Earnings Updates: Aqua Metals (AQMS), Everbridge (EVBG) and Primo Water (PRMW)
Aqua Metals (AQMS) Aqua Metals reported results on Thursday and the stock’s reaction means I’m moving the position to SELL. It is trading lower after reporting, and I suspect that there could be more weakness in the weeks ahead. The bottom line is that this was an opportunity for management to establish greater credibility with the investment community as it moves its first plant through the de-bottlenecking process and toward meaningful revenue generation. I don’t think they did so. Here’s why.
Results included EPS of -$0.26 ($0.08 shy of expectations) and no reported revenue. Consensus was for around $100K in Q1 (which is basically nothing), and roughly $5 million in Q2. Management said on the conference call that they’re not giving forward revenue guidance during plant ramp up. They said production began in Q1 (January–March) and that sales to a strategic partner began in Q2 (April–June). I think avoiding details around revenue on the call was incredibly stupid. That’s what investors care about at this stage, even if the long-term plan is industry domination! This major communications error leaves us guessing how significant revenue could be, even though the company is already half-way through the quarter. I can understand not wanting to be overly specific, but the management team seems to want to get credit for having the plant at “revenue generating stage,” but not adding any color around that. Unfortunately, this has given fuel to the bears.
The plan remains to ramp production throughout the rest of 2017 to exit the year with production at 120 metric tons per day. There are 16 AquaRefining Modules at the plant, and Module 1 is going, Modules 2-4 are starting up, and Modules 5-16 are undergoing process updating. Ingot production is being commissioned, so at the moment, the company is just selling metallic lead that’s not in ingot form. It plans to have four shifts, and A and B are currently staffed, with C and D recruiting.
The company put together the following slide that shows how operations are currently going while they de-bottleneck the plant and move material byproducts out the door, until they are up to full capacity. As you can see, trucks from the three strategic supply partners come in (Battery Systems, Interstate Batteries and Johnson Controls) and drop off batteries to go into “Breaking and Separation.” From this process, the roughly 50% of lead that doesn’t need to go through AquaRefining is sold, as are the plastics. The remaining materials go into the “AquaRefining Prep Process,” and out of that, some lead compounds are sold. The remaining material is now being fed into Module 1 (and soon Modules 2-4), and the resulting high value metallic lead is being sold. Management said this isn’t the most efficient process, but in start-up mode, it allows them to refine operations throughout the commissioning process, and start generating revenue sooner (although, again, it wouldn’t say how much).
Management says plans for AquaRefineries 2-5 are in the works, with around 160 metric tons of daily capacity per facility. They seem to think financing is no problem, even if plant 1 isn’t up to full capacity. It also said the Ebonex acquisition could help it develop an additional high-value lead product, though it was clear to point out that this would be new to the market and not something that would come in the near-term. There was no additional detail on when a JCI plant would be retrofitted, or where that plant would be. One question that I have is this: with respect to all the process improvements at TRIC, how far out might this push the first JCI facility?
The bottom line here is that there is now even greater pressure on Aqua Metals’ management team to show that they are on the right track and that investors should put money into the stock. In my opinion, this conference call was a great opportunity to move past questions about the company’s potential, both in the short and the long term. Management failed, and we’re seeing that play out in the stock’s action today. There are plenty of opportunities out there where we don’t need to row against the tide, so let’s step aside from this one today. SELL.
Everbridge (EVBG) Everbridge did exactly what investors want their companies to do—it beat expectations, raised guidance, and gave specific reasons as to why its core markets are growing! The rally in shares yesterday is evidence that the market liked what it heard. Revenue was up 33.3% (beating by $710K) while EPS of -$0.15 beat by $0.03. Guidance for 2017 was increased by $1 million (to $101 million–$102 million) and EPS by a penny (to -$0.29–$0.32). The big news is that the company continues to make inroads closing multi-product deals, with 54 closed in the quarter, up from 42 in the previous quarter. There is also strong demand for the new suite of non-mass notification solutions, which are helping organizations keep tabs on employees whether they are in an office, on a sales call, or traveling in another country. Big name wins included Hulu and Oracle.
The bottom line here is that management guided for revenue growth of 32%, and given the history, that will probably prove to be conservative. The company’s solutions are gaining traction and it is the market leader, leagues ahead of anybody else. On the conference call, management said the pipeline of state/government opportunities (these are relatively large contacts) is growing and, while these could lead to lumpy sales quarter to quarter, it believes a number of deals will be announced over the next year. Analysts are raising price targets, and I’ll consider moving back to Buy depending on how shares trend over the coming days. For now, just hold. We have a gain of roughly 56%. HOLD.
Primo Water (PRMW) Primo released Q1 results yesterday that were largely good in my opinion given the major changes resulting from the Glacier acquisition. That said, shares are under pressure today after they initially surged higher on the market open. There is a lot of trading activity going on and, frankly, it’s more than a little wild. I suggest holding on to your position, and looking to be an opportunistic buyer. While I can’t guarantee anything, I suspect things will calm down and those that stepped up will be rewarded. Just keep new positions small. There should be considerable support around the 11.5 mark.
Details: Revenue growth of 88% to $60.7 million came in $3.8 million under expectations, which was initially concerning to me (and I think this is what the market is reacting to). But after management explained that the revenue shortfall was largely due to a shift in Water Dispenser Segment sales from Q1 to Q2/Q3, I don’t see cause for concern (full-year guidance isn’t affected). Billy Prim said that, historically, Primo has run dispenser promotions in Q1. This year, they are shifting those promotions to Q2/Q3 since those are busier times of the year, and they think that the promotions will be much more effective. In previous quarters, we’ve heard the team talk of running marketing tests that could be rolled out a large scale. This is one of them. And it makes sense to me—why run promotions when nobody is interested? Revenue guidance for Q2 is $72 million–$75 million, versus consensus of $72.4 million, and annual guidance is unchanged, so it looks like there is a high degree of confidence in picking up those deferred Water Dispenser sales.
Earnings of -$0.05 compare to EPS of $0.07 in the year-ago quarter, and came in $0.14 better than expected. Water Segment sales were the growth driver, increasing 137% to $53.1 million, largely due to the Glacier acquisition and 6.1% same-store unit sales growth. Dispenser segment sales were down 23% to $7.6 million from $9.9 million, for the reasons I mentioned above. Management said the Glacier integration is tracking ahead of plan, and it raised its 2017 EBITDA outlook by $1 million to $53 million–$55 million. This is based on expected synergistic savings of $3 million this year versus an initial range of $1million–$2 million. Revenue guidance remains at $280 million–$285 million, implying roughly a doubling of sales over 2016. Gross profit margin in Q1 was up to 29.5% from 28.9% due to higher margin Water Segment sales.
The stock’s chart doesn’t look great but I continue to believe that this is a transition stage for Primo and that it will execute well as it integrates the Glacier business. Ultimately, I believe the company will be sold and I expect that would be done at a higher price than shares trade at today. We have a current gain of around 30% and can afford to be patient here. If the stock drops much below 11.5, I may change to Hold. But for now, I’m keeping at BUY.
There are a few other minor updates to squeeze in.
First, BioTelemetry (BEAT) has cleared the anti-trust hurdle for the acquisition of LifeWatch and is moving forward with the tender offer. The window closes after 10 trading days, which works out to May 23. This is good news, and I expect the tender offer to be successful. BioTelemetry remains a BUY.
And second, we have earnings coming up for both Asure Software (ASUR) and Marrone Bio (MBII) on Thursday. Both are rated Buy, with the caveat that Marrone is only appropriate for risk-tolerant investors that are working to build half of an initial position.