I didn’t find anything that surprising from Nutracea’s 4th quarter results. I had speculated approximately $6 million in revenue for the quarter, but that was including about $1 million in licensing revenue that I thought might be achievable. After listening to the conference call, I realize that I had misinterpreted the company’s strategy with regard to licensing revenue, and that licensing revenue will probably not increase until capacity expansion increases.
Given that capacity had not changed for Q4 vs. Q3, the increase in revenue and the Q3 number can be accounted for mostly be pricing. At the guidance price that NTRZ has issued ($400/ton for SRB, $2000/ton for insoluble, and $10000/ton for soluble), current capacity gives about $3.7 million in revenue per quarter. Even when accounting for the $500k in licensing revenue, it is evident that pricing is at least 20% higher than the base pricing given by the company.
With regard to licensing revenue, I realize after listening to the conference call that licensing revenue is probably not going to increase until capacity increases, because NTRZ has no further product to license at present.
Finally, it is worth noting that account receivable doubled to $7 million versus the third quarter. Nutracea mentioned in the conference call that with their bigger customers, orders tend to come in right at the end of the quarter, and therefore, it appears that a significant amount of revenue was not recognized this quarter, and will most likely be recognized in Q1 2007.
Given all of this, I would expect revenues to come in around $6 million in the first quarter, with $500k coming from licensing. More significant to Q1 results will be the huge increase in share count, which will jump to somewhere between 135 million and 175 million. The discrepancy here comes from the fact that there are about 40 million warrants and options outstanding that can be exercised, but it remains to be seen how many will be. Just to be safe, I would assume a share count of $175 million for the 1st quarter, which means that earnings per share will drop to about a half-cent per share (even though net income will likely increase).
On the positive side, gross margins in the fourth quarter increased from 50 percent to 58 percent, a number which should be replicable in the first quarter. However, gross margins will decline in the second quarter when the LA plant comes online, simply because the basic SRB product has lower margins and will make up more of the production after Q2. Management continues to target 50% margins over the long term.
In addition, it is worth noting that Nutracea shed a bit more color on the European expansion, stating that a second plant might be completed by the end of the year. Although it is not likely to add to 2007 earnings, this rapid buildout in Europe is a positive sign.
All in all, Nutracea appears to be on track with its development plans, and it appears that they will land within the $50 to $70 million in revenue for 2007. After accounting for dilution, my earnings model (check the archives for a more detailed description)still yields a lower bound fair value above $4, and the upper bound for the model is still above $10. Obviously, which side of the range the reach will depend on execution and future performance, but management has executed on their plans consistently so far, and I have no reason to doubt them or there product at present.