The Good News and Bad News for Solazyme's Algenist Brand

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Investors may not be thrilled with the slow pace of progress at renewable-oils manufacturer Solazyme , but the company's performance would be unfathomably worse without its leading revenue generator: the portfolio of skin-care products sold under the Algenist brand. The cosmetic line accounted for 100% of the company's product revenue until the Intermediates and Ingredients portfolio arrived on the scene last year, but it should still account for over half of product revenue in 2015. Better yet, Algenist routinely achieves 68% gross margin quarter after quarter.

Put another way, Algenist is pure awesome for Solazyme -- and investors are happy to have it while operational setbacks are corralled. While some of the companywide bad luck has caught up with the brand in the first half of 2015, the portfolio continues to improve in one key metric. Here's the good news and bad news for Algenist.

The bad newsI'm beginning with the bad news because, as I've stated before, it will take more than a few quarters to confirm the trend. That being said, Algenist's growth could be slowing at exactly the wrong time for Solazyme. Consider the following chart, which shows that the second quarter of 2015 marked the first time ever that quarterly revenue from the brand fell for three consecutive quarters.

Source: SEC filings.

As a result, in 2015 Algenist achieved its lowest historical first-half growth rate compared with the prior-year period. Consider the year-over-year growth from the portfolio:


First-Half Revenue

Growth From Prior Year Half


$8.9 million



$11.0 million



$11.5 million


Sources: SEC filings, press releases.

To be fair, the real world doesn't work in linear fashion; choppiness should be expected. Additionally, management said the discrepancy in year-over-year growth rates was the result of a promotion that took place in the second quarter of 2014 and did not take place in the second quarter of this year. There is a summer promotion taking place in the current third quarter that should easily end the quarterly streak of declining revenue. But Algenist needs to hit some spectacular quarterly sales levels in the second half of the year to maintain a year-over-year growth rate of at least 20%.

One reason I would urge investors to keep an eye on Algenist's growth rate is that it whiffed on 2014 guidance: management projected 30% growth compared with 2013, but the brand grew 23%. Of course, that's still very healthy growth and only amounted to a miss of $1.4 million for the year. But this slowdown also follows a 54% increase in store count and the launch of several new SKUs that took place at the end of 2014, in addition to a first quarter, Algenist-specific inventory adjustment. Give some extra attention to the brand's performance when third quarter results are released in November.

The good newsInvestors have to dig a little for the good news, but it's worth the extra work. While Algenist's high gross margin gets all of the attention, the brand's net margin -- that is, the margin after accounting for production costs and marketing expenses -- could top 20% in 2015. That would mean that for every $1 the company invests in manufacturing and promoting the skin-care line this year, the portfolio would return at least $1.20 to the coffers. It's making cold, hard cash! Actual profitability!

Consider the historical evaluation of the company's investment in Algenist, where marketing expense attributed to Algenist is estimated for 2014 and 2015 (marketing expenses for Algenist and other products aren't separated), and full-year 2015 figures are estimated.


Algenist Revenue

Gross Profit

Marketing Expense

Net Margin


$7.2 million

$4.7 million

$5.0 million



$16.5 million

$11.1 million

$10.0 million



$19.9 million

$13.5 million

$10.2 million



$24.4 million

$16.7 million

$11.8 million*



$27.5 million*

$18.1 million*

$12.5 million*


*Figures are estimated. Sources: SEC filings, author estimates.

This calculation shows that Solazyme made a net profit of $4.8 million on Algenist in 2014 and could generate a net profit of $5.6 million on the brand in 2015. It may not be much, and Algenist wouldn't be a profitable standalone business (it wouldn't cover enough selling, general, and administrative expenses), but it's an extra $5.6 million of non-dilutive capital that can be reinvested into the business. Better yet, since gross margin is dependably stable, net profits will grow along with revenue for the foreseeable future so long as marketing efforts remain efficient.

What does it mean for investors?The observation that revenue growth is slowing could amount to nothing more than noise. And regardless of whether it's noise or an actual trend, it could be completely out of the company's control. Meanwhile, the company is quietly generating cash from the skin care portfolio. Essentially, this "good news, bad news" analysis for Solazyme's Algenist shows what's important to consider when estimating future growth and evaluating current performance for the brand. I'll continue to reside on the sideline until companywide production costs fall and demand for non-cosmetic products is proven.

The article The Good News and Bad News for Solazyme's Algenist Brand originally appeared on

Maxx Chatsko has no position in any stocks mentioned. 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. 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.

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