there a business case to almost pivot the other way and start adding more consultant type services to help support some of these new customer opportunities?

Mark Brayan: Yes. Fair question. Although we see it slightly differently and maybe I need to give a little extra color. If we look at business development outside of the major tech players, so amongst the big five tech players, we absolutely take a very collaborative, very consultative approach because their programs can be very big and it's up to us to do what the customer needs to do. Outside of that, we still see a lot of variability in the nature of the projects but we have the opportunity to coach the customer along a more replicable line, if you will. So I can't think of a good analogy up the top of my head but if you walk the aisles of Bunnings trying to work out how to do something at home and then you meet a tradesman and they can do the same thing but in a different way but they do it every day. We bring that sort of pragmatic expertise to the customer where we can achieve the same outcome for them but perhaps in a different way to the way they were thinking about it. So the value in us bringing our expertise and our technology platform to the customer is, they can actually see and understand, aha, that's how I get the outcome that I was after. That makes perfect sense. So there is a repeatable model there. There's a lot of variety in the use cases that we tackle. But amongst people that are earlier in their journey, there is the opportunity to get to coach them down a more repeatable way of doing things.

Quinn Pierson: That's helpful. Thanks. And lastly for me, you have provided some helpful color on the competitive set across the different categories of work, relevance, speech, image. I was hoping you could also put an overlay of customer dynamics and customer demand across those and perhaps put in order where we should be looking for growth to be led at a group level versus where it might be growing slower than the group across the relevance, speech and image, please?

Mark Brayan: I think the essential dynamic there, Quinn, is as we called out between relevance and speech and image. Relevance has that ongoing refresh requirement which will go to ongoing growth. And yes, we know that was lower than it has been historically last year. But we are starting to deal in some very big numbers with the relevance revenue. And the speech and image relies on us winning more and more customers to get higher growth rate because the nature of the projects, they are more cyclical in terms of the data requirements. So we have to do three things very well. We have to look after our big customers and be there to support them on their existing and new projects. We have to support and grow all of the new customers that we have won in 2020. And then we have to continue to win new customers. And I am confident in our ability to do all those things. We have got a well established sales and marketing capability now that delivered a lot of new customers in 2020 and it will continue to do that in 2021. But we got all those things to get continued growth.

Quinn Pierson: Helpful color. Thanks for your time.

Mark Brayan: Thank you.

Operator: Thank you. The next question comes from Paul Mason with Evans and Partners. Please go ahead.

Paul Mason: Hi. Just a couple from me. So the first one is to do with your platform CapEx. So two questions related. So the first is, your trajectory looks like it stepped up in the second half versus the first half in terms of your capital spend. And then I was just wondering, so should we think about the second half run rate as sort of what you are going to do in 2021? Or should we think about the annualized total as the amount you are going to do in 2021? And then related to that, could you maybe make a comment on like whether any of those automated annotation tools are actually in production now or whether they are still in the development phase? And I have got some other follow-ons after that.

Kevin Levine: Yes. Hi Paul. I will handle the first part of it. And to guide you guys, you should be thinking about H2 as a proxy for 2021, H2 annualization for 2021 proxy.

Mark Brayan: And on the automation, Paul, there are some of the automation tools are in production but in very early stages. One thing we absolutely don't want to do is mess up the quality of the data and service that we provide for our customers. And so we are making sure that we start small in the use of the automation tools. I can give one example which is for one of our customers that we do a lot of transcription work for. We are using AI to pull apart the data. So specifically, we get a page of text, a scan of an image, a page of text. The annotator highlights the whole line of text. And then the AI automatically breaks it into woods and identify the gaps and the punctuations which speeds up the transcription work which is the next part of the process. So it might sound fairly trivial but it means that the annotators are just saying, okay, split up this text and then it's straight into the transcription queue as opposed to identifying each word in the workflow. So the summary is, generally more pilot than production at this point. So we see some productivity benefits as we roll those more aggressively into production.

Paul Mason: Okay. Great. Just a question related to, so you got some of the customer liabilities balance which has been shrinking and I think that that's related to Figure Eight used to pay for a third party annotation service and now that it's internalized, you are sort of not requiring as much upfront payment as what Figure Eight used to. But could you maybe comment, like should we expect that balance to actually like go to zero over time? Or has it sort of hit its low point now in terms of the levels for the customer liabilities?

Mark Brayan: Paul, I think when it comes to the customer deposit side of things, yes, that's very much talk to the migration of the traditional Figure Eight third party providers that used to do the labeling work now being done by us. So obviously the end goal is that we do all that work. And once that happens, then from that point of view, that will be the bottom point for our customer deposits. The rest of the movement is around the deferred revenues, contracts. And obviously that would still be very much in future.

Paul Mason: Yes. Okay. And just the last one for me. Just obviously Lionbridge AI during the period. And I was just wondering if you could make any comments on whether you participated in the process at all? Or if you didn't, why you didn't?

Mark Brayan: I think we said previously, Paul, that our customers liked the fact that they have got a couple of vendors to choose from. And I think it would be strategically unwise for us to look at something like that.

Paul Mason: Okay. All right. Thank you for your time.

Operator: Thank you. The next question comes from Rangwan Dusdeesurapot with PineBridge Investments. Please go ahead.

Rangwan Dusdeesurapot: Hi Mark. Hi Kevin. Can you hear me?

Mark Brayan: Yes, we can. How are you?

Rangwan Dusdeesurapot: Hi. I am well. Thanks. Hope you are well as well. Yes, so just a question for me on the large projects that are commencing, right. You noted some weakness in these projects late last year. And I think the big question then was whether it's a temporary reprioritization, as you said, or a structural change in the customer's view towards the data requirements for these more mature projects? And at that time, you sort of believed that it's the former rather than latter but sort of mentioned the uncertainty due to your lack of your understanding into the workings of the customers. So just wondering, with the comments now that you are seeing these projects will be commencing and some conversations with the customers in between, can you give us an updated perspective or even a level of confidence on whether or not that rollup that you saw and are seeing now is indeed temporary versus structural in nature. Thank you.

Mark Brayan: It appears much more temporary than structural, Rangwan. However, the pace of the return is the thing that we are calling out as uncertain, per the other responses. So definitely, it's looking far more temporary than structural. But the pace of it getting back to where it was is the bit that's uncertain at this point.

Rangwan Dusdeesurapot: Okay. And a question on the order book figure that $240 million, it looks quite solid to me, right. So as a percentage of the entire sales, given the EBITDA margins that we expect and the EBITDA number, it looks to be a percentage that is higher or at least in line with the historical trends, right. So I just want to reconcile this seemingly strong order book with the comments of sort of uncertainty from the customers' side and the customer wait and see attitude. So really, how this strong order book number reconcile with those like more with the softer comments on your side?

Mark Brayan: So I think it can be consistent, first of all, because the order book is for the full year and we are calling estimates certainly in the first half and that there is an implied skew to the second half in activity and that has come directly from conversations with customers. So you customers are just being a little more considered in the way they are getting back to these programs because they have got a lot of considerations to consider. There is a lot of things to think about. They have got the pace of the return to business as usual under COVID. Things are looking good but the world turned upside down 12 months ago and that may be going on their minds. It certainly is on our minds. You have got the regulatory environment that they are facing. So they have got a bit more of a complex world to deal with at this point and they are trying to work through that and they are calling that out and they work with us which I think is good that they are being very transparent with us. So the summary is, the order book is for full year. We are calling out some uncertainty in the first half. And as we progress through the first half, we will keep the market informed as things evolve.

Rangwan Dusdeesurapot: Okay. Thank you. And last question for me on those new less data intensive projects from the large customers that those are new initiatives. From having worked on these projects and understanding their nature, can these projects ever be as large as the more mature ones that are seeing weakness now? And what would be their ramp-up profile? Can we expect them to achieve substantial scale this year or the next? Or would this have to be a sort of multiyear wait?

Mark Brayan: It's a little early to tell, Rangwan. I mean knowing what we know about these programs, they are certainly data rich and that could lead to a substantial ramp-up. But it depends very much on the success of the product in the market. So you have got existing programs that have got tremendous market traction and good market position that need an amount of data to stay relevant. But then you have got a bunch of new product developments that are unproven and should they all take off, it could be terrific. But again, it's a little early in their lifecycle to know.

Rangwan Dusdeesurapot: Okay. Thank you. And that's all for me.

Mark Brayan: Thank you.

Operator: Thank you.

Mark Brayan: I am really sorry but we are going to have to wrap the call up. I have another meeting in a minute's time and we are 15 minutes over. So we very much enjoyed the questions. We look forward to talking to people one-to-one through the week. But I will hand it back to the moderated to close the call.

Operator: Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.