Canopy Growth (CGC -0.30%) just delivered its biggest quarterly surprise in quite a while. The Canadian cannabis producer reported fiscal 2020 third-quarter results before the market opened on Friday and surpassed expectations across the board.
Analysts looked for Canopy to post Q2 net revenue of 105.4 million in Canadian dollars. Canopy's actual net revenue totaled CA$123.8 million. Analysts expected an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of CA$110 million. Canopy reported an adjusted EBITDA loss of CA$91.7 million.
Perhaps most importantly, Canopy's financial metrics are trending in the right direction. But how did the company deliver such positive results while its primary rival, Aurora Cannabis (ACB 0.62%), posted dismal results on Thursday from its latest quarter? Here are three key factors behind Canopy's blowout Q3 results.
1. More stores
Aurora Cannabis blamed the continued lack of cannabis retail stores in Canada as one of the main reasons behind its lackluster performance in its fiscal 2020 second quarter, which ended on Dec. 31, 2019, the same day that Canopy's fiscal Q3 ended. And there still aren't nearly enough retail stores, especially in Ontario.
But Canopy Growth focused on the positive. The company attributed its solid revenue growth in Q3 primarily "to over 140 stores becoming active in the quarter."
At the end of Q3, Canopy owned 22 Tweed and Tokyo Smoke retail cannabis stores. Canopy said that its quarter-over-quarter gross revenue increase from the Canadian recreational business-to-consumer channel stemmed mainly from increased sales at its corporate-owned retail stores.
2. Impact of acquisitions
A big chunk of Canopy Growth's year-over-year revenue increase resulted from its acquisition of German cannabinoid company C3 in April 2019. Three other acquisitions also contributed significantly to the year-over-year growth -- German vaporizer maker Storz & Bickel, U.K.-based skincare and sleep solutions company This Works, and sports-nutrition company BioSteel.
These acquired businesses also generated solid organic growth. Canopy said that C3 primarily drove its 3% quarter-over-quarter increase in international medical cannabis revenue. The company reported that Storz & Bickel's vaporizer sales soared 46% quarter over quarter, helped in part by seasonal sales. This Works revenue in Q3 jumped 42% quarter over quarter.
Canopy Growth has posted strong revenue growth in the past, but it's also delivered a worsening bottom line in the past, too. This time around, though, the company showed significant improvement, thanks in large part to cost-cutting efforts.
Sure, Canopy still posted a big net loss of CA$124.1 million in Q3 and a big adjusted EBITDA loss of CA$91.7 million. But both numbers reflected progress in the right direction.
The company's total operating expenses in Q3 fell by 14% from the second quarter. When expenses go down by a double-digit percentage and net revenue increases by a double-digit percentage, it's a great recipe for cooking up a strong quarter.
Perhaps the most encouraging thing about Canopy Growth's Q4 update is that the company's future appears to be pretty bright. There are several growth drivers for Canadian marijuana stocks, notably, Ontario's retail expansion and the Cannabis 2.0 cannabis derivatives market. But Canopy's Q3 performance puts it at a different level than most of its peers.
Canopy Growth CFO Mike Lee said, "Actions taken earlier this year are expected to meaningfully reduce stock-based compensation in FY21, and we have started to implement tighter cost controls across the organization." He added, "We plan to take further steps to reduce our costs and right-size our business to ensure that we can generate a healthy margin profile and cash generation in the coming years."
Those words are music to the ears of investors who have grown weary of Canadian cannabis producers' lack of fiscal discipline.