SodaStream International Ltd. Earnings Point to a Return to Growth

SodaStream (SODA) might finally be ready to add some fizz back into its business. The manufacturer of home beverage carbonation machines posted third-quarter earnings results this week that hinted at an imminent return to sales growth. But the earnings also showed plenty of work ahead in management's risky plan to reconnect with customers who may have abandoned the brand.

Another rough quarter
To be sure, this quarter's reported figures don't look like much of a rebound. Revenue dove 13% as SodaStream logged a 22% drop in machine sales and a 12% decline in flavor sales. Revenue was down significantly in every geographic area, including a double-digit slump in the critical U.S. region.

Yet many of those sales results are skewed by foreign currency swings against the U.S. dollar, which push reported revenue lower. On a constant-currency basis, SodaStream's sales were actually flat at $125 million, compared to a 16% dive last quarter. Unit volumes, while still diving, also look much better this quarter than they did three months ago:

Source: SodaStream financial filings.

"Our operating results were similar to the year ago period on a constant currency basis as the growth plan we announced a year ago continues to gain traction," said CEO Daniel Birnbaum. That plan involves repositioning the SodaStream brand away from a soda focus and into a healthy water brand. The huge drop in starter kit and flavor sales over the last few quarters has mostly reflected this reboot as the company stopped selling one line of products and began shipping its entirely new line.

Higher consumption, lower expenses
But the switch has also made it hard for investors to judge whether SodaStream's products still have traction with customers -- or whether people have just moved on from the idea of at-home carbonation for their beverages.

SodaStream is relaunching into a water brand. Image source: SodaStream.

That's why carbon dioxide sales are such an important metric for shareholders to watch: They're the best indicator of the size of the customer base, as well as evidence of usage of the machines. Refill sales growth accelerated to 10% (the best showing in a year) from 7% in the second quarter. SodaStream added 600,000 customers, bringing its base to a record 7 million. Management called this gain "a great indication that our global user base is increasing consumption."

Meanwhile, SodaStream kept a lid on expenses this quarter. Gross margin held steady after accounting for foreign currency shifts. The company also booked declines in general expenses, and in sales and marketing costs, which helped operating margin stay firmly positive.

The drop in marketing spending is surprising, given the major shift in branding. But management might just be saving much of its advertising and sales budget for a big push in the holiday quarter.

Big-picture outlook
Executives haven't issued financial projections for this year or next. But they have predicted that sales trends would improve in the second half of 2015, which is true -- so far. Their updated outlook suggests that SodaStream will return to solid growth beginning next year. "We believe we are poised to start delivering improved financial results and greater shareholder value beginning in 2016," Birnbaum said.

Management has a long way to go to claw back its recent losses. Through the first three quarters of the year, revenue is down 22% and operating income is 72% lower. But the fourth quarter will provide the biggest test yet of whether SodaStream's risky brand reboot is working. That's still a huge question mark for investors. But given the most recent revenue and carbon dioxide sales trends, it's likely that the business will at least manage a return to modest growth soon.