Is SodaStream's US Market Drying Up?

While SodaStream delivered an earnings beat in its latest report, investors were worried about a plunge in revenue at the company's US business.

May 23, 2014 at 9:40AM

The first quarter wasn't a particularly inspiring one from SodaStream (NASDAQ:SODA), the maker of home carbonation systems. Overall, the results beat on both the top and bottom lines. However, a slowdown in the US had investors worried, as did a dramatic drop in earnings. Nevertheless, the stock managed to recover from a loss before the bell, as investors mulled over the company's growth prospects going into the rest of the year. What can we expect from the Israeli company?

The quarter in detail
Overall, the company's results were more or less inline with its own expectations and those of analysts. The company reported earnings per share of $0.08, which was considerably higher than the $0.01 consensus estimate. However, this was down dramatically from the $0.57 per share reported last year, as an expensive US marketing campaign weighed on the company's profits. Revenue inched up 0.5% to $118.2 million, which just about beat analysts' estimates.

Granted, last year's first quarter was a particularly strong one, which makes the comparison difficult. Unit gains for soda makers were up a huge 78% in the US last year, with gas refills and flavors up over 100%. This year, soda maker units were down 69% in the area, while flavor units declined by 20%. The results also compare poorly to the last quarter of 2013, when US soda maker unit sales were up by 21% year-over-year, and gas refills and flavor units increased by 29% and 54% respectively. Still, holiday sales in the region were softer than expected.

Going a little further back, Q3 soda maker unit sales rose 31% year-over-year in the US, while gas refills unit sales increased by 65% and flavor units dipped slightly. Sequentially, soda maker unit sales dropped rather dramatically between Q4 2013 and Q1 2014, down to 80,000 from 679,000, while flavor units dropped from 4.3 million to 2.7 million, although unit volumes were up substantially from Q3 to Q4 due to holiday sales. Looking at year-over-year growth then, we can see a clear slowdown in the US between the third quarter of last year and the first of 2014, while unit sales in the region are down sequentially as well over the last half year or so. 

Overall, sales declined by 28% in the US, although this was largely offset by a strong performance in the company's other geographic regions. The Americas have become increasingly important for the company, and as of the first quarter were good for around 30% of the company's overall revenue. Due to the plunge in revenue, this figure is down from 41% last year. Western Europe remains by far the most lucrative region for the company, contributing more than half of the company's sales, while Asia Pacific is good for around 10% and Central Eastern Europe, Middle East & Africa contribute some 7.6%.

Management blamed a weak holiday season for the poor performance in the US, and a higher tax rate also ate into the company's profits. At least management didn't mention the weather. Going forward, management left its full-year guidance intact and still expects revenue to increase by 15%. Excluding negative currency effects, the company expects EBITDA to rise by 25% but only expects a 3 % rise in net revenue. In order to combat the slowdown in US sales, the company will be putting more of a marketing focus on health and wellness, at the expense of environmental themes and convenience .

Bad news for competitors?
The company's lackluster results did not only scare SodaStream investors, they also cast doubt on the prospects of the tie-up of Coca-Cola (NYSE:KO) and Keurig Green Mountain (NASDAQ:GMCR). Only a few months after acquiring a 10% stake in the home beverage company, Coca-Cola has increased its share of the company to 16%. Keurig Cold, the company's cold beverage system, which is expected to debut sometime in the company's fiscal 2015, is meant to be a direct competitor to SodaStream's home carbonation system . Coca-Cola, faced with slowing sales of its own, is looking to get into the home carbonation market which it apparently views as a lucrative one.

However, any slowdown in the US home carbonation market would naturally affect demand for the Keurig Cold machine. SodaStream's results aren't particularly encouraging in this regard. In any case, speculation is growing that SodaStream is looking to find a partner of its own in order to level the playing field. While several potential suitors have been identified by the financial media, no one has made an actual offer yet.

The bottom line
SodaStream's most recent results were less than stellar. While the company beat expectations on both the top and bottom lines, its earnings took a rather dramatic fall and US sales declined considerably. However, investors weren't too worried as the stock ended the day on a positive note. However, any slowdown in the US home carbonation market would also have Green Mountain investors worried, and with Coca-Cola having increased its stake in the company, Coca-Cola investors as well.

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Daniel James has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Keurig Green Mountain, and SodaStream. The Motley Fool owns shares of SodaStream and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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