Canopy Growth shares fall as fourth quarter revenues rise, loss deepens

Linton
Canopy Growth co-CEO Bruce Linton. File photo

Shares of Canopy Growth Corp. slipped on Friday after the cannabis company reported an uptick in fourth-quarter net revenues but a wider-than-expected fourth-quarter loss as operating expenses ballooned.

During the three-month period ended March 31, Canopy reported net revenue of $94.1 million, up from $22.8 million a year earlier and more than the $92.6 million expected by analysts.

But Canopy's net loss attributable to shareholders jumped to $335.6 million or 98 cents per share for the quarter, compared with a loss of $61.5 million or 31 cents per share during the same period a year ago.

That is three times the net loss of 30 per cents per share expected by analysts, according to Thomson Reuters Eikon.

Canopy's co-chief executive Bruce Linton said it has been investing heavily for longer-term growth, such as ramping up production capacity and preparing for the launch of edibles and other next-generation cannabis products when legal later this year.

"You need to use that capital to build scale. And we did," Linton said on a conference call on Friday, noting that those investments have resulted in assets that are not yet benefiting the bottom line.

Canopy's stock slipped to $52.99 on the Toronto Stock Exchange in early afternoon Friday, down more than eight per cent.

On an adjusted basis, Canopy's loss before interest, taxes, depreciation and amortization (EBITDA) amounted to $98 million, compared with its $21.7-million loss a year ago, as its operating expenses grew by more than 300 per cent.

Quarterly operating expenses totalled $242.9 million, up from $56.2 million during its financial fourth quarter in 2018.

"Lack of profitability should be no surprise given recent company commentary on investment commitments," said Jefferies analyst Ryan Tomkins in a note to clients. "But, given the degree of the losses and the fact that profitability is becoming more of an investor focus, it is likely to cause concern."

Canopy's recreational cannabis revenues for the quarter, both wholesale and retail, amounted to $68.9 million, after Canada legalized adult-use pot in October.

Medical cannabis gross revenue in Canada for the quarter totalled $11.6 million, down from $19.5 million a year earlier.

RBC Capital Markets analyst Douglas Miehm said he is "somewhat concerned by medical sales that fell" from Canopy's financial third quarter.

"While near-term financial results have generally been shrugged off, we believe the market may pay closer attention to Canopy's margin profile, which continues to tracker lower than consensus, and the company's 2020 outlook," he said in a note to clients.

Canopy's gross margin during the quarter was roughly 16 per cent, down from 22 per cent in the previous quarter, he added.

Linton said Friday that the cannabis company has reached the "bottom of our margin trough."

"By the time we exit this year, we're moving up the margin model back to where we were, and we'd like to do that well or better," he told analysts, pointing to its investments and the potential from the sale of higher-margin edibles and other ingestible products as early as December.

He noted that at the end of 2017, Canopy had a gross margin of more than 50 per cent.

"We could have stayed there, and we would have been a nice, tidy little company, probably quite profitable."

Canopy to target specific markets for edibles

Canopy aims to have cannabis-infused beverages and edibles in market by December in time for the holidays or New Year's Eve celebrations, but starting with select markets and a smaller range of products at the outset.

The company expects to be ready with ingestible pot products, but the launch timing will depend on logistics and provincial governments' appetite and capacity to put them in the warehouse and on shelves, said Linton.

Canopy is currently in discussions with various provinces and will determine which markets to prioritize, he said during an interview on the sidelines of the IdeaCity conference in Toronto earlier this year.

The holidays present an occasion for consumers to purchase the next wave of cannabis products, but it also presents a logistical challenge as employees go on vacation and workflow slows.

"We won't have everything ready on the 18th, but we are going to have a bunch of them ready... You're not going to get a universal rollout given the fact that we're starting, essentially, four or five days before Christmas," Linton said.

Last week, Health Canada said the new rules governing edibles and other Cannabis 2.0 products would come into force on Oct. 17. After the law takes effect, federal cannabis licence holders must provide 60 days notice to the agency of their intent to sell the new products.

Health Canada said, in turn, that a "limited selection" of next-generation cannabis products such as edibles, topicals and vapes would "gradually" hit retail shelves no earlier than mid-December.

Linton said deciding variables for which markets to focus on initially would include whether products could be shipped directly to stores, rather than via a provincial warehouse, in order to reach customers faster.

"When you're really trying to beat the clock to the end of the calendar year and the Christmas shutdown, that will be a factor," he said.

However, what is still to be determined is when licensed producers can ship their products to the provinces and territorial governments, said Aurora Cannabis' chief corporate officer Cam Battley.

Aurora expects to have some Cannabis 2.0 products on the market in December, he said on the sidelines of the IdeaCity conference.

"We're fully prepared... We don't want to get too cocky because there can be bumps in the road along the way for companies, as well as for the new system. But we're feeling awfully good about it. We have our technology ready."

The Edmonton-based cannabis company has prioritized the rollout of vaping products, but will also launch "certain edible forms," Battley said, but would not specify which ones.

Canopy expects to have a "good mixture" of its cannabis beverages, but not the full line, out in December, said Linton.

Constellation Beverages, the U.S.-based maker of Corona Beer, has a 38 per cent stake in Canopy, with warrants that could increase its ownership to more than 50 per cent. As part of this relationship, the two companies have been working together to develop cannabis-based beverages.

However, Linton notes that Canopy has been working on beverage technology "even before Constellation started talking to us."

Canopy has already built a bottling line and a chocolate factory, with the ability to add cannabis if and when, he added.

Ingestible products will be launched under its brands Tweed, Tokyo Smoke, but also under new brands for different formats, Linton said.

"I would really like to have a Tweed and tonic for Christmas," he said. "If not Christmas, for sure, New Year's Eve party."