Solazyme’s product revenue shoots up 20% in Q1 2015 earnings report

May 7, 2015 |

Solazyme-smIn California, Solazyme announced a loss of $34.7 million on sales of $12.6 million compared with a $34.7 million loss on $12.4 million in sales for Q1 2014. Product revenue of $8.8 million was up 20% versus the comparable quarter.

Comments from Solazyme

“We are executing against our operating plan for 2015 and are pleased with the progress we are seeing across the company and in our manufacturing and commercialization efforts specifically,” said Jonathan Wolfson, CEO of Solazyme. “Advances are being made at the Moema JV production facility in Brazil including substantial improvements in downstream processing efficiency and oil production as well as in overall up-time and integrated operations. On the commercial side, we are moving forward as well. Recent progress includes the announced Flotek strategic partnership for Encapso and Flocapso, new AlgaVia food ingredient customers and the expansion of our relationship with Bunge to cover a next generation food ingredient.”

“During the first quarter, we continued to build the market for our AlgaVia food ingredients business, which had its best quarter yet, and our Algenist personal care brand turned in 26% year-on-year growth,” said Tyler Painter, COO and CFO of Solazyme. “We are focused on sales as well as overall financial performance and continue to believe that we are well positioned to profitably commercialize our products globally.”

Key business updates

Products

Encapso: Highlight was a strategic alliance agreement with Flotek under which Flotek will market Solazyme’s Encapso, the first commercially available, biodegradable encapsulated lubricant for drilling fluids, in certain Middle Eastern markets. The companies also reached a joint product development and marketing agreement to globally commercialize Flocapso, an innovative, advanced drilling fluid.

Algenist: Another quarter of double digit year-on-year revenue growth as we continue to grow and expand our Algenist brand, which is now distributed in 22 countries with 36 SKUs, and two new launches in process including a Genius Bi-Phase Peel at Sephora and QVC and Sublime Defense Anti-Aging Moisturizer with SPF 30, launching at QVC, Sephora, Ulta and select Nordstrom locations.

AlgaVia: Q1 revenues were not broken out but described as “the highest to date for our AlgaVia food ingredient product line. We continue to add new projects with food and beverage manufacturers, as well as three new customers for lipid powders and protein ingredients.”

Partners

Partner Developments: Solazyme noted, “We expanded our relationship with Bunge and entered into a new joint development agreement for a next generation food ingredient.

Production

Moema: The company highlighted “improved downstream recovery rates from production and greater volumes through the facility. Although we continue to experience some power and steam intermittency, fixes implemented to date have led to improved reliability, and we have experienced multi-week periods where the facility has run on a continuous, fully integrated basis. Key steam and power redundancy projects remain on track to be completed by the end of Q2.”

Analyst Reaction

Pavel Molchanov, Raymond James

We reiterate our Outperform rating.  The adjusted loss per share of $(0.37) topped our estimate, same as consensus, of $(0.40), while total revenue of $12.6 million was below our model, with both product sales and R&D revenue coming in low, but product sales of $8.8 million posted y/y growth of 20%. While operational shortfalls in 2014 clouded the production scale-up outlook, we believe the tightened business model’s focus on the highest-value products is strategically sound. The balance sheet also remains in good shape, with the largest cash balance in the peer group.

Moema is doing better but not yet great. The good news is that oil production during the March-May period was more than 4x the total from full-year 2014, but operational consistency is still below target levels. Recall, Solazyme is not recognizing revenue from this joint venture for the time being, and we haven’t been modeling this until 2016.

Consistent with other earlier-stage (pre-cash flow) clean tech companies we cover, we apply a discounted cash flow approach to arrive at a DCF value of $6.59 per share (see page two). The current multiple is 54%, and our target price of $7.00 is based on the DCF

Mike Ritzenthaler, Piper Jaffray

We maintain our Underweight rating and $2 price target on shares of SZYM following Q1 results that were essentially in-line with our model. Management stated that they are making progress against the operational milestones and economic initiatives – steadying Moema and reducing cash burn. While the company may have made more oil in the 10 weeks between the 4Q14 and 1Q15 earnings calls than it did in all of 2014, it is not obvious to us that the company’s commercial markets are ready for the volumes anyway.

While the utility problems will likely be fixed, we continue to be concerned by the business plan that hinges on selling novel drilling additives (focus on selling Encapso and Flocapso) in a lower-demand environment for drilling, and the impact that will have on the timing of corporate-level economics. Solazyme burned ~$27 million in 1Q (essentially unchanged y/y despite the restructuring efforts), compounded by some $9 million in SB Oil investments and other capex. Lower volumes over the company’s fixed overhead will likely strain the balance sheet until a cash infusion is required, perhaps in 2H15.

Jeffrey Osborne, Cowen & Company

Solazyme’s lumpy revenue in 1Q15 is primarily due to delays in milestone payments from R&D programs. R&D program revenue is expected to decline as a percentage of total revenue as several products ramp up in 2H15. Moema, while improving, continues to face electricity generation issues. Management maintains full year guidance of 15% growth y/y and expects revenue acceleration in the 2H15 due to the launch of several new products, as well as the continued expansion of its existing lines. Solazyme is continuing to build out its partnership with Bunge to develop unique food ingredients, with the past quarter marking the best performance to date for food products. Algenist performance was strong in the quarter with revenue totaling $6.2 million, up 26% y/y. Encapso continues to gain traction in the oil and gas industry as its geographic footprint expands (N.A., S.A., and M.E.).

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