Tilray: Not Getting Better
- Tilray missed Q4 targets by a wide margin.
- The company forecasts using most of the outstanding cash during 2020.
- The forecast doesn't show the cannabis company reaching cash flow positive until Q4'20 or Q1'21 while requiring quarterly revenues to nearly double.
- The stock isn't investable despite new all-time lows.
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The Tilray (NASDAQ:TLRY) quarterly results reinforce my theory from the beginning of the cannabis investment story. The Canadian cannabis LP is chasing so many different business opportunities around the globe that the end results are always disappointing. My investment thesis remains negative on the stock as the 10% employee cut isn't enough to turn the financial prospects around in the near term.
Another Disappointing Quarter
For Q4, Tilray missed revenue estimates by a startling $8.6 million. Excluding the hemp business bought last year, the company only generated $28.3 million in cannabis revenue in the quarter. Those revenues were down a shocking $7.2 million from the prior quarter despite the introduction of Cannabis 2.0 products in December.
Source: Tilray Q4'19 earnings release
In total, Tilray basically reported quarterly revenues back equivalent with Q2 when the company reached revenues of $45.9 million. The major warning back during the sales ramp was the reliance on bulk sales of $6.8 million. The large Canadian cannabis companies didn't build global operations to dump product on the bulk market.
As investors can see the different business categories all bounce around. The company saw medical cannabis and bulk sales peak in Q3 and the hemp business hit a high back in Q2. In a cannabis market where sales are generally rising, Tilray seems to be chasing too many businesses with disastrous results.
On the earnings call, CEO Brendan Kennedy highlighted some of the products availability that highlights my major concerns of Tilray being unable to manage the business. The company seems to shift focus to one business segment and loses out in the other segment:
- Medical cannabis products available in 15 countries and 5 continents.
- Hemp products available in over 17,000 retail doors in 20 countries.
- Facilities and offices in Canada, U.S., Europe, Australia and Latin America.
- Cultivation faculties in Canada and Portugal.
A prime example is the adult-use and bulk business where combined revenues went from $25.8 million in Q3 to only $20.9 million in Q4. Basically, the company shifted more sales into the adult-use sector at selling prices of only $3.19 per gram. Other companies were selling wholesale at this rate so Tilray clearly lost market share during the quarter when monthly sales continue to hit records in Canada.
More Restructuring Needed
The main issue with the company remains the wide focus on a hemp business in the U.S. and a medical cannabis business in Germany and other countries around the world while the main business was always suppose to be Canadian cannabis, whether medical or recreational. Those businesses don't necessarily work together when trying to get product into a retail store versus a pharmacy and prescribed by a physician.
The end result is another quarter with 29.5% gross margins (excluding inventory reserves and returns) and a substantial EBITDA loss of $35 million. Tilray cut about 10% of the employee base during February to reduce costs, but the company needs to streamline operations and focus.
The Q4 operating expense base was $52.4 million with an additional $1.7 million for research and development. During the earnings call, the CFO stated the goal was to target an expense base of closer to $40 million due to one-time charges and the headcount:
So first, you got a cut off roughly $9 million, and when you look at the runway rate. And then, we had some changes in our G&A as we announced -- as Brendan mentioned of 10%, on the headcount side. We expect G&A to get into the $40 million to $45 million range, closer to $40 million by the end of the year, which is actually when you look at total SG&A for 2019, at average $37.5 million, I know the last quarter was higher because of some onetime costs, but we actually will see a little bit of an increase from 2019 kind of on average for the quarter to -- in the $40 million to $45 million range.
The company continues to anticipate a gross margin opportunity in the 50% range and adjusted EBITDA margins of 25% to 30%. The recent results provide no confidence in the company actually achieving these goals.
Tilray predicts gross margins reaching 40% in the short term requiring the company reach $100 million in quarterly sales in order to breakeven with an operating expense base of $40 million. Analysts have the company reaching this quarterly sales level in Q1'21, but investors need to question the ability of Tilray to essentially double sales while cutting costs in just over a year.
Another year is far too long for Tilray to remain cash flow negative. The company ended 2019 with a cash balance of $97 million and the company added another $60 million in debt, but the cash costs for 2020 place liquidity under stress this year:
- Negative operating cash flows: $35 million to $45 million.
- Cash interest and principal payments: $40 million.
- CapEx: $25 million to $35 million.
Even the company forecasts using up to $120 million in cash during the year and Tilray hasn't hit most financial targets in the last year.
The key investor takeaway is that too many things have to go right for Tilray to become an investable stock. The company still has too many far flung operations to manage in order to reach financial targets.
The stock might appear cheap down at $13 considering the massive declines from the highs, but a money losing business with questionable operations shouldn't trade with a $1.3 billion market cap with sales targets of only $300 million.
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