Aurora Cannabis: Good or Bad News for Its Q1 Earnings?

Aurora Cannabis (ACB) reported its first-quarter earnings results yesterday. After its earnings release, its stock closed at 4.38 Canadian dollars on the TSE (Toronto Stock Exchange), 6.61% lower than its previous close. Meanwhile, the stock closed at $3.29 on the NYSE, 7.32% lower than the previous day.

Year-to-date, ACB stock is down by 38.22% on the TSE and down by 50.90% on the NYSE. Why is the stock falling? Let’s find out.

Aurora Cannabis missed analysts’ revenue and EBITDA estimates

In the first quarter, Aurora Cannabis’s net revenues grew 153.57% YoY (year-over-year) but fell 24% sequentially to 75.24 million Canadian dollars. However, its revenues fell shy of the consensus estimate of 94.24 million Canadian dollars, which would have implied a YoY rise of 217.59%. The company’s net cannabis revenues grew YoY by 187.75% but fell sequentially by 25% to 70.78 million Canadian dollars.

Aurora Cannabis attributed its first-quarter revenue slowdown to changing consumer preferences as well as to provincial and retail distribution constraints. In the first quarter, the company’s net non-wholesale cannabis revenues declined sequentially by 19% to 60.45 million Canadian dollars. The company also reported a 7% sequential rise in average net selling price per gram to 5.68 Canadian dollars.

ACB’s adjusted EBITDA deteriorated 238% sequentially to -39.67 million Canadian dollars, missing the consensus of -19.53 million Canadian dollars. In its quarterly filing, the company attributed its first-quarter EBITDA performance to a slowdown in revenue growth.

Aurora Cannabis expects its adjusted EBITDA to improve after it starts selling high-margin derivative products. The company also expects EBITDA improvement after it ensures optimal growth in corporate development and SG&A (selling, general, and administrative) expenses.

Aurora Cannabis surpassed margin and EPS estimates

In the first quarter, Aurora Cannabis’s gross margin on net cannabis revenues was sequentially flat at 58% but higher than the consensus of 53.21%. The company expects its gross margins to continue improving due to the launch of high-margin products and international market expansion initiatives.

Medical marijuana prices in these markets are higher than in Canada. The company’s non-GAAP EPS (earnings per share) of 0.01 Canadian dollars also beat the consensus of -0.043 Canadian dollars.

Medical cannabis revenue performance

In the first quarter, Aurora Cannabis’s medical cannabis net revenues rose 26.65% YoY and 2.69% sequentially to 30.45 million Canadian dollars. This increase occurred despite market cannibalization from the consumer segment. ACB’s registered patient base rose sequentially by 8% to 91,116 at the end of the first quarter. The company had 91,408 active registered patients on November 14.

Canadian dried medical cannabis sales rose 8.22% YoY and 3.08% sequentially to 14.88 million Canadian dollars. Canadian medical cannabis extract sales were up 41.64% YoY but sequentially down by 1.17% to 10.61 million Canadian dollars. Aurora Cannabis’s international dried medical cannabis sales rose 62.43% YoY and 1.61% sequentially to 4.55 million Canadian dollars.

Aurora Cannabis also reported international medical cannabis extract sales of 0.41 million Canadian dollars. Canadian medical cannabis and international medical cannabis accounted for 34% and 7% of the company’s first-quarter net revenues, respectively. The company is focused on strengthening its position in the German medical cannabis market.

According to its quarterly filing, the company benefited from increased European sales, the acquisition of Whistler, and increased production at its Aurora Sky, River, and Ridge facilities. However, excise taxes on Canadian sales pulled down the company’s first-quarter net medical cannabis revenues by $3.1 million.

The company’s net selling price per gram of medical cannabis dropped 6% sequentially to 8 Canadian dollars. The negative revenue impact of reduced selling prices was offset by an increase in the patient base. According to its third-quarter earnings call, ACB reduced medical cannabis prices to increase its patient base.

Medical cannabis gross margins

ACB’s gross margin on net medical cannabis revenues rose sequentially by 3 percentage points to 63% in the first quarter. According to its quarterly filing, the company benefited from economies of scale due to rising production at the Aurora Sky facility. This trend helped reduce ACB’s cash cost to produce per gram sold of dried cannabis YoY by 41.38% and sequentially by 25% to $0.85.

ACB also benefited from reduced conversion costs for medical cannabis. This reduced its cash cost of sales per gram of dried cannabis sold YoY by 39.47% and sequentially by 21.77% to $1.15. However, excise taxes in Canada affected its gross margins negatively by 4% in the first quarter.

Consumer cannabis performance

In the first quarter, ACB’s consumer cannabis net revenues fell 33.11% sequentially to 30.02 million Canadian dollars. According to the first-quarter earnings call, this decline resulted from lower orders from distributors who already have excess inventory.

The slower-than-anticipated retail rollout in Canada has resulted in a supply-demand imbalance in the cannabis market. ACB expects these headwinds to persist in the second quarter of fiscal 2020. The company expects these problems to resolve in the second half of fiscal 2020.

In the first quarter, ACB’s consumer dried cannabis sales declined sequentially by 35.69% to 26.89 million Canadian dollars. However, the company’s consumer cannabis extract sales rose sequentially by 2.08% to 3.13 million Canadian dollars. Consumer cannabis sales accounted for 40% of ACB’s total revenues.

ACB’s net selling price per gram of consumer cannabis rose 3% sequentially to 5.28 Canadian dollars. Its gross margin on net consumer cannabis revenues decreased by 2 percentage points sequentially to 53%.

ACB’s wholesale cannabis performance

Aurora Cannabis’ net wholesale bulk cannabis net revenues declined sequentially by 49% to 10.3 million Canadian dollars. Here, the net selling price per gram of cannabis declined 4% sequentially to 3.46 Canadian dollars. The gross margin on net wholesale cannabis revenues decreased sequentially by 3 percentage points to 58%.

ACB’s cultivation capacity

In the first quarter, Aurora Cannabis’ cannabis production rose sequentially by 43% to 41,436 kilograms. According to the first-quarter earnings call, this increase was attributable to the company achieving production targets, as well as ongoing optimization at Aurora Sky and Aurora Ridge facilities. However, the company sold only 12,463 kilograms, a sequential decline of 30%.

In the second quarter, ACB has guided for production capacity close to 150,000 kilograms near the company’s targeted capacity for fiscal 2020. The company plans to deploy the excess capacity to increase its share in the wholesale market in the second quarter. ACB is also working on expanding its while label cannabis business.

Aurora Cannabis’ balance sheet strength

At the end of the first quarter, Aurora Cannabis’ cash and cash equivalents totaled 153 million Canadian dollars. In August, the company amended its secured credit facility from 200 million Canadian dollars to 360 million Canadian dollars, with an accordion feature for an additional 40 million Canadian dollars. In September 2019, the company sold off its stake in Green Organic Dutchman for a gross consideration of 86.5 million Canadian dollars.