Leading Canadian marijuana firm Aphria (TSX:APHA)(NYSE:APHA) is set to release its fiscal third-quarter (Q3 2019) financial results for the period ended February 28 on April 15 before market open. Revenue growth and operating cost management remain the key investor focus right now and there is a strong chance that the company could surpass current analyst top-line projections in the upcoming report.
Public analyst revenue projections for the quarter range between $60 million and $68.92 million, implying a 145% sequential growth from the $24.52 million gross revenue for a previous quarter, or up to 571% year-on-year growth from the $10.27 million sales reported for the same quarter in 2018.
This could be a massive quarterly revenue jump by any standards. How could it come about?
Why the sharp revenue jump?
The company realized a 63% sequential rise in net revenue in a previous quarter, as adult-use cannabis sales boosted sales volumes. However, the previous earnings report only captured roughly a month and a half of recreational sales to month-end November, while the upcoming report covers a full three months of adult-use sales. This could drive substantial cannabis revenue growth.
I expect Canadian segment revenue to come in the range of $30-35 million for the quarter, but there are significant chances for the reading to come in lower.
The forecast above leaves a whole +$30 million in expected revenues unallocated, and the biggest contributor to the company’s revenue growth this time will be the company’s latest European acquisition.
The company completed the acquisition of Germany-based pharmaceuticals distributor CC Pharma GmbH in early January this year. The acquired company has a strong pharmaceuticals distribution footprint across Europe, with access to more than 13,000 pharmacies in Germany — a growing medical cannabis market.
CC Pharma generated €262 million (about $393 million) in revenue for 2018, and that would equate to an average monthly revenue of about $32 million. Considering that the acquisition was completed before January 9, there is a possibility that the new subsidiary contributed close to $60 million in sales during the two months before quarter ended on February 28.
Well set for a revenue beat?
Around $60 million in quarterly revenue could possibly come from CC Pharma if the company chooses gross revenue reporting, and there is a small additional revenue stream from Latin America, too. One would think that the marijuana firm is well set to beat analyst revenue estimates.
However, there were persistent productive capacity challenges during the quarter.
The company was stuck at a functional productive capacity well under 30,000 kilograms per annum throughout the quarter while waiting for new production licences on its extended flagship Aphria One facility, which finally came soon after the quarter had already closed.
Further, January medical and recreational dried marijuana sales were reported weaker than October to December monthly sales, according to Health Canada, and Canadian quarterly sales growth could have been softer for the company, even after new shipments to Shoppers Drug Mart debuted during the quarter and cannabis oil sales picked month on month to January.
Watch the profit margins
The company reported a weaker adjusted gross margin at 47% in the previous report and a negative gross profit for the quarter due to lower product net prices, while production costs soared as productivity declined. I expect production costs to have remained high, as the company grappled with capacity constraints during the quarter.
All-in cost of sales and cash costs to produce marijuana in Canadian operations may have remained elevated.
Canadian operating expenses may remain largely unchanged, but the operating margin may improve with increased revenue generation.
That said, it may be too early to expect a return to positive adjusted EBITDA, as the company may be yet to reach breakeven sales volumes locally.
I will be interested in watching how CC Pharma, which generated a positive 4% EBITDA of €10.5 million ($15.75 million) in 2018, could improve Aphria’s adjusted operating margin for the quarter, but the bottom line will most likely be distorted by realized and unrealized gains from the company’s investment portfolio.
Foolish bottom line
The biggest concern for marijuana investors currently is revenue growth and, to some extent, operating cost management. The company is most likely going to impress on these two fronts in the upcoming earnings release — the first report after the departure of founding CEO Vic Neufeld.