The high potential business of engineering chemicals has had its ups and downs, but it's starting to enter a phase of maturity that investors haven't yet seen. For algae company Solazyme Inc (SZYM +0.00%), the progress may not be as fast as investors had hoped, but it's taking steps in the right direction. In fact, Friday's third-quarter earnings report included a divestiture that will reduce growth potential but could save the company tens of millions and help bring positive cash flow from operations.
Solazyme's results: The raw numbers
| Metric |
Q3 2015 Actuals |
Q3 2014 Actuals |
Growth (YOY) |
|---|---|---|---|
|
Total revenue |
$11.4 million |
$17.6 million |
(35.1%) |
|
Product revenue |
$9.1 million |
$11.6 million |
(21.4%) |
|
Net income |
($34.9 million) |
($39.7 million) |
(12%) |
|
Adjusted EPS |
($0.43) |
($0.50) |
(14%) |
Source: Solazyme.
What happened with Solazyme this quarter?
There were some major developments that Solazyme announced on Friday along with earnings. Here are the highlights:
- Solazyme is terminating existing contracts for the Clinton and Galva manufacturing facilities. This will push all production to the Moema JV plant in Brazil and will make Peoria essentially an R&D and pilot facility. This move is expected to save $12 million to $15 million in expenses in 2016.
- Bunge, Solazyme's JV partner in Brazil, has agreed to expand their joint venture to include food products, part of the shift out of Clinton/Galva. Bunge will essentially be the manufacturing arm while Solazyme focuses on technology and new oils. This is a similar model to what Amyris (AMRS +0.00%) has done in partnering with the cosmetics and pharmaceutical industries.
- Algenist revenue was up 30% from the second quarter but flat year over year.
- A joint development agreement with Unilever was extended, which is expected to bring new products to the market in 2016. Financial impact is thus far undefined.
- Encapso, Solazyme's drilling lubricants product, has been negatively affected by low oil prices. The weakness in this high potential product helped drive the move to more food product production with Bunge.
- Cash at the end of the quarter stood at $117 million.
What management had to say
There's a clear shift in focus for Solazyme to building a sustainable production model and the products that will feed the production line. The challenge has always been determining how fast Solazyme's products will be adopted and how quickly it will be able to reduce production costs. It's not a problem that's unique to Solazyme, either. Amyris has shifted to a similar model of focusing on developing new high-value chemicals, which has a long adoption period. Customers have to design your chemicals into their designs and launch products, which can be a multiyear process in some cases. That's why we're seeing such weakness in product sales.
From a cost perspective it looks like Solazyme is doing extremely well. Operating expenses are down 20% from a year ago and operating cash burn is down 30%. Abandoning the Clinton/Galva facilities will help drive expenses lower and there's potential the company could have breakeven operations by the end of 2016.
For that to happen, the company will need to increase revenue and an expanded agreement with Unilever and the production agreement with Bunge are a step in that direction.
Looking forward
Falling revenue and negative cash flow for Solazyme aren't positives, but the company is making strong strategic moves to improve the performance of high-value products over the next year. Investors will want to watch how quickly management can launch new products with Unilever and if Bunge can bulk-supply food products through its sales channels.
Those two growth opportunities are key as Solazyme's products mature. But adoption is taking longer than many investors had hoped.
