Earnings Reports (May 13th-17th)
Earnings Reports (May 13th-17th)
Taking a Look at Avita Medical (RCEL) & DLocal's (DLO) Earnings Results.
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1. Avita Medical (RCEL)
Recently, AVITA Medical (RCEL) released their Q1 2024 financial results, and investors have been questioning the company’s future. With a new management team that built back trust, which is a challenging feat in the business world, this trust may have been more fragile than management anticipated.
The company had a surprisingly weak first quarter, with revenue growth of just 5%. This is concerning, especially given that two significant expansions of the sales team resulted in a 38% increase in operating expenses over the past year. This surge in expenses has led to the highest level of quarterly operating cash burn in over five years. Despite these challenges, RCEL management remains optimistic. They have reiterated their belief in achieving nearly $78.5M in full-year 2024 revenue. Additionally, they have further expanded the sales team and announced plans to broaden the product portfolio into adjacent wound care areas. This aggressive approach is somewhat perplexing given the current financial pressures, in my opinion.
On one hand, scaling the business is necessary. The company needs to approximately double or triple its quarterly revenue to approach breakeven operations, likely by the first half of 2026. On the other hand, the timing of these investments is questionable. The rapid expansion of the sales team has led to operational inefficiencies without immediate payoff, a risky strategy with a limited cash runway.
RCEL's financial performance has been underwhelming (not trying to sound like a perma bear). The company's revenue growth of just 5% reflects struggles within its core treatment indications of burns and full-thickness skin defects. The latter, launched in July 2023, has faced delays due to slower-than-expected approval processes from Value Analysis Committees (VACs). Management admitted to underestimating these processes and lacking internal expertise in navigating them.
More on the sales team front, the investment in the commercial sales team – growing from 30 reps at the beginning of 2023 to 104 by the end of March 2024 – has not yet resulted in meaningful revenue growth. This rapid increase in headcount is a notable departure from the historically slow trend in growth. So, with the combination of slow revenue growth and high expenses has led to a deterioration in operating income and cash flow. These fluctuations, although temporary, have created doubt among myself, and fellow investors, about the company's growth projections for 2024. With a cash balance of $68.2M, the financial outlook is uncertain.
The slowdown in burn-related revenue is also concerning. Larger peer Vericel reported a 56% YoY increase in sales of its burn product, Epicel, while RCEL saw revenue declines in the United States, Japan, and Australia. This suggests potential operational inefficiencies or other underlying issues, such as manufacturing challenges or unofficial recalls.
Despite the challenges, RCEL is positioned for near-term growth. The company expects to increase the number of accounts for full-thickness skin defects from 73 at the end of March to about 119 by the end of June. The PermeaDerm matrix product, launched in March 2024, and the upcoming ReCell Go, expected to receive regulatory approval by the end of May 2024, are anticipated to drive growth. And, with the company's aggressive revenue guidance of $78.5M for 2024 seems unrealistic. To meet this target, second-half 2024 revenue would need to reach nearly $53.5M, a steep and improbable ramp-up (overpromise and under deliver?).
My Take
This article isn't just a critique of RCEL and its management team, but the points highlighted above are warranted. Management has significantly failed to meet their promises to investors. The stock price surged from $5 per share to $22 per share based on overpromised future performance, only to fall below $9 per share due to their failure to deliver, reflecting poor decision-making.
Now, they face the possibility of needing to raise additional capital if they can't reach their targets. Despite my harsh critique, it's worth noting that RCEL has promising products in their pipeline and existing products that are still ramping up. These could potentially serve as catalysts to restore the company's previous standing. For now, management must prove themselves before I consider adding to my position. I need to see results. This remains a hold for me, deserving patience over the next couple of quarters to see if they hit their targets.
2. DLocal (DLO)
This past week, DLocal (DLO) plummeted nearly 30% following the release of its Q1 2024 financial results. DLO primarily facilitates international business transactions by managing foreign currency exchange. From a volume perspective, the business is thriving, with the company's total payment volume surging 49% YoY to $5.3B in Q1. However, what upset the market and many short-term retail investors was the contraction in margins. Despite the significant increase in payment volume, DLO’s operating income for Q1 was just $27M, a 32% YoY drop in profitability. This stark contrast underscores the impact of its declining take rate.
Management, however, did not seem overly concerned, a sentiment that aligns with the perspective of many long-term investors. For several quarters, management has emphasized their strategy of reinvesting in the business amidst a challenging macro environment. They plan to leverage the company's balance sheet and lower stock price by authorizing the repurchase of $200 million in shares.
My Take
This outcome should have been expected since management has consistently emphasized reinvesting in the business. Short-term investors, who claim to be long-term investors, are criticizing the compressed margins despite management’s repeated focus on reinvestment. Additionally, they point to a top DLO customer struggling with competition and pricing power after renegotiating contract terms upon renewal. Investors assume this was due to competition but fail to consider that the customer might be operating in a challenging macro environment and simply wanted a lower rate. Isn’t that a plausible scenario, or is pessimism just easier to scale?
To clarify, when I say this was expected, I’m referring to business performance, not the stock price. Volatility is beyond our control, and the level of volatility this week was quite intense. Investors might either let this volatility drive their decisions irrationally or take a step back, see the bigger picture, and recognize a potential buying opportunity. I chose the latter, consolidating my position further this week.
It was indeed a tough quarter from a business perspective but considering the long-term outlook and the sustainably rising Total Payment Volume (TPV), this presented a buying opportunity for me.