Aurora Cannabis (ACB) is expected to announce its Q4 FY20 results in the next few weeks. The company has missed the Street’s revenue estimates in 4 of its last 5 quarters so investors would be anxious to see if the company is able to break this streak of underperformance this time around. But in addition to tracking its headline revenue figure, investors may also want to track its bifurcated financials, its margin profile and listen in on its management’s outlook for the next year. These items are likely going to determine how the stock reacts post-earnings. Let’s take a closer look at it all.
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Bifurcated Financials
Aurora Cannabis classifies its cannabis revenues in four end-markets — Canadian Medical, Consumer, International Medical and Wholesale. The COVID-19 outbreak has had a varied impact on global supply chains across major end-markets so, tracking this bifurcation of Aurora’s revenues would shed light on how exactly has the cannabis producer been impacted during these uncertain times.
(Source: BusinessQuant.com)
Aurora Cannabis generates most of its revenues from recreational sales in Canada — accounting for 55% of the company’s overall revenues during its Q3 FY20. So, any fluctuation in this revenue stream is bound to have a notable impact on the company’s overall financials. Fortunately, for its shareholders, the retail cannabis market in Canada seems to be doing well of late.
Latest data reveals that recreational cannabis sales in Canada reached a record high of C$201 million during June, as the COVID-19 outbreak pushed the domestic demand for cannabis and its derivative products, higher. Not only that, but the month over month rate of growth accelerated from April through June. So, I opine that Aurora stands to benefit from these industry tailwinds as well and its revenues from recreational cannabis sales in Canada are likely to grow sequentially and year over year during its Q4 FY20.
(Source: Business Quant)
Upon converting this monthly sales data into quarterly data, we find that recreational sales across Canada grew by 15.6% quarter on quarter. So, I’m forecasting Aurora’s recreational sales to more or less grow in-line with this industry growth figure in its upcoming earnings call.
The chart above also highlights that Aurora’s revenue from medical cannabis sales in Canada has remained stable in the last four quarters and I don’t find any reason to suggest that the figure would change in Q4. So, I’m estimating its medical revenue within Canada to remain flat sequentially.
The company claims on its website that it has a presence in 25 countries. The bullish rationale with investing in Aurora has been: It’s en-route to becoming a global cannabis supplier and it’ll register exponential financial growth once its international operations pick up steam. But that hasn’t happened yet. In-spite of this aggressive global expansion, the chart above highlights that Aurora’s international medical revenues accounted for just 5.5% of total revenue in its Q3 FY20.
I don’t see any triggers that would catapult its growth anytime soon so I believe its international medical revenues would remain flat on a sequential basis in Q4. But we must track this revenue stream and any associated variations nonetheless in the company’s upcoming earnings report, to see if management’s ambitious international expansion plans are starting to bear fruit or if its international footprint continues to be a burden on the company’s financials.
We must also listen in on management’s outlook for the next year and how they plan to kickstart their overall growth engine. For the record, analysts are forecasting its FY21 revenues to be at $415 million.
Margin Profile
Moving on, we’ve seen that demand for recreational cannabis and its derivative products surged in Canada during the last quarter. But we don’t know how this affected Aurora’s profitability. If its management played its cards right, then they should register a margin expansion in their Q4 by way of strategically shifting their sales mix to more profitable products, or by hiking average selling prices to capitalize on heightened demand.
Data by YChartsThe cannabis producer has been burning through cash to fund its management’s ambitious international expansion plan, which, so far, hasn’t raked in much revenue yet. So, it’s all the more important for the company, its management and its shareholders that Aurora posts some kind of a margin expansion in the near future.
This would put money in the bank, provide financial flexibility to its management to better execute their business transformation plans, hopefully defer future rounds of shareholder dilutions and maybe even reinforce shareholder’s confidence in the management. So, I would suggest readers and investors to monitor the company’s gross margin profile in its Q4 FY20 results.
Per this article, Aurora Cannabis “will shut its offices in Portugal, Spain, and Italy while reducing its European workforces by one-quarter in select countries and its regional office.” The author of the article claims that the information was validated by one of Aurora’s spokespersons. So, we could expect an announcement about the same in the company’s upcoming earnings call. But from a financial standpoint, Aurora may register one-time expenses and write-offs as it scales down its operations, which may result in operating and net margin compression in Q4 FY20.
What Lies Ahead
Aurora Cannabis is surrounded by uncertainty for the time being at least. We don’t know how the company is positioned in the COVID-19-era or how scaling down its business is going to impact its financials. This is probably why even professional analysts have extremely divided opinions about its current and future prospects. For the record, analysts are forecasting the cannabis producer’s Q4 FY20 revenues to be between C$66.4 million and $82.77 million – a massive variance of almost 25% between low and high-end estimates.
Having said that, I would recommend readers and investors to not get swayed by any one metric in particular in its upcoming earnings report and instead track its revenue growth, its margin profile and its bifurcated financials to get a fuller picture of its state of operations. Good Luck!
Author’s Note: I’ll be writing another article on Aurora Cannabis next week, you can stay updated by clicking the “Follow” button at the top. Thanks!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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