The big day is nearly here for cannabis investors. On Wednesday, Sept. 11, following the market close, Aurora Cannabis (NYSE:ACB) will release its highly anticipated fiscal fourth-quarter operating results.
As you're probably aware, Aurora Cannabis is expected to be Canada's leading cannabis producer, with at least 625,000 kilos of run-rate production by the end of June 2020. It's also been leading its peers in terms of run-rate production thus far in 2019, with more than 150,000 kilos of run-rate annual output through the end of March. Thus, investors are very interested to see what another quarter of ramping up has done to Aurora's bottom line.
Aurora's preliminary guidance laid the groundwork for the fiscal fourth quarter
But unlike most marijuana stocks, Aurora has been relatively transparent with regard to providing sales guidance well in advance of its quarterly reports. In August, the company guided Wall Street to expect 100 million Canadian dollars to CA$107 million in net fourth-quarter sales, which includes the reduction of excise taxes paid from gross revenue. This suggests gross revenue might come in closer to CA$120 million, which was higher than analysts had been forecasting at the time of its preliminary sales update.
The company also reiterated that it was on track to achieve positive recurring EBITDA during the fourth quarter. However, keep in mind that positive EBITDA doesn't mean that Aurora Cannabis will necessarily be profitable, especially taking into account the bounty of one-time benefits and expenses it regularly accounts for on its income statement. Wall Street's consensus continues to call for a modest net loss for the company in fiscal 2020.
Aurora's preliminary guidance increased its quarterly production available for sale as well to a new range of 25,000 kilos to 30,000 kilos. The company's previous forecast had called for 25,000 kilos. This boost jibes with the company's message that production ramp-up is commencing on schedule.
In other words, with Aurora spilling the beans on its sales guidance and production, the headline numbers for Aurora's fourth-quarter report are already pretty well known. But if you wind up looking past the headlines, there are three numbers you'll want to pay very close attention to.
1. Aurora's gross margin
Maybe one of the most exciting things about Aurora Cannabis is that it has a chance to be one of the lowest-cost marijuana producers in the world. It's not necessarily the techniques that the company is using to grow cannabis, so much as the sheer size of Aurora's operations that could allow economies of scale to really come into play. The fourth quarter could be our first real look at how a large-scale grower pushes production costs down.
Of course, production costs are one side of the coin. We're also going to want to see how well dried cannabis prices held up on a per-gram basis, as well as cannabis extracts. Given the persistent supply shortages throughout Canada, I'd expect prices to have held up pretty well from the sequential third quarter.
Putting these factors together will give us our first under-the-radar figure: gross margin. Aurora's gross margin has consistently been higher than its mid-cap peers in recent quarters, but I'm still not convinced that operating profitability is imminent. Nevertheless, an improvement of a few percentage points in gross margin from the sequential third quarter (Q3 gross margin was 55%) would go a long way to confirming to Wall Street that Aurora is on the path to profitability in fiscal 2021, if not 2020.
2. International sales
The next figure investors should keep a close eye on is international sales, which in the sequential third quarter came in at a pretty anemic CA$4 million -- although this was a 40% increase from the sequential second quarter.
International sales are pretty much the future for Aurora Cannabis. Aurora has a cultivation, export, or research presence in more countries worldwide (25) than any other marijuana producer. These overseas markets are going to be especially important if and when dried cannabis production overwhelms the Canadian marketplace. Having up to two dozen external sales channels at its disposal should help ensure that Aurora's gross margin doesn't nosedive because of domestic oversupply.
Furthermore, the company has a very clear stated purpose of focusing on the medical side of the industry. Even though the medical cannabis patient pool is considerably smaller than recreational weed, the margins and pricing power are substantially higher. Medical patients tend to use cannabis more frequently, buy regularly, and are more willing to purchase high-margin derivative products. With the exception of Uruguay and Canada, the other roughly 40 countries worldwide to have legalized marijuana to some degree have done so for medical purposes.
While I'm not expecting international revenue to make up a large portion of sales, it would be nice to see Aurora tack on far more than the CA$4 million registered in the fiscal third quarter.
A final figure you'll want to know that Aurora Cannabis is certain not to highlight in its operating results or conference call is the company's ballooning goodwill, which stood at CA$3.18 billion at the end of March. This CA$3.18 billion represents 57% of Aurora's total assets.
Goodwill is simply the premium that one company pays for another above and beyond tangible assets. Some amount of premium is perfectly normal when making a purchase, as it's the dangling carrot that can entice a board of directors to approve being bought out by a larger peer. In an ideal world, the purchasing company will monetize patents and expand upon existing assets to fully recoup the premium that's been paid for another business. Unfortunately, things aren't always ideal.
In the case of Aurora Cannabis, it's made well over a dozen acquisitions over the past three years, and they've nearly all contributed to its rapidly rising goodwill. Of course, none has been a bigger culprit than its CA$2.64 billion all-stock purchase of MedReleaf, of which CA$2 billion has been classified as goodwill. In my personal opinion, it's going to be virtually impossible for Aurora to recoup CA$3.18 billion in goodwill. Rather, I find it likely that Aurora will admit that it overpaid for some of its deals and eventually write down a portion of its goodwill.
For the fiscal fourth quarter, investors should keep a close eye on whether or not goodwill rises significantly, as well as whether or not it grows as a percentage of total assets. In my view, a positive result would be seeing goodwill stay relatively flat, with its value as a percentage of total assets declining below 55%.
Now that you know what to watch out for, we simply wait for Aurora Cannabis to deliver the goods after the bell on Wednesday.