Imagine Babe Ruth pointing to the outfield fence before stepping up to the plate, confidently predicting that a home run is on the way. The pitch comes. He swings -- and hits a pop-up that's easily caught by an infielder. What a letdown that would have been, right?
That scenario isn't too terribly different from what Aurora Cannabis (NASDAQ:ACB) just did. In August, the Canadian cannabis producer provided guidance for its fiscal 2019 fourth quarter. It predicted net revenue between $100 million and $107 million in Canadian dollars ($76 million to $81.3 million). That range reflected impressive quarter-over-quarter growth of 59%. A home run.
Aurora stepped up to the plate after the market closed Wednesday to report its actual Q4 results. And the company failed to hit that predicted home run. Here's what you need to know.
Q4 net revenue was CA$98.9 million. Not only was that lower than the range the company projected just a few weeks ago, but it also came in well below the CA$108.3 million expected by analysts.
What happened? Aurora committed the age-old business mistake of overpromising and underdelivering.
In several respects, the company's Q4 top-line results were very good. Net revenue jumped a whopping 52% over the previous quarter. That kind of growth possibly would have been well received had expectations not been set too high.
Consumer cannabis net revenue, which reflects sales in the Canadian adult-use recreational cannabis market, increased 52% quarter over quarter to CA$44.9 million. Aurora also sold a lot more cannabis in the wholesale bulk market -- CA$20.1 million in Q4 versus less than CA$2.1 million in the previous quarter. The company's medical cannabis net revenue climbed 10% to nearly CA$29.7 million.
But the average selling prices in the consumer and wholesale bulk markets are much lower than average prices in the medical cannabis market. As a result, its overall average net selling price fell from CA$6.40 per gram in the third quarter to CA$5.32 in the fourth quarter.
Perhaps the most telling sign of Aurora's challenges is the company's statement that "the Canadian consumer channel continues to experience challenges at the retail level in key markets, and resolution of this issue is beyond the Company's control." In other words, provinces aren't opening enough retail outlets yet, causing problems for Aurora and its peers.
Chief Corporate Officer Cam Battley also stated in the company's Q3 conference call that he expected positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the fourth quarter. That didn't happen. Aurora instead announced an adjusted EBITDA loss of CA$11.7 million.
What to like
While the glaring revenue miss is the big story with Aurora's Q4 results, there were several things for investors to like with the company's latest update. The supply constraints of the past don't appear to be a big issue now. Aurora said that its facilities currently have an annualized run-rate of more than 150,000 kilograms of cannabis. The company produced 29,034 kilograms of cannabis in the fourth quarter, up from 15,590 kilograms in the prior quarter.
Gross margin also improved, rising to 58% in Q4 versus 55% in the third quarter. This increase reflected continued progress in reducing its production costs per gram.
Despite failing to deliver positive adjusted EBITDA, the company is tracking in the right direction. Its Q4 adjusted EBITDA loss of CA$11.7 million was a whole lot better than the adjusted EBITDA loss of CA$36.6 million in the previous quarter.
More at-bats to come
Aurora shouldn't have provided revenue guidance that it wasn't able to hit. And it shouldn't have talked about delivering positive adjusted EBITDA if it wasn't fully confident that it could meet that goal. But the Q4 results weren't horrible from an objective perspective, putting aside estimates and predictions.
More importantly, the company should be able to continue on its path to profitability. The Cannabis 2.0 market (referring to the upcoming legalization of derivatives in Canada) presents new growth opportunities for Aurora, which plans to launch multiple new products in December. The company is also evaluating what it said were "a number of alternatives to grow Aurora's presence in the U.S. market."
Investing in marijuana stocks comes with the kinds of ups and downs we're seeing with Aurora. The company itself stated that "quarter-to-quarter sales volumes and revenues may be volatile." Its share price could mirror that volatility.
Aurora demonstrated that it's not the Babe Ruth of cannabis. But there are more at-bats to come.