Imagine that Babe Ruth pointed to the outfield fence before stepping up to the plate, and confidently predicting that a home run was on its way. The track is coming. He swings – and hits a pop-up that is easily caught by an infielder. What a letdown that would have been, right?
That scenario is not too different from what Aurora Cannabis (NYSE: ACB) just did. In August, the Canadian cannabis manufacturer provided guidance for the fourth quarter of fiscal 2019. It predicted net revenues between $ 100 million and $ 107 million in Canadian dollars ($ 76 million to $ 81.3 million). This area reflected impressive quarter-on-quarter growth of 59%. A home run.
Aurora went up to the plate after the market closed on Wednesday to report the actual fourth quarter results. And the company failed to hit the predicted home run. Here's what you need to know.
Q4 net income was $ 98.9 million. Not only was it lower than the range the company projected just weeks ago, but it also fell well below the $ 1[ads1]08.3 million expected by analysts.
What happened? Aurora made the old business mistake by overpromising and subcontracting.
In several respects, the company's results in the fourth quarter were very good. Net income jumped 52% over the previous quarter. This kind of growth might well have been well received had expectations not been set too high.
Consumer cannabis net revenues, reflecting sales in the Canadian recreational cannabis market, increased 52% quarter over quarter to CA $ 44.9 million. Aurora also sold much more cannabis in the bulk wholesale market – $ 20.1 million in the fourth quarter, compared to less than about $ 2.1 million in the previous quarter. The company's medical cannabis net income rose 10% to nearly $ 29.7 million.
However, the average sales prices in the consumer and wholesale markets are much lower than the average prices in the medical cannabis market. As a result, the overall average net sales price fell from $ 6.40 per gram in the third quarter to $ 5.32 in the fourth quarter.
Perhaps the most well-known sign of Aurora's challenges is the company's statement that "the Canadian consumer channel continues to experience retail-level challenges in key markets, and solving this problem is beyond the company's control." In other words, the provinces are not opening enough sales yet, which creates problems for Aurora and its peers.
Chief Corporate Officer Cam Battley also stated in the company's third conference call that he expected positive adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in the fourth quarter. It didn't happen. Instead, Aurora announced an adjusted EBITDA loss of $ 11.7 million.
What to like
While the blank revenue loss is the big story with Aurora's Q4, there were several things investors could enjoy with the company's latest update. The supply constraints of the past do not seem to be a major issue now. Aurora said the plants today have an annual running rate of more than 150,000 kilos of cannabis. The company produced 29,034 kilos of cannabis in the fourth quarter, up from 15,590 kg in the previous quarter.
Gross margin also improved, increasing to 58% in Q4 compared to 55% in Q3. This increase continued to reflect progress in reducing production costs per gram.
Despite not delivering positively adjusted EBITDA, the company is tracking in the right direction. The corrected EBITDA loss of CA $ 11.7 million was much better in the fourth quarter than the adjusted EBITDA loss of USD 36.6 million in the previous quarter.
More Bats Coming
Aurora should not have provided revenue guidance for failing to hit. And it shouldn't have talked about delivering positive adjusted EBITDA if it wasn't quite sure it could meet that goal. But the Q4 results were not horrible from an objective perspective, leaving estimates and predictions aside.
More importantly, the company should be able to continue on its path to profitability. The Cannabis 2.0 market (citing the upcoming legalization of derivatives in Canada) presents new growth opportunities for Aurora, which plans to launch more new products in December. The company is also considering what it said as "a number of options to increase Aurora's presence in the US market."
Investing in marijuana stocks comes with the kind of ups and downs we see with Aurora. The company itself stated that "sales volume and revenue from quarter to quarter can be unstable." Its stock price may reflect that volatility.
Aurora demonstrated that it is not Babe Ruth of cannabis. But there are more bats to come.