Earnings Reports (Nov 6th-10th)
Taking a Look at Magnite, Rocket Lab, Planet 13, Avita Medical, Weekly Activity, & Portfolio Update.
The past week in the earnings season has certainly been a rollercoaster, with the market responding to various companies' announcements with sharp and often unpredictable fluctuations. This volatility, sometimes seeming irrational, aligns with a principle I often emphasize: volatile markets can unveil unique opportunities.
This week, we've already dived into earnings for Coherus BioSciences (CHRS), Upstart (UPST), and Global Crossing Airlines (JETMF). As of my last update on Thursday, I was on the fence about my stance on Upstart. After careful consideration, I chose to exit my position and lock in the profits. I'll elaborate more on this in my portfolio update section. Now, let's shift our focus to the recent earnings of other notable companies, including Magnite (MGNI), Rocket Lab (RKLB), Planet 13 (PLNH), and Avita Medical (RCEL), and unpack their financial performances.
1. Magnite (MGNI)
Magnite released their results this past week, and it was what I was expecting. The company has successfully been taking market share in their most targeted segment, which is CTV. Although most of the numbers look terrible, which has been industry wide between other AdTech players, I’m still optimistic about the long-term future with the company.
Key Financial Highlights:
Magnite's Q3 2023 showcased a mix of growth and challenges. Here are the key highlights reorganized for clarity:
Revenue Growth:
Total revenue reached $150.1M, marking a 3% increase from the same period last year.
Contribution ex-TAC Developments:
Overall, Contribution ex-TAC grew by 4% YoY to $133.1M.
Within this, Contribution ex-TAC from CTV (Connected TV) saw a 6% decrease to $52.5M, which was within the guided range of $50 to $52M.
On a brighter note, Contribution ex-TAC from DV+ (Digital Video Plus) climbed 12% to $80.7M, surpassing the guidance of $78M to $80M.
Profitability Metrics:
The net loss improved to $17.5M, or a loss per share of $0.13, compared to last year's net loss of $24.4M, or $0.18 per share.
Adjusted EBITDA was reported at $40.3M, translating to a 30% Adjusted EBITDA margin, albeit a decrease from $44.4M in Q3 2022.
Non-GAAP earnings per share stood at $0.12, a decline from $0.18 in the same quarter of the previous year.
Operational Cash Flow and Debt Management:
The company generated an operating cash flow of $31.8M.
Additionally, Magnite repurchased $34.5M of its convertible notes during the quarter. To date, approximately $125M, or 31%, of the total convertible notes have been retired.
CTV Segment Performance:
The Connected TV (CTV) segment continued to gain market share, demonstrating Magnite's strengthening position in this domain.
Notably, there was an over 20% growth in advertising spend in the CTV segment, reflecting robust market demand and Magnite's effective capture of this growth opportunity.
This quarter's results reflect Magnite's ability to grow revenue amidst market challenges, with notable progress in managing its profitability and debt. The variances in different segments of the business, such as the growth in DV+ and the decline in CTV, highlight the dynamic nature of the industry and Magnite's adaptability within it.
Financial Outlook:
Q4 2023 Projections:
Total Contribution ex-TAC: Expected to be between $158M and $162M.
CTV Contribution ex-TAC: Anticipated to range from $61M to $63M.
DV+ Contribution ex-TAC: Forecasted to be between $97M and $99M.
Adjusted EBITDA Operating Expenses: Projected to lie between $94M and $96M.
Full-Year 2024 Outlook:
Total Contribution ex-TAC Growth: Predicted to be in the high single digits, with the CTV segment growing faster than DV+.
Adjusted EBITDA Margin Expansion: Targeting an expansion of 50-100 basis points.
Adjusted EBITDA Growth: Aiming for double-digit percentage growth, with even higher growth projected in FCF.
Capital Expenditures: Expected to be in the mid $40M range.
These forecasts reflect Magnite’s optimistic outlook for continued growth, especially in the CTV segment. The company is also focusing on expanding its Adjusted EBITDA margins and achieving substantial growth in Adjusted EBITDA and free cash flow for the year 2024. This forward-looking approach suggests a strategic emphasis on balancing growth and profitability. I will say, the poor guidance did bother me and many investors, but this is happening industry wide.
My Take
As a shareholder of the business since 2018, back when it was known as The Rubicon Project, my journey with this company has been a learning experience. One key lesson was the missed opportunity to trim my holdings during its rapid ascent, a move I now see as crucial in managing investment risks. Despite this, my long-term belief in the company remains steadfast, and I plan to continue holding my shares unless there’s a fundamental shift that undermines my investment thesis. The sector of programmatic advertising, still in its nascent stage, is highly fragmented and ripe for consolidation. I'm convinced that Magnite, already adeptly positioned, stands to benefit significantly when AdTech spending normalizes. Given the current undervalued state of the company, it wouldn’t be surprising to witness substantial mergers and acquisitions activity in the future, potentially positioning Magnite as an attractive acquisition target (hopefully not).
However, the prevailing sentiment among investors often unfairly compares every AdTech company to The Trade Desk, overlooking the unique strengths and challenges of each firm. In Magnite’s case, while concerns about its debt are understandable, I view this skepticism as somewhat overstated. The company’s debt, largely stemming from strategic acquisitions aimed at future growth, places it in a promising position for what lies ahead. Moreover, Magnite's proactive approach to debt reduction is a positive sign.
Initially, I considered throwing Magnite in the Upstart bucket, but recent quarters have shown a different trajectory. Magnite is not only gaining market share but is also poised to capitalize on industry-wide tailwinds. The launch of ClearLine and Magnite Streaming presents additional catalysts for revenue growth as the industry returns to normalcy. A key development I’m closely monitoring is the influx of aggressive political ad spending, an often-underestimated factor with substantial financial backing. Additionally, the company’s ongoing effort to reduce its debt will be crucial in strengthening its financial standing. Another vital aspect to watch is its performance in the CTV market segment. Any signs of losing ground to competitors like PubMatic would be a red flag, potentially prompting a reevaluation of my investment thesis. Personally, my stance on Magnite is to maintain a holding position. The company’s current trajectory and potential in the evolving AdTech landscape justify a watchful yet optimistic approach.
2. Avita Medical (RCEL)
Avita delivered an exceptional performance this quarter, surpassing expectations across nearly all metrics. Following the after-hours release of their financial results this past week, the company's stock experienced a dramatic surge, nearing an impressive 25% increase. This is particularly noteworthy considering Avita's relatively low profile among retail investors. Based on their consistent track record of execution (as detailed in my archived article on Avita), I am confident that this company is on a trajectory to become a significant success in its sector.
Key Financial Highlights:
Commercial Performance and Financial Growth:
Avita Medical reported a robust increase in commercial revenue (excluding BARDA), reaching $13.5M – a 51% rise compared to $9M in the same period of 2022.
Total Revenue (Including BARDA):
Rose by 50% to $13.6 in Q3 2023, compared to $9.1M in the same period last year.
Gross Profit Margin:
Improved to 84.5%, up from 83.2% in Q3 2022.
Growth primarily driven by increased production and lower shipping costs.
Operating Expenses:
Totaled $21M in Q3 2023, up from $14.2M in Q3 2022.
Increase mainly due to:
$5.1M rise in sales and marketing costs, linked to commercial expansion.
$0.6M increase in R&D costs.
$1.1M increase in G&A costs, largely from higher stock compensation expense.
Net Loss:
Reported at $8.7M, or $0.34 per share, compared to a net loss of $5.6M, or $0.22 per share, in Q3 2022.
Liquidity Position:
As of September 30, 2023, cash, cash equivalents, and marketable securities stood at approximately $60.1M.
Strategic Developments:
Marking a significant milestone in its growth strategy, the company announced an international expansion plan. This includes partnering with PolyMedics Innovations GmbH to spearhead its entry into key European markets, namely Germany, Austria, and Switzerland.
In October, the company secured a debt financing facility of up to $90M, with $40M drawn at closing. Coupled with $60.1M in cash as of September 30, 2023, Avita believes it is well-capitalized to achieve its operational goals and reach profitability by 2025.
Upcoming Milestones and Future Plans:
FDA real-time review of the PMA Supplement for RECELL GO™ is expected to resume on March 1, 2024, with approval anticipated by May 30, 2024.
The company reiterates the high growth potential in the full-thickness skin defect market, which is estimated to be 10 times larger than the initial burns market.
Plans are underway to establish new international distributor partnerships in Australia, Japan, and the European Union within the next 6 to 12 months.
Full enrollment for the post-market TONE study is targeted by the end of February 2024.
An initiative to conduct a healthcare economics study focusing on the longitudinal costs for vitiligo patients is in progress.
Initial reimbursement coverage for vitiligo treatment is expected in Q3 2025.
The company remains on track to achieve profitability in 2025.
CEO's Statement:
Jim Corbett, Chief Executive Officer, emphasized the company's focus on executing its growth strategy and pathway to profitability. He mentioned ongoing efforts to support the FDA’s review of RECELL GO and anticipated the submission of responses to the FDA by February 28, 2024. He expects FDA approval under the Breakthrough Device program by May 30, 2024, setting the stage for immediate product launch.
CFO’s Insights:
David O’Toole, Chief Financial Officer, highlighted the company’s significant revenue growth over the last three quarters, with rates of 40%, 42%, and 51% respectively, YoY. He expressed confidence in the company's cash reserves and its ability to fulfill its objectives and achieve profitability by 2025.
The latest results from the company are indeed impressive, indicating that it is well on course to meet its profitability goal by 2025. However, it's important to maintain a realistic perspective. While we should anticipate potential challenges along the way, the company's smooth progress so far is encouraging. If it continues to navigate without encountering significant obstacles, that would be an excellent outcome.
Financial Outlook:
Q4 Projections:
Commercial Revenue: Projected to be between $15.3M to $16.3M.
Growth Rate: This estimate represents a significant YoY increase, with the lower and upper bounds of growth set at 64% and 73%, respectively, compared to the same quarter in the previous year.
Full Year 2023 Projections:
Commercial Revenue: Expected to fall in the range of $51M to $53M for the entire year.
Annual Growth: Anticipated to reflect a robust growth rate of 50% to 56% over the full year, compared to 2022.
Gross Margin: Predicted to remain strong, with a forecast range of 83% to 85% for the year.
My Take
If you want a detailed look on my thesis for Avita, I would strongly consider reading my archived article. Avita’s results should not have come with surprise. The alignment of revenue and gross margin with prior expectations and guidance indicates a commendable level of predictability and stability in the company’s financial performance. This consistency is particularly noteworthy in the ever-evolving medical sector, suggesting effective management and a solid understanding of the market dynamics.
Looking ahead, management has set ambitious yet achievable goals. The revenue forecasts for both the fourth quarter of 2023 and the full year signal a confident outlook on the company’s growth trajectory. These projections, along with the targeted milestone of achieving profitability by 2025, reflect a strategic approach towards sustainable growth and financial health. Achieving profitability in this timeframe would mark a significant turning point for Avita, underscoring its potential for long-term success (which is what us LT investors are focused on).
However, the slight shift in the commercial timeline for the stable vitiligo treatment using RECELL is a development worth noting. While the adjustment to anticipate insurance coverage for RECELL in Q3 2025, instead of early 2025, might seem minor, it indicates a level of caution and realism in the company’s planning. This change suggests that Avita is responsive to external factors and regulatory landscapes, which is crucial in the medical field. The company's ability to adapt and recalibrate its strategies in light of new information bodes well for its resilience and agility in navigating the complexities of the healthcare market.
Overall, the company is certainly on a promising path. Investors would do well to keep a close watch on the company as it continues its trajectory of solid execution. Given its current performance, the likelihood of seeing those $5-$7 price levels again seems increasingly slim. On a personal note, I'm quite content with my position size and the cost-basis I've established. However, should the market respond irrationally to Avita's progress, it could present an opportune moment for me to consider bolstering my stake in the company.
3. Rocket Lab (RKLB)
Key Financial Highlights:
Revenue Growth:
Sequential revenue increase of 9%, or $5.6M.
Growth primarily driven by satellite business, especially due to increased MDA contract revenue.
Partially offset by a reduction in various components businesses and less favorable launch pricing mix.
Gross Margin and Backlog:
Gross margin decrease influenced by a one-time favorable release of a $4.1M launch loss-reserve in Q2, but partly mitigated by efficiency improvements in satellite bus and launch businesses.
Backlog increased by 9%, or $48.1M, mainly due to strong bookings in the Launch business from commercial and HASTE customers.
Decline in Space Systems backlog due to growth in recognized revenue and the nonlinear nature of larger contract closures.
Cash Flow and Expenditures:
Increase in capital expenditures by $10.4M, attributed to investments in Neutron research and expansion of satellite and solar capacities.
Operations consumed $19.1M more cash, largely due to the timing of receipts and payments in satellite manufacturing.
Reduction in cash consumed by asset acquisition and business combinations by $15.3M after major costs incurred during Q2.
Third Quarter 2023 Business Milestones:
Successfully launched two Electron missions, advancing the goal of making Electron the world’s first reusable small orbital rocket.
Received FAA authorization to resume Electron launches following a September 19th anomaly.
Scheduled an Electron launch for Japanese customer iQPS in late November 2023.
Fully allocated launch manifest for 2024 and early 2025, reflecting strong growth in Electron bookings.
Business Developments Since September 30, 2023:
Acquisition of assets in Warkworth, New Zealand, enhancing composites production for Electron and Neutron rockets.
Inaugurated the Engine Development Center in Long Beach, California, for Rutherford engine production and Neutron’s Archimedes engine development.
Achieved multiple milestones in the Neutron program, including cryogenic tests, production of Archimedes engine components, and site improvements in Virginia and Mississippi.
Growth in HASTE bookings for hypersonic test launches, including a new mission for the Defense Innovation Unit with Australian company Hypersonix.
Secured a new Space Systems contract, achieved milestones in the $143M MDA contract for Globalstar, and contributed to NASA’s Psyche mission.
This quarter for the company can best be described as neutral. It's crucial to remember that we are still in the early stages of the space economy's development. It's encouraging to see a slight increase in revenues, even considering the impact of a failed launch, alongside a growing backlog. The company's efforts to innovate and diversify its business lines are commendable, expanding its reach within the total addressable market.
The Neutron rocket stands out as the main catalyst for the business's future success. Frankly, the fate of this pivotal project is what will ultimately determine the viability of the business and the validity of my investment thesis. The development and performance of the Neutron rocket are critical factors to watch in assessing the company's long-term potential in the burgeoning space sector.
Financial Outlook:
Q4 2023 Guidance for Rocket Lab:
Overall Revenue Expectation:
Projected to be between $65M and $69M.
Revenue Breakdown:
Space Systems: Anticipated between $48.5M to $52.5M.
Launch Services: Approximately $16.5M.
Gross Margins:
GAAP Gross Margins: Expected to be between 24% to 26%.
Non-GAAP Gross Margins: Forecasted between 30% to 32%.
Operating Expenses:
GAAP Operating Expenses: Predicted to be between $61M to $63M.
Non-GAAP Operating Expenses: Estimated between $50M to $52M.
Other Financials:
Expected Interest Expense (Income), net: $2M.
Adjusted EBITDA loss: Forecasted to be between $23M to $27M.
Basic Shares Outstanding: 487M.
Q1 2024 Guidance for Rocket Lab:
Overall Revenue Expectation:
Projected to be between $95M and $105M.
Revenue Breakdown:
Space Systems: Anticipated between $65M to $68M.
Launch Services: Expected to be between $30M to $37M.
My Take
The recent quarter for Rocket Lab wasn’t bad, and looking ahead, there are several long-term catalysts to consider. The space economy represents a market opportunity exceeding $1 trillion, and Rocket Lab is in a prime position to capture a significant share of this market. This, however, hinges on their ability to handle larger payloads, a capability that the Neutron rocket is expected to bring to the table. Successfully launching Neutron would not only open new revenue streams for Rocket Lab but also position them as a direct competitor to industry giants like SpaceX.
Currently, the market has a critical need for a reliable launch provider that specializes in larger payloads. SpaceX, while a major player, doesn't focus on this niche and often offers ridesharing options that may not align with every company's schedule. There's a clear gap in the market for a provider that can offer tailored services for these larger payloads. The stakes are high for Rocket Lab, particularly with the Neutron project. The company’s future could largely depend on the successful launch of Neutron. A failure in this area could lead to significant financial strain, possibly even jeopardizing the company's existence. On the other hand, a successful launch paves the way to inevitable profitability.
It's also worth noting Rocket Lab's ventures into various sectors like HASTE, biomedical space engineering, Space Systems, and particularly Neutron. The ultimate success of the company hinges on Neutron’s performance though. From my perspective as an investor, I’m currently adopting a “hold” position. A successful Neutron launch could be a compelling trigger for me to increase my investment. For a more comprehensive analysis of Rocket Lab’s potential and market opportunities, I recommend referring to my detailed archived article on the company.
4. Planet 13 (OTC: PLNH)
Planet 13 released their Q3 results this past week, and it was what I was expecting.
Key Financial Highlights:
Revenue:
Decreased by 3.3% to $24.8M, compared to $25.6M in the same quarter last year.
The decline was due to lower sales at the SuperStore and a slight drop in wholesale revenue in Nevada.
Gross Profit:
Increased to $11.1M or 44.7%, up from $10.6M or 41.2%.
Improvement in gross margin attributed to reduced product discounting at retail.
Total Expenses:
Rose significantly to $55.1M from $15M, a 268.4% increase.
Included a one-time, non-cash impairment charge of $39.6M. Excluding this, total expenses were $15.4M.
Net Loss:
Expanded to $46M, compared to a net loss of $6.3M, primarily due to the $39.6M impairment charge.
Adjusted EBITDA:
Slightly decreased to $0.2M from $0.5M.
Lower Adjusted EBITDA margin was partly offset by improved gross margin.
Balance Sheet Comparison (To December 31, 2022):
Cash:
Decreased to $36.8M from $52.4M.
Total Assets:
Reduced to $178.4M from $233.6M.
Total Liabilities:
Slightly decreased to $41.5M from $42.7M.
Q3 Highlights and Recent Developments:
Acquisitions and Corporate Changes:
On August 28, 2023, announced an agreement to acquire VidaCann.
On September 15, 2023, completed change in domicile to Nevada and updated OTC trading symbol.
On November 1, 2023, revealed plans for the Dazed! Consumption Lounge.
The business is currently facing challenges due to legislative hurdles, yet it's making noteworthy progress in its growth strategy, particularly through the expansion of its dispensary network. This ambition is clearly evidenced by their recent acquisition of VidaCann, which marks a significant step in their expansion, especially in the Florida market. Their proactive approach in targeting dispensary growth, despite regulatory obstacles, indicates a focused commitment to scaling their operations and enhancing their market presence. Also, the company gave no clear guidance on the rest of 2023.
My Take
This investment is purely speculative growth. Consequently, my allocation to it is quite modest, and I don't intend to increase my stake until there's tangible and clear progress in legislation. Frankly, the company's future relies largely on legislative developments, which are currently a bottleneck for the full potential of their SuperStore business model.
Despite these legislative challenges, they are actively exploring other avenues to enhance both its revenue and profitability. The company's aggressive approach to expanding and optimizing its dispensary operations is a testament to its adaptability and strategic planning. Until there's a favorable shift in cannabis legislation at the congressional level, I plan to maintain my current position without any changes.
Weekly Activity (November 6th-10th)
75 shares of Boston Omaha
Portfolio Update
I've recently made some significant adjustments to my portfolio, notably with the removal of Upstart and the increased presence of Boston Omaha.
Starting with Upstart, my decision to exit stemmed from a thorough analysis of their recent performance, coupled with a critical evaluation of the management's actions and communications. My approach with management teams involves a 'three strikes' policy. Upstart's first misstep, in my view, was the misleading information provided to shareholders regarding loans on their balance sheet. This was followed by concerning actions in their Q2 and Q3 earnings releases. In Q2, they inexplicably removed the visual revenue illustration from their presentation, offering no explanation. The situation worsened in Q3 when the management presented outdated default rates from the previous summer, rather than using current quarter statistics (which I didn’t notice until after my publication). These instances shook my trust in Upstart's management, a crucial factor for any investor. Additionally, when comparing Upstart’s performance with its direct competitors, the outlook appears bleak unless there’s a change in leadership. While I believe new management could potentially steer the company back on track, the combination of issues related to the credit cycle, interest rates, unreliable management, and underperformance compared to peers led me to divest and redirect my capital to more promising opportunities.
On a different note, I've actively increased my stake in Boston Omaha, purchasing an additional 75 shares in this relatively undervalued company. With just over $1K still available for investment, my strategy remains flexible and opportunity-driven. I'm prepared to allocate this remaining capital to other promising ventures as they arise.