Aphria (APHA) couldn't make it three in a row. The Canadian cannabis producer posted better-than-expected results in its previous two quarterly updates. But it was a different story when it announced fiscal 2020 second-quarter results before the market opened on Tuesday.
Many investors focused on Aphria's revenue miss. The company reported net revenue of 120.6 million Canadian dollars, well below the CA$130.4 million analysts expected. However, there were at least five things in Aphria's Q2 update that were more important than the revenue miss.
1. No more "interim" CEO
Irwin Simon has been Aphria's chairman of the board since December 2018. He has also served as the company's interim CEO since February 2019.
Now, the "interim" label has been removed from Simon's title. Aphria announced that Simon is the company's permanent CEO. This comes as no big surprise: Aphria has turned things around significantly as Simon led the company in moving past allegations of overpaying for Latin American acquisitions in a transaction that benefited key insiders.
2. Germany continues to be Aphria's center of gravity
Aphria's revenue fell in Q2 by 4% from the prior quarter. The company said that it was due to lower distribution revenue from CC Pharma, the German medical cannabis distributor that Aphria acquired early last year. Aphria stated that this lower distribution revenue was "associated with the change in the German government's medical reimbursement model and seasonality in CC Pharma."
The key takeaway, though, is that Germany continues to be the new center of gravity for Aphria. CC Pharma distribution revenue in Q2 was CA$86.4 million -- nearly 72% of the company's total net revenue. As Germany goes, so goes Aphria, at least for now.
3. Supply couldn't keep up with demand
There was an intriguing statement buried in Aphria's Q2 results press release: "Customer demand exceeded the Company's supply capabilities in the second quarter." In the previous quarter, some of Aphria's rivals experienced the opposite scenario with products being returned.
Aphria said that the supply-demand imbalance was caused by the timing of receiving a license for its Aphria Diamond facility. As a result, the company had to buy wholesale cannabis products from other licensed producers to bolster its own capacity. While Aphria's margin was lower for the sales of these products, the company also sold fewer wholesale products to other companies, thereby achieving higher gross margins overall.
4. What's behind the swing to a loss
Aphria posted a nice profit of CA$16.4 million, or CA$0.07 per share, in the first quarter. However, the company reported a net loss of CA$7.9 million, or CA$0.03 per share, in the second quarter. What happened?
The lower revenue was one key factor. But Aphria also spent significantly more on share-based compensation (up CA$2.6 million from Q1) and selling, marketing, and promotion (up CA$4.4 million from Q1). Combined with smaller increases in other expenses, these were enough to swing Aphria to a loss after two quarters of profitability. The company did, however, post positive earnings before interest, taxes, depreciation, and amortization (EBITDA) of CA$1.9 million.
5. Why 2020 guidance was lowered
Probably the biggest story in Aphria's Q2 update was that the company lowered its full-year fiscal 2020 outlook. Aphria now projects net revenue will be between CA$575 million and CA$625 million with adjusted EBITDA between CA$35 million and CA$42 million. The company's previous guidance was for 2020 net revenue of between CA$650 million and CA$700 million with adjusted EBITDA between CA$88 million and CA$95 million.
Aphria said the reasons for the lower guidance included a slower-than-expected rollout of new retail stores in Ontario, Alberta's temporary ban on vaping products, higher costs from buying from third parties due to the timing of receiving a license for its Aphria Diamond facility, and CC Pharma's slower growth stemming from Germany's medical reimbursement model changes.
It's easy to miss the forest for the trees with any company's quarterly update. This wasn't a great quarter for Aphria, but it wasn't a horrible one either. And while Aphria's streak of beating investors' expectations came to an end, the company's growth prospects certainly haven't.
All Canadian marijuana stocks, including Aphria, will benefit from the expansion of the retail infrastructure in Ontario. Sure, it's not coming as quickly as companies or investors would like, but it's coming. Aphria and its peers will also see higher revenue as the Cannabis 2.0 market for cannabis derivatives market takes off. Aphria's future could very well be better than its present.