No one expected that Aurora Cannabis (ACB 12.87%) would give fantastic news in its fiscal 2020 second-quarter results. After all, the Canadian cannabis producer just announced major staffing cuts and that its longtime CEO was stepping down. Those aren't the actions you'd expect if great news was on the way.
It came as no surprise, therefore, when Aurora reported anemic results in its Q2 update before the market opened on Thursday. The company's Q2 total net revenue fell to 56 million in Canadian dollars from CA$70.8 million in the previous quarter -- a 26% quarter-over-quarter decline. Aurora announced an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of CA$80.2 million in Q2, significantly worse than the CA$39.7 million adjusted EBITDA loss in the first quarter.
Why were Aurora's Q2 results so dismal? Here are the three main reasons.
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1. Weak wholesale revenue
Aurora's Q2 revenue took a really big hit with its wholesale cannabis sales. The company reported wholesale bulk cannabis net revenue fell to only CA$2.4 million in the second quarter from CA$10.3 million in Q1. That's a whopping 77% quarter-over-quarter drop.
Former Chief Corporate Officer Cam Battley said in Aurora's Q1 conference call that "the wholesale market continues to represent an opportunity for Aurora." He added that the company was "in a unique position to capture a greater share of that market in the coming quarters with potential white labeling strategies and other bulk sales opportunities." However, CFO Glen Ibbott warned that Aurora expected wholesale revenue "to continue to be uneven."
It's obvious that Ibbott's more cautious view was borne out in Q2. Another factor behind Aurora's lower wholesale revenue is that the prices of cannabis sold in the wholesale market were lower in Q2. The company's average net selling price for wholesale bulk cannabis plunged 45% quarter over quarter to CA$1.90.
2. Product returns and price adjustments
The second-biggest reason behind Aurora's poor performance in Q2 was the company's product returns and price adjustments. Aurora recorded CA$6.1 million in actual returns and price adjustments in the second quarter and booked a CA$4.5 million provision for future returns and price adjustments. In total, this caused the company's net revenue in Q2 to be CA$10.6 million lower than it would have otherwise been.
Just three months ago, Battley told analysts that Aurora wasn't experiencing the same issues with product returns that negatively impacted some of its peers, notably including Canopy Growth (CGC 20.65%). He even stated, "I want to touch wood because you never know what will happen in the future, but we do not anticipate that we will have those issues either."
Battley again proved to be overly optimistic in his outlook. Aurora wound up facing the same problems that Canopy did. The only silver lining in the dark cloud was that Aurora's hit from product returns and price adjustments was a lot lower than the CA$32.7 million that Canopy recorded in its fiscal 2020 second quarter.
3. Germany embarrassment
Another significant problem for Aurora in Q2 resulted from the company's debacle in Germany. Aurora temporarily lost its medical cannabis license in the important European market because it sold irradiated medical cannabis without the required permit to use radiation to prevent microbial contamination.
The company reported that the temporary suspension of its license in Germany caused its international medical cannabis revenue to fall to CA$1.8 million in Q2 from CA$5 million in the previous quarter. This negative impact was a little worse than what I had projected in December.
What's next for Aurora
Don't look for the situation for Aurora to improve very much over the next few months. In fact, the outlook for Canadian marijuana stocks overall doesn't appear to be very bright.
Aurora stated that "there is likely to be a slower than previously expected rate of industry growth in the near-term." The company anticipates that industry headwinds including a market shift to value brands and the sluggish growth in the number of retail stores in Canada will result in it having "modest to no growth" in the fiscal third quarter compared to Q2.
In the meantime, Aurora is tightening its belt considerably by cutting spending and reevaluating all of its capital projects. Glen Ibbott said that these actions "have already positively impacted SG&A [sales, general, and administrative] expense and we are confident that our run-rate will be approximately [CA]$40 million-[CA]$45 million as we exit the fiscal fourth quarter of 2020."
