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Aurora Cannabis: Q2 revenues rumble while margins crumble

Investors were anxiously waiting for Monday's release of Aurora’s fiscal second-quarter results. This was the first opportunity to measure business after Canada legalized cannabis on October 17.

If revenue were the only measure of relevance, the quarter was impressive. Most everything else; not so much. Here is why.

Net revenue came in at CA$54.2 million ($40.88 million). That marks an 83 percent gain quarter over quarter and 363 percent from last year. Analyst coverage on Aurora is pretty thin but the expectation at about CA$52 million ($39.22 million). So for what it is worth, Aurora beat on revenues.

Aurora’s Q2 earnings are being released today! Follow @aurora_invest for all the latest investor news.Aurora publiera aujourd’hui ses résultats du 2e trimestre! Suivez-nous @aurora_invest pour les dernières nouvelles destinées à nos investisseurs. pic.twitter.com/ERDVgjCnAO

— Aurora Cannabis (@Aurora_MMJ) February 11, 2019

The company attributed the revenue surge to its launch in the Canadian consumer market, where it reported sales of CA$21.6 million ($16.29 million). That was good for 20 percent of the Canadian market according to the company. Overall 6,999 kg of cannabis were sold.

[Bruce Linton tempers expectations as larger licensed producers Canopy Growth, Aurora Cannabis brace for disappointing earnings reports this week]

So far all of this is good news. But the rest of Monday’s report was a sloppy mix that could not have impressed many. Production costs are going in the wrong directions.

Source: Aurora Cannabis

The squeeze is on

Gross Margins on cannabis revenues came in at just about 54 percent. That was down sequentially from the previous quarter of 70 percent and previous year levels of 63 percent.

The company was hurt both from the standpoint of production costs and average selling prices. Cash costs, year over year increased 36 percent while average selling prices fell 21 percent for dried cannabis and by 25 percent for extracts. 

[PharmaCielo granted new cannabis licenses in Colombia as competition heats up in Latin America]

This may prove to be a temporary condition for average selling prices considering the pressure in Q2 to maximize revenues. But additional cost pressures will hit the income statement when construction of Aurora Sky, the company’s 300,000 square foot expansion of it’s Edmonton Airport facility comes online late in quarter four.

Non-operating items

And then there is the matter of the CA$237.8 million ($179.35 million) net loss. Close analysis will trace most of this to a non-cash mark-to-market charge of CA$190 million ($143.30 million) on derivative investments. Nevertheless, it still came as a surprise; an especially big one considering the size of present and projectable revenues.

Looking ahead

So for the balance of the year, production and operating costs could prove to be key factors in Aurora’s stock performance. Management is standing by its projection of sustainable positive EBITDA beginning in the fourth quarter.

The company anticipates that with Aurora Sky operating at full capacity, as well as continued reduction in operating costs, the cash cost to produce per gram will trend significantly lower. Management expects that long-term operating cost at its Sky Class facilities will be well below $1 per gram.

Cost per gram in Q2 was $1.92. Thus progress with Aurora Sky is what short term investors will be placing their bets on.

[Marijuana stocks weekend investor roundup: Analysis of the week's most important events in the cannabis industry (February 9)]

Other industry leaders are reporting this week that will add data points to the newly legalized Canadian cannabis market. Tilray (TLRY) is scheduled for Tuesday while Canopy Growth (CGC) will be out on Thursday.

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