You could hear a subtle sigh of relief across the marijuana investing community Monday afternoon when Aurora Cannabis (NYSE:ACB) announced its second-quarter results. The Canadian marijuana producer didn't spring any bad surprises on shareholders. Of course, it helped that Aurora had already provided a sneak peek in January to its potential second-quarter revenue.
As expected, Aurora recorded impressive year-over-year revenue gains. It also wasn't shocking that the company posted a big net loss. Much of that loss stemmed from market-to-market adjustments on Aurora's derivative investments, especially from a lower fair value of its share purchase warrants for The Green Organic Dutchman.
There was more to Aurora's Q2 results, though, than the headline numbers revealed. Here are five things you need to know about the company's most recent earnings update.
1. Medical cannabis is still important to revenue
Sure, recently legalized recreational marijuana sales in Canada contributed most of Aurora's revenue growth in the second quarter. But even though Canada's recreational marijuana market was open for all but two and a half weeks of the second quarter, medical cannabis sales generated nearly 55% of total cannabis revenue and 48% of overall net revenue.
Aurora stated in its Q2 earnings announcement that it "intends to continue prioritizing medical patients in Canada and globally where margins continue to exceed those achieved on the wholesale consumer market." Recreational pot might be what everyone is interested in but, for now, medical cannabis is better for Aurora's bottom line.
2. International sales are still relatively small
Aurora Cannabis CEO Terry Booth said the company has "maintained [its] market leadership in Germany and other key international markets." However, international sales remain only a small overall part of Aurora's business.
The company reported net revenue of CA$2.9 million ($2.2 million) from sales in Europe. That's only 6% of Aurora's total cannabis revenue. European medical cannabis sales barely increased from the previous quarter, up only 1.8%. These numbers could improve in the future as Aurora markets cannabis oils and other products other than dried cannabis. They'll need to increase significantly for Aurora to grow rapidly enough to justify its steep valuation.
3. Margins look weak now but should improve dramatically
Most companies would love to have a gross margin of 54% -- what Aurora reported for the second quarter. But this margin reflected a steep drop from the 70% gross margin achieved in the previous quarter. Don't worry, though. While margins might look relatively weak now, they'll probably improve soon.
The Q2 result was lower for several reasons, including a lower average selling price per gram of dried cannabis, excise taxes on medical cannabis, and a lower mix of higher-profit cannabis oil sales. In addition, Aurora had to absorb higher costs from new packaging requirements for recreational marijuana products and initial expenses from bringing its Aurora Sky facility to full production.
The good news is that those one-time costs associated with packaging requirements and the Aurora Sky ramp-up will go away. Aurora also launched its softgels in December, which should help boost margins in future quarters. In addition, the anticipated opening of the Canadian market for cannabis edibles, beverages, and concentrates later this year will give Aurora new opportunities for higher-margin products.
4. Further share dilution probably won't be a concern anytime soon
Throughout much of its history, Aurora's go-to source for raising cash was to issue new shares. The problem has been that taking this approach diluted the value of existing shares. As a case in point, Aurora's market increased significantly in 2018 but its share price plunged -- all because of the dilution from issuing new shares.
Dilution shouldn't be a concern anytime soon, though. Aurora CFO Glen Ibbott noted that the company recently completed the placement of US$345 million in convertible notes. This gives Aurora a strong cash position to fund operations and expansion in 2019.
5. Capacity is king -- and Aurora is wearing a crown
Perhaps the best news in Aurora's Q2 update related to production capacity. The company is already operating an annualized production run rate of around 120,000 kilograms. By March 31, 2019, Aurora thinks that rate will increase to more than 150,000 kilograms.
With demand outstripping supply in the Canadian market, capacity is king. Aurora's numbers show that it's wearing a crown. By comparison, Aphria -- which ranks among the largest Canadian marijuana producers in terms of production capacity -- only had an annualized growing capability of 35,000 kilograms when the company reported its Q2 results in January.
The big unanswered questions
There were two big questions that Aurora's second-quarter update didn't answer. One is whether or not the company will enter the U.S. hemp market. The U.S. legalized hemp in December 2018. So far, Canopy Growth is the only Canadian marijuana producer to announce definitive plans to enter the U.S. market.
The other question relates to how long it might be before Aurora lands a big partner outside of the cannabis industry. Canopy and Cronos have already secured significant investments from major companies. Tilray and HEXO have announced partnerships with big alcoholic beverage makers. Aurora could be at a disadvantage compared to these peers in competing globally if it doesn't team up with a partner with deep pockets.