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Marijuana Stocks: 5 Facts About Tilray's Quarterly Performance

By Todd Campbell – May 16, 2019 at 10:16AM

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Cannabis company Tilray's latest financial report includes plenty of pros and cons.

Canadians have been able to buy marijuana for recreational use since last October, and that's creating a massive opportunity for cannabis companies, including Tilray (TLRY). Tilray reported its latest quarterly earnings earlier this week, and while sales are soaring, so too are its expenses. Here are five facts you should know about Tilray's recent performance.

1. Surging sales

Tilray's first-quarter revenue was $23 million (CA$31 million), up 195.4% year over year and $2.5 million better than analysts were anticipating. The company's first-quarter sales come on the heels of sales increasing 204% year over year to CA$20.9 million in the fourth quarter. 

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In the quarter, sales in Canada's adult-use market were $7.9 million, up 80% sequentially. Direct-to-patient and bulk sales were $7.8 million, up from $7.4 million one year ago, and international sales were $1.8 million, up from $430,000 last year. The company's Feb. 28 acquisition of hemp products maker Manitoba Harvest also contributed $5.6 million in sales during the quarter. Going forward, Tilray expects Manitoba Harvest will add quarterly sales of about $20 million, excluding any impact from future U.S. product launches later this year.

2. Product mix

Cannabis extracts command higher prices per gram than dried flower, so companies like Tilray want them to account for an increasingly larger proportion of their product mix.

Unfortunately, extracts only accounted for 37% of sales in Q1, down from 54% of sales in Q4. Increasing recreational, adult-use revenue and a dip in medical sales, which historically tilt toward extracts, were responsible. The shift in product mix caused average net selling prices per gram to fall to $5.60 (CA$7.54) from $5.94 (CA$8) last year.

3. Sourcing is an issue

Tilray's business model relies heavily on third parties for marijuana supply. That could be smart long term, given wholesale prices fell significantly in the U.S. once legal markets like Colorado matured. However, it's creating a sales and profit-margin headwind in the short term because Canada's supply is still falling shy of demand.

Nevertheless, Tilray still sold 3,012 kilograms of marijuana equivalents in Q1, up from 2,053 kilograms in Q4, and 1,299 kilograms in the same quarter one year ago. And, gross margin did improve sequentially to 23% from 20%, despite supply constraints.

Tilray thinks the headwind to wholesale supply is likely to last longer than anticipated, stretching out at least 12 to 18 months. As a result, it plans on investing $32.6 million to boost internal production, which should help get it to deliver on its previously stated target of 90,000 kilograms of marijuana capacity.

4. Climbing costs

Higher costs for wholesale supply contributed to cost of goods sold increasing, and more spending to fuel future growth caused operating expenses to climb, too. As a result, the company reported a net loss of $30.3 million in the first quarter, roughly in line with its $31 million loss in the fourth quarter.

Operating expenses Q1 2019 Q4 2018 Q1 2018
Sales and marketing $7.8 million $6.3 million $2.3 million
General and administrative $12.8 million $13.8 million $4.1 million
Stock-based compensation $5.3 million $4.1 million $31,000
Research and development $1.0 million $1.8 million $975,000
Total operating expenses $33.3 million  $26 million $7.6 million

Data source: SEC filings.

5. Prepping for new markets

The company's improving international sales were driven by increased exports to Germany. Unlike some, Tilray opted against pursuing licenses allowing it to cultivate cannabis within Germany's borders, deciding instead to focus on securing European good manufacturing practices certification for its facility under construction in Portugal. The company believes exporting various products to Germany provides it with better optionality, allowing it to create derivative products that could enhance margin down the line.

Tilray is also planning to make a splash in the U.S. later this year. The company's Manitoba Harvest acquisition gives it entry to about 16,000 retailers, and the first CBD products from its licensing pact with Authentic Brands Group are expected to become available in the second half of 2019.

Management also made a point of highlighting that it's been "inundated with contacts from Fortune 500 companies who are interested in exploring partnerships with Tilray." Those partnerships could include deals with consumer goods companies. Furthermore, Tilray says it's talking to U.S. retailers eager to sell cannabis products, such as CBD oil. Given that the U.S. CBD market could grow from an estimated $600 million last year to multiple billions annually following the launch of new products, Tilray is understandably excited about deals that could help it quickly win market share.

Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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