HEXO Q4 Earnings: Good or Bad News?

HEXO (HEXO) shocked the cannabis industry this month. The company withdrew its fiscal 2020 outlook and reported lower preliminary results for the fourth quarter. HEXO reported its fourth-quarter results today. Were the results good or bad news? Let’s find out.

Were HEXO’s results disappointing?

HEXO generated net revenues of 15.4 million Canadian dollars in the fourth quarter compared to 1.4 million Canadian dollars in the fourth quarter of 2018. The company’s revenue guidance was 14.5 million–16.5 million Canadian dollars—mentioned during the preliminary results. HEXO also missed analysts’ estimates of 16.04 million Canadian dollars. Sequentially, the company saw an increase of 18.2% from the third quarter.

Notably, adult-use cannabis accounted for 91% of the total revenues. Canada completed adult-use legalization last year. Also, adult-use gross sales increased 30% to 18.9 million Canadian dollars in the fourth quarter.

The sales volume also rose 45% to 4,009 kg from 2,759 kg equivalents sold in the previous quarter. The acquisition of Newstrike contributed to the increased sales volume and net revenues. The adjusted gross margin was 45% of the adjusted net revenues for the quarter.

HEXO’s operating expenses rose to 46.9 million Canadian dollars year-over-year in the fourth quarter, which implies the company’s increase to the scale of its operations. Likewise, the company reported a loss of 18 Canadian dollars per share compared to a loss of 5 Canadian dollars per share in the fourth quarter of 2018. The loss per share was also higher than analysts’ estimate of 6 Canadian dollars per share.

HEXO mentioned the following reasons for the increased net loss this quarter:

  • There was a significant scale of operations.
  • The company’s stock-based compensation expenses increased due to higher cannabis market value.
  • HEXO’s R&D expenditure increased in the fourth quarter.
  • There was an impairment loss on the inventory.

Fiscal 2019 results

For fiscal 2019, the company reported net revenues of 47.5 million Canadian dollars—an increase to 4.9 million Canadian dollars in 2018.  Legalizing recreational cannabis in fiscal 2019 drove the increase. Recreational cannabis accounted for 89% of the total net revenues from the sale of goods. Meanwhile, the operating expenses rose to 111.4 million Canadian dollars, which reflected the increase to the scale of the company’s operations. For fiscal 2019, the company reported a loss of 67.6 million Canadian dollars.

For fiscal 2020, analysts expect cannabis companies to report lower revenues. The revenues from edibles expansion won’t be seen until later next year. The products will hit the market in December. Demand, regulations, and other factors could impact the edibles market.

Canopy Growth (CGC) (WEED) was expected to hit 1 billion Canadian dollars in revenues in fiscal 2020. However, analysts expect the company to report revenues of 564.9 million Canadian dollars. Read Canopy Growth: Is $1 Billion in Sales Still Possible? to learn more. The company is also expected to report a negative EBITDA of 318 million Canadian dollars.

Aurora Cannabis (ACB) will likely report revenues of 534.4 million Canadian dollars. The company is also expected to report a negative EBITDA of 51.2 million Canadian dollars in fiscal 2020. Aurora Cannabis’s rising debt is also a concern.

Management’s view

Talking about the fourth-quarter performance, Sebastien St-Louis, HEXO’s CEO and co-founder, said, “We are at the end of the first year of adult-use legalization in Canada, which was an incredible year full of successes and challenges across the industry. We’ve gone from $4.9M to $59.3M in gross revenue in just one year. This type of revenue growth is a testament to the Company’s resilience and capacity to pivot in the face of uncertainty.”

Despite the pessimism surrounding HEXO’s performance and its fundamentals, management still thinks that it will be able to increase its market share and total revenues. St-Louis also said, “I am confident that our multi-brand approach, focusing on customer demand, re-evaluating our strain mix, as well as the introduction of new products to counter the black market, will help us increase our market share and total revenue.”

HEXO’s stock performance

After returning 15.2% in 2018, HEXO has lost 55.8 this year as of Monday. HEXO stock has fallen 41.4% in October. The stock closed with a loss of 2.5% on Monday. HEXO stock has risen 0.43% in pre-market trading today.

Aurora Cannabis (ACB), Canopy Growth, and Aphria fell 2.8%, 1.0%, and 6.0% on Monday. The marijuana sector has also underperformed the broader equity market this year. Aurora Cannabis and Canopy Growth will report their earnings next month.

Outlook

On October 10, HEXO withdrew its fiscal 2020 outlook due to various headwinds. In the fourth-quarter results, the company discussed its new outlook for 2020. The company expects its net revenues to be approximately $14,000–$18,000 in the first quarter of fiscal 2020. HEXO also aims to achieve a positive adjusted EBITDA in 2020.

Recently, HEXO announced that it eliminated 200 positions across its departments and locations to reduce its cost structure. Read HEXO Trims Workforce, Stock Falls More than 6% to learn more. The company also suspended cultivation at the Niagara facility. The current market conditions in Canada don’t support additional cultivation space. HEXO also said that its current annualized production run rate is approximately 80,000 kg of dried cannabis equivalents. HEXO and Molson Coor’s joint venture, Truss Beverage, will launch cannabis-infused beverages later this year. Read Why Did HEXO Rise 17% on Thursday? to learn more.

HEXO will hold an earnings call today when the market opens.

Stay with us for an in-depth review of the company’s fourth-quarter results.

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