Solazyme Earnings: The Only News That Really Matters

Image source: Solazyme.

By now, investors are well aware of the risks facing new technology platforms in industrial biotechnology. While established players with large capital reserves such as DuPont and Monsanto have had success from development to production to marketing, newcomers making bigger leaps with genetic engineering in an attempt to capture larger potential rewards have had a difficult time recovering from setbacks. Renewable oils manufacturer Solazyme (TVIA) is just the latest example, although after being the de facto favorite among individual investors and Wall Street in recent years its fall is arguably the most deflating.

The company announced its much anticipated fourth quarter and full-year 2014 earnings this week on the first conference call since management was forced to reset expectations to reflect recent setbacks at manufacturing facilities in Moema, Brazil and Clinton, Iowa. While investors were awaiting updates for the year ahead, not much changed from the prior guidance given at the end of the third quarter. But there were several important updates that could impact Solazyme's performance in 2015. Here's the only news that really matters from its latest earnings.

Same guidance, new break down in revenue
Management gave the exact same initial guidance for 2015 that it gave in early November. More specifically, Solazyme expects total revenue to grow at least 15% to $70 million. That excludes production and sales from Moema since it currently belongs to the joint venture with sugarcane producer Bunge, called Solazyme Bunge Renewable Oils.

We can break down the guidance a bit more with the numbers in hand from the company presentation and after making assumptions:

• R&D revenue remains flat (it grew 16% year over year in 2014)
• Algenist cosmetic sales grow 23% year over year (in line with historical growth)
• All product sales will be derived from the high-margin Algenist cosmetics, Encapso drilling lubricants, and AlgaVia food ingredients portfolios.

With those assumptions, investors can expect the following:

Source: Solazyme presentation.

Solazyme also clarified how it expects to utilize its manufacturing capacity in the United States, which includes Clinton and a facility in Peoria, Illinois.

*Peoria also serves as R&D facility. Source: Solazyme presentation.

Not much has really changed, although if management thinks Peoria (which has an annual production capacity of 1,820 metric tons) can handle all AlgaVia production (the most important growth product for Solazyme), then that indicates demand for the company's food ingredients must not be very high. Not yet, at least.

AlgaVia update
Several summers ago Solazyme dissolved a joint venture with European industrial biotech leader Roquette for food ingredients. Unfortunately, a lawsuit and arbitration followed, with each company slinging accusations at the other about stealing or copying intellectual property and trade secrets concerning microalgae food ingredient production. Management remained silent on the issue, but was finally able to update investors on the earnings call. As CEO Jonathan Wolfson put it:

Last week, the arbitration panel handed down their decision, and it was a clear and complete victory for Solazyme.

In summary, the arbitration awarded solely to Solazyme all Solazyme Roquette Nutritionals, JV patent applications -- JV know-how related to high-lipid Algo flour and high protein Algo powder, all Roquette patent applications filed since November 2010 related to Algo food and food ingredients, as well as methods for making and using them, and $2.35 million for legal fees and expenses.

While Roquette is trying to reverse the decision on a technicality, this is the best possible legal outcome for investors. We can't know for sure if the ongoing litigation kept potential customers away from AlgaVia food ingredients, but that will no longer be a possible risk. Despite the lack of near-term enthusiasm for orders demonstrated by production guidance noted above, Solazyme has over 65 active application projects with leading food and beverage companies and brands. Investors desperately need AlgaVia to be successful as soon as possible -- and the portfolio is heading into 2015 with relatively healthy momentum.

Additional highlights
As I recently wrote, the most important metric for Solazyme shareholders in 2015 is market traction for the company's high margin products. All other metrics -- production volumes, production costs, gross profit margin, product sales -- rely on it. That being said, here are several interesting updates for investors to chew on:

• Algenist missed its year-over-year growth target of 30%, notching only 23%. The miss represents only $1.5 million in annual revenue, but fourth-quarter sales were actually lower than third-quarter sales despite a significant increase in store count and expected boosts from the holiday season. I think it's likely a one-time fluke, but investors will want to keep an eye on the portfolio's performance to make sure.
• Encapso expanded to 37 commercial oil and gas wells in North America. The company expects to have it in use on three continents in the first half of 2015 and expand potential applications, too. However, questions remain about the portfolio. Does it have enough exposure to influence the decision to close, open, or maintain wells in a low price oil environment? Additionally, while growth will no doubt be aided by the distribution partnership with Eni SpA, Solazyme will sacrifice potential revenue and profits to spread risk.
• Cost-cutting measures are going into full effect in 2015. The company took a one-time restructuring charge of $3.5 million in the fourth quarter, but will decrease cash operating expenses by at least $18 million compared to 2014. Additionally, capital expenditures and equity investments in Solazyme Bunge Renewable Oils will fall $20 million to $30 million compared to last year, which represents a decrease of 37% to 54%. The moves won't be enough to reach profitability, but are absolutely necessary given the change in events. Good news for investors. 
• More good news: Solazyme entered 2015 with $207 million in cash -- more than enough to float operations for 2015.
• Moema is still not expected to be consolidated this year. Of course, without strong demand for the company's products, it doesn't really matter if Moema is operating or not.

What does it mean for investors?
Investors expected an uncomfortable end to the year as restructuring and adjustments worked their way through the system. And since financial guidance remained the same as that given in early November, nothing changes for what investors need to watch in 2015: market traction. That could be demonstrated by announcements concerning Encapso sales or by securing long-term distribution deals for AlgaVia food ingredients, which would provide a major boost for the company's near-term and long-term prospects. In the meantime, all investors can do is wait.