Solazyme Earnings: Lack of Details Disappoints Investors, Again

By Markets Fool.com

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Source: Solazyme.

The difficult road for renewable oils manufacturer Solazyme continues. No one said this would be easy -- well, maybe one guy -- but the most recent second-quarter results demonstrate that patience is mandatory for investors brave enough to stick it out. While management was shy on details,and the financial metrics weren't rosy, the company successfully seeded several new long-term partnerships and sales agreements in the last several months. Historically, that hasn't translated to demand and sales (see: patience), so frustration is understandable.

What should you make of it all? Here's a level-headed analysis and discussion for investors with the most recent information.

By the numbers
Financial numbers carry a little less weight for Solazyme than for more established companies. With that in mind, revenue receded 26% in second quarter 2015 compared to the prior-year period, due mostly to a steep drop in R&D revenue. Product revenue fell 8%, but this was expected. The good news is that sales volumes -- excluding the company's skincare brand Algenist, also called Intermediates and Ingredients, or I&I -- increased by 24% compared to the first quarter 2015.

More good news: Solazyme succeeded in keeping operating expenses at reduced levels for a second straight quarter, and reduced its cash burn to just $26 million, compared to $34 million in first quarter 2015.

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Given the shift in focus this year compared to last year, reporting year-over-year results mutes the progress achieved, which is misleading. Therefore, I'm comparing to this year's first quarter.

Metric

Second Quarter 2015

First Quarter 2015

% Change

Total revenue

$11.7 million

$12.6 million

(7.2%)

R&D revenue

$3.4 million

$3.8 million

(11.1%)

Algenist revenue

$5.2 million

$6.3 million

(17.5%)

I&I revenue

$2.5 million

$3.1 million

(19.4%)

Operating expense

$38.1 million

$38.5 million

(1.1%)

Source: Solazyme press release.

Not bad if you take a big-picture view.However, given the results for the first half of this year, it seems likely that Solazyme will fail to meet its own guidance for 2015.

Solazyme has guided for a 15% increase in revenue in 2015 compared to last year, excluding Moema sales, which would be roughly $69.5 million. If investors exclude $2.9 million in revenue from Moema last year before calculating guidance, then the expectation for 2015 revenue drops to $66 million. Both targets appear unrealistic.

The de-emphasisof R&D revenue this year means product revenue needs to make up for lost ground, in addition to delivering growth. Meanwhile, with petroleum prices headedlower again -- thus suffocating North American oil rig count -- Encapso drilling lubricant sales are facing more pressure than originally expected. Worse, Algenist is off to a slow start for the year.

Consider the table below, assuming the lower revenue target of $66 million, and the historical 23% growth rate for Algenist.

Metric

2014 Total

2015 Total

Total Needed per Remaining Quarter to Meet Guidance

Total revenue (ex-Moema)

$57.5 million

$66.1 million

$20.8 million

R&D revenue

$23.0 million

$15.0 million*

$3.8 million

Algenist revenue

$24.5 million

$30.1 million

$9.3 million

Encapso & AlgaVia revenue

$12.8 million

$21.0 million

$7.7 million

*On pace for $15 million in R&D revenue for 2015. Source: Solazyme, author calculations.

The amounts per category can shift, but to meet guidance, Solazyme needs $20.8 million in revenue in each of the next two quarters. The company's all-time quarterly high is $17.6 million. Because CFO Tyler Painter decided to maintain guidance for now, investors should prepare for a miss or reduction in guidance.

Moema update
Power is now connected to Solazyme's flagship production facility in Moema, Brazil, and all equipment is working in sync for the first time. The focus for the second half of 2015 is to "optimize downstream productivity including oil extraction," which has plagued the facility for more than one year now, and is absolutely critical to lowering production costs.

Production gains will remain limited for the foreseeable future as the company focuses on making timely deliveries of in-spec oil. Management still does not expect the Solazyme Bunge Renewable Oils joint venture to be consolidated for the "foreseeable future."

Analysts get tough
I was pleasantly surprised that Wall Street analysts asked several difficult questions of management -- something that was lacking when everyone was on the bandwagon (until the stockcrashed in November 2014). The first several questions, relating to two recent supply agreements with United Parcel Service and BASF, were nearly identical to those I raised earlier this week.

The first question asked CEO Jonathan Wolfson what Solazyme would contribute to the UPS renewable diesel program, which will see it purchase a total of up to 46 million gallons, or 209,000 metric tons, of renewable diesel from Renewable Energy Group, Neste Oil, and Solazyme over a three-year period. Wolfson responded: "The other two suppliers are significantly larger suppliers of renewable diesel and are already in the market... I would expect [our supply] to be significantly less than one-third of the overall volume."

That makes sense given the company's new focus on high-margin products, and the fact that the two other suppliers can produce more than 1.6 million MT of renewable diesel per year. Solazyme's contribution will simply seed a long-term opportunity for advanced renewable fuels.

The same analyst asked Wolfson about price points for a surfactant that Solazyme will supply to BASF for personal-care applications. Amidopropyl betaine, the end product that will be sold by BASF, sells for between $1,000 and $1,600 per MT -- designating it a low-value commodity product.

Solazyme is making a part of the molecule that replaces an oil typically found in palm kernel oil, another commodity chemical. It will be very difficult for the company to reach breakeven on supply unless BASF pays a substantial premium. Management didn't specify price points, simply stating that it competes with commodity chemicals.

Another analyst quipped that he didn't remember a promotion for Algenist in the second quarter of 2014, which was management's reasoning for the year-over-year decline, on paper, in the portfolio's sales. To be fair, the promotion didn't have to be a major public event to have been successful. It simply could have been an online marketing push that resulted in an increase in sales, so I wouldn't agree with the analyst's concerns.

However, in 2014 Algenist did miss its full-year growth target of 30%, only notching 23% sales growth over 2013. This coincides with internal grumbling from employees about the company's decision to move the Algenist sales team from San Francisco to Los Angeles last year, which will not be under the daily scrutiny of senior management. I'll continue to give Solazyme the benefit of the doubt, but one more quarter of lackluster sales growth would be a red flag.

What does it mean for investors?
Solazyme's second-quarter earnings lacked any big update that investors wanted to see. However, new agreements were announced with Natura (cosmetics), BASF (surfactants), UPS (renewable diesel), an unnamed beverage company (perhaps San Francisco start-up Soylent -- food ingredients), and Flotek (drilling lubricants), in addition to an intention to launch a new major cosmetic product later this year.

These are good developments that will seed long-term opportunities across industries, but it will take many quarters and several years to achieve the growth many investors expect. Patience is required beyond this point, although I'll remain on the sidelines until production costs move lower and demand picks up for high margin products.

The article Solazyme Earnings: Lack of Details Disappoints Investors, Again originally appeared on Fool.com.

Maxx Chatsko owns shares of Renewable Energy Group. Check out hispersonal portfolio,CAPS page,previous writingfor The Motley Fool, and follow him on Twitter to keep up with developments in the synthetic biology field.The Motley Fool recommends Solazyme and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.