Solazyme Takes One Step Back Before Running Forward

| About: TerraVia Holdings, (TVIA)

Investors of Solazyme (SZYM) were greeted with a welcome surprise on Wednesday as the company announced its Q2 2013 earnings results. The developing company announced a wave of news including two partnerships, a new technology capability, a new oil profile under development, and the "all-clear" for its ongoing construction timeline. Coming off of its first significant setback found in a failed partnership, it was well anticipated that this particular earnings report would be viewed with additional scrutiny.

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Yet despite its recent disappointment, Solazyme exceeded expectations yet again. CEO Jonathan Wolfson highlighted the company's accomplishments when it came to ongoing product development, getting production running, and commercializing the company's products. The following is my list of noteworthy points pertaining to the earnings conference call found here:

The Very Good

  • Sasol. Solazyme forged a new relationships with Sasol. Sasol Olefins & Surfactants is part of Sasol Limited (SSL), a $30 billion parent company and a leading energy and petrochemicals provider operating throughout the world. Through this new partnership with Sasol, Solazyme gains a supply arrangement with binding minimums and increasing quantities. The arrangement is even based upon Solazyme's feedstock costs to help the company maintain its margins. As one of the largest critiques of Solazyme has been its lack of binding offtake announcements, this latest news clearly reinforces the idea that the company is progressing with some of the largest leaders in their respective industries.
  • Oil Development. Oil profile development continues to exceed expectations according to management. Because the company had "progressed ahead of schedule" on its work with Mitsui & Co. over its tailored oils development, Solazyme was able to move onto its next project. This involved developing a high erucic acid tailored oil profile. This accelerated development ultimately allowed for the supply agreement mentioned above.
  • American Natural Processors. The revealing of American Natural Processors [ANP] as a partner may have come as a surprise for some. By allowing the company to handle the downstream process of the Clinton facility production, Solazyme believes it can help lower its capital expenditures and operating risk. Yet the news also revealed that ANP has been Solazyme's downstream partner since 2009. Much of the work conducted with the U.S. Navy involved this partner. By informing investors of this partner now, it leaves one wondering if there are other hidden partners still working outside of the public spotlight.
  • Twinlab Corporation. The announcement made yesterday of a new algal protein line with a new partner was met with limited enthusiasm on the stock market. However, the product gives Solazyme a direct entry into to a high-margin, specialty nutrition market with an established partner. Similar to how Solazyme has found success in the cosmetic industry through Algenist, the company's new relationship with Twinlab could have a similar effect in specialty nutritionals.
  • New Tailoring Capability. Solazyme announced its ability to design oils with very long chain lengths. With an expansion of its technology portfolio, the company can now leverage this new capability to pursue additional high-value markets.
  • Clinton Acceleration. The early commissioning of this facility helps to de-risk production while also producing larger volumes earlier on. This should be useful for pricing discovery. It should be noted that this is not expected to ramp-up commercial production capability any quicker.
  • Moema Construction. The most anticipated facility now under construction remains approximately 80% complete. Management states that this facility remains on time and on budget.
  • Product Margins. The company's product margins remain distinctly high. For Q2 2013, product margins marginally improved. Based off of $4.9 million in revenues, the company retained a gross margin of 69.6%. This remains consistent with its margin guidance for its target markets.

The Possible Bad

  • The Facility Dictates The Timeline. As the facility in Moema comes online, the ramp-up in production will be determined by the problems Moema has to offer. While there is no technology risk according to management, the company will have to address the challenges the new facility will inevitably face.
  • Future Partnership Conflict. Wolfson affirmed that the future may be filled with potential conflicts between Solazyme's partners. If not properly mitigated, these conflicts may hurt the company's important relationships.

The Potential Ugly

  • Roquette Loose Ends. There remains some uncertainty concerning the high-lipid product and high-protein algal powder developed under the former Solazyme Roquette Nutritionals joint venture. Wolfson stated that the company "believes" it will retain the rights to these products. This is due to the fact that the technology, intellectual property, and know-how originated from the company even though it was further developed by the joint venture. However, the lack of a definite answer could suggest that loose ends may still exist here.

Financial Performance

Solazyme beat analyst expectations on both the top and the bottom line. Revenues for the second quarter were $11.2 million compared to analyst estimates of $10.7 million. Likewise, the net loss per share was $0.28 compared to expectations of $0.37 on a non-GAAP basis.

Algenist sales increased approximately 21% over the second quarter in the prior year. While government revenues were practically eliminated as expected, development revenues managed to increase approximately 33% from the prior year. Altogether, non-government related revenues increased roughly 28% over the prior year. This remains impressive considering the lack of a supply capacity increase.

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These trends continue to support the claim that despite a decline in total revenues, the company's commercial development continues to progress. The ability for the company to grow brands and improve its market relationships remain significantly more important than the total revenues and lack of positive earnings now attributed to the company as a whole. With the upcoming commissioning of the plants in Moema and Clinton, the ability to perform will no longer be hindered by a lack of supply capacity.


It remains an understatement to say that the company came out with the big guns today. Solazyme made multiple positive announcements concerning product development, production, and commercialization. These three goals remain the priority in terms of proving that the company is able to execute upon its business plan.

Amidst these accomplishments there will always remain some level of uncertainty regarding the unknown. As I detailed in my short list of cons above, investors are sure to have some anxiety when dealing with a developing company introducing a new technology. Nevertheless, Solazyme has managed to outperform across almost every metric used to measure its performance.

Solazyme now trades with a market capitalization of $692 million at its current price of $11.20. As of June 30, the company held $217 million in cash and marketable securities. The company trades 37% below its IPO price despite having a very healthy balance sheet and two major facilities nearing completion. Above all, Solazyme has forged together a list of Tier 1 names capable of advancing the company's goals.

SZYM Chart
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SZYM data by YCharts

It remains important to consider the bigger picture now at hand. Solazyme is introducing an entirely disruptive technology capable of addressing multiple markets with a single renewable solution. More importantly, the company's process uses well-understood infrastructure and produces improved products capable of integrating directly into existing supply chains. The company is now building upon lasting relationships with partners who are both willing and capable in advancing the company's agenda. Last of all, Solazyme remains adequately financed and equipped with a technology platform that continues to improve seemingly every quarter.

Disclosure: I am long SZYM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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