Highlights From Solazyme's Q2 2014 Conference Call

Aug. 1.14 | About: TerraVia Holdings, (TVIA)

Summary

Solazyme reported an in-line production update in relation to prior expectations.

The company increased customer interest and secured new and key market relationships.

The company's brands of Algenist, Encapso, and AlgaVia continue to progress.

Solazyme (SZYM), a renewable oils and bioproducts company, reported its Q2 2014 earnings on July 30. The early-commercialization stage algae-to-tailored-oils company reported revenue and earnings that fell short of analyst expectations. While some of these original estimates had mistakenly accounted for a consolidation of the company's joint venture with Bunge (BG), investors were quick to discount the company's shares anyways. By early morning of July 31, shares of the company's stock were down almost 7% amidst the company's earnings results. General market volatility and weakness in associated fermentation-based companies also played a role in the sharp market action.

Despite the market response to the company's earnings, Solazyme delivered a rather progressive update on their ensuing conference call. Management stated operation performance was in-line with their prior expectations when it came to ramping production. The company also introduced several large partnerships even though it respected their anonymity by leaving these customers unnamed. Solazyme even included a partnership expansion with AkzoNobel (OTCQX:AKZOY), one of the world's largest paints and coatings companies.

Highlights From The Conference Call

The following were a few additional details released by the company during the earnings conference call.

  • Increasing Customer Base. The company expanded its customer base by 50% over the last quarter from 10 unique companies to 15. It is also engaged with 75 customers who are currently qualifying Solazyme's products through multi-ton samples.
  • Affirmation Of Market Demand. On numerous occasions, management noted that Solazyme's production remains demand-driven and supply-constrained. Before even considering the company's bioproducts, management confirmed that the existing demand for oils by prospective customers has exceeded the company's constructed capacity in the present.
  • 40% Production Increase. While still early in its commercial production ramp, management noted that production at its Clinton facility had increased 40% from the prior quarter. This allowed the company to report its highest product revenue in company history, a trend which should continue as the company continues to ramp its production at its new facilities.
  • An Emphasis on AlgaVia. Based on the strong reception of Solazyme's food oils and whole algal powders, Solazyme expects to place the highest emphasis on its AlgaVia brand going forward. AlgaVia has long been expected to provide a large market opportunity with high margins. The company's emphasis on this brand suggests that the early market reception remains positive. This is another de-risking measure as the company capitalizes upon this opportunity in the large-scale market for healthy food products.
  • International Expansion For Encapso. Solazyme's unique drilling lubricant used for increased performance in oil wells has now been positively tested with potential customers in Asia and the Middle East as well as the ongoing trials in the United States. The company has also stated it has been used in a new geographic region of future importance. In obtaining a new customer found in a large multi-national oil & gas company, Encapso's market acceptance continues to gain momentum despite its recent introduction as a product.
  • Future Expansion with Ulta Salon, Cosmetics, & Fragrance, Inc (NASDAQ:ULTA). Solazyme announced a distribution expansion with Ulta which will significantly expand the reach of its Algenist brand. The relationship will increase Algenist's exposure by another 700 stores. This positively compares with the initial 800-store introduction of Algenist with Sephora, a key partner that has helped make Algenist the largest revenue contributor for the company to date.
  • Lower Overall Cost Advantage. In its latest announcement of an expanded partnership, AkzoNobel cited that use of Solazyme's product will reduce its total overall cost. Management clarified on the conference call that this was representative of an economic advantage for Solazyme with use of their product compared to the petroleum- and palm oil- derived alternatives.

My Take On The Company Now

Solazyme now trades with a market capitalization of $735 million, based on the closing price of $9.68 as of July 31. The company reported $15.94 million in total revenue, of which $9.02 million was from product sales. This quarterly amount was more than the $8.92 million found in the product revenue for the first half of 2013. While the associated costs also increased, investors should expect for the growth of revenue to outpace the growth of costs in the coming quarters. As guided by management, total operating expenses will only gradually increase. Looking forward, total operating costs are expected to amount to 15% more than 2013.

Solazyme's loss grew to $0.56 per share on a diluted basis, up from $0.42 from the year prior. A large part of the growing loss results from the upfront costs associated with expanding operations and marketing expenses. Most of these expenses have been largely incurred in these early phases of ramping commercial operations. As a result, investors should not read too deeply into the growing losses in light of rising product revenue. As Solazyme accelerates its production in the coming months, the trend towards profitability should become more abundantly clear to see.

I believe long-term investors have much to appreciate from this past conference call. Solazyme made tangible progress in regards to partnerships that affirms market demand continues to outpace the growth in supply. It also emphasized the company's prudence in proving reliable production in order to secure long-term relationships with large partners. Yet at the same time the company continues to execute upon its previously stated goals. Production increased 40% from its initial volumes and is expected to grow rapidly in the coming months.

Solazyme is now addressing several differentiated markets found in food products, drilling lubricants, cosmetics, and industrial oils. The company has successfully developed its brand of Algenist and is now in the process of doing the same with Encapso and AlgaVia. Most importantly, its products maintain innate economic advantages over the alternative. This is confirmed by statements such as that from AkzoNobel along with their commitment to offtake 10,000 metric tons of product annually for five years.

Final Thoughts

With a high beta of 1.59, Solazyme is not an ideal company to own for short-term traders attempting to time their market entries amidst the possibility of a general market correction. The company's price action is volatile and operations remain in the early phases of commercialization. As such, the company should not yet be evaluated on the basis of its earnings, but rather on the pace of its revenue growth.

Yet for long-term investors, Solazyme remains one of the most promising names on the market in the present. The company has successfully developed and commercialized a disruptive technology that replaces petroleum-based alternatives in a more cost-effective manner. More importantly, the company has innovated unique product characteristics useful for the markets they address.

This is important when one considers that these products can only be sourced through Solazyme. The latest quarterly results provide a snapshot of this very picture. While investors may have focused on the growing loss, the company emphasized its growing market interest. It has secured large partnerships and build upon the framework needed to accelerate the company's performance going forward.

Disclosure: The author is long BG, SZYM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.