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News of the Week (November 8-12)
GoodRx; Olo; Duolingo; CuriosityStream; Green Thumb; Cresco Labs; Upstart; Tattooed Chef; Penn National Gaming; Ozon; Ayr Wellness; My Activity
1. GoodRx (GDRX) — Earnings Review
GoodRx guided to $193-$197 million in quarterly sales while analysts expected $194.9 million. GoodRx generated $195.1 million in sales beating its own midpoint by 0.5% and analyst estimates by roughly 1%.
Note that GoodRx’s core prescription price-comparison product was hurt by the pandemic as elective care halted and prescription volume declined. The company continues to believe that the pandemic is impacting growth here with a 1 billion+ un-diagnosed visit care backlog. This points to a demand acceleration when this backlog finally does unwind likely throughout next year. Telehealth was helped by the pandemic but is a much smaller piece of the company’s business overall.
“When the country reopened after the vaccine became available, we expected utilization to rebound with normal seasonal trends returning. However, what we’ve seen is a continued backlog reflecting a lag in utilization recovery. Whether due to physician capacity limits, new variants or delaying care, we believe this is largely temporary. We continue to believe the unwinding of the diagnosis backlog will serve to fuel future growth. We are well-positioned for when utilization does increase and regular patterns resume.” — Co-CEO Trevor Bezdek
The company is seeing improvements in utilization trends but not a return to normal like it anticipated. It believes prescription volumes will “return fully to pre-pandemic levels in a quarter or two” according to CFO Karsten Voermann. Lower cold and flu season activity hit revenues by $5 million in the year over year period — that hit was “smaller” during this quarter as progress continues.
Despite this headwind, the company still met expectations and reiterated its 2021 guidance (covered below) thanks to strength from other parts of its business. If 25.2% prescription transaction growth is a trough, that works for me.
GoodRx guided to a roughly 30% adjusted EBITDA margin. It posted a 31.7% margin beating expectations by 170 basis points.
Net income margin in the third quarter was hurt by a $55.5 million swing in tax benefits vs. the second quarter of this year and a $20.1 million non-recurring stock-based compensation charge in connection with the IPO.
GoodRx has been expecting a shrinking adjusted EBITDA margin as its lower-margin telehealth segment gains more traction and it rapidly grows headcount and marketing to support demand. It sells products here at cost to drive cross-selling and traffic to its other platforms. This margin trend is depicted below:
GoodRx was expected to guide to the following for the 4th quarter:
$216.9 million in revenue. It guided to $212-$222 million beating expectations at the midpoint by 0.4%.
$66.4 million in adjusted EBITDA. Its margin guidance implies forecasts of $65.1 million missing expectations by 2.0%.
Note: GoodRx removed annual guidance last quarter and re-instated it this quarter. This reiterated guidance is despite the time lag on the elective care backlog unwind. It is still not unwinding which would feed the company’s prescription business. GoodRx anticipated this backlog would have already begun to unwind in its Q1 2021 guide.
D. Co-CEO Doug Hirsch Notes
GoodRx has now saved Americans $35 billion on prescriptions vs. “over $30 billion” last quarter and “over $20 billion” when it went public last year.
Average savings rate is now 80% vs. 79% sequentially. It was 71% at the time of the IPO last year and 59% in 2016.
Consumers and healthcare professionals both reward GoodRx with a lofty +90 net promotor score (NPS). Healthcare professional NPS was +86 at the time of its IPO and consumer NPS is stable at +90.
Over 2 million prescribers have a patient that has used GoodRx.
GoodRx plans to extend into health insurance by “navigating customers through the insurance process as their trusted advocate.”
This would probably resemble a marketplace like one of its telehealth products
The GoHealth partnership will be a big part of this launch
Hirsch highlighted the recently announced “Fetch Rewards” partnership. Click here to read my take on what it means.
GoodRx partnered with CoverMyMeds during the quarter to create new, custom branded discounts “supported by the pharma manufacturers.”
The company also is launching a branded drug-integrated co-pay card to further support its thriving pharma manufacturer solutions business
“CoverMyMeds is a leader in biopharma-supported solutions for patient affordability and, as a leader in consumer affordability solutions, we see this as a natural partnership.” — Co-CEO Doug Hirsch
On GoodRx Health:
GoodRx Health — its research database for all things healthcare — officially launched during the quarter. This service offers strictly vetted and curated healthcare information to consumers for free. It focuses on topics in health knowledge, financial guidance on healthcare costs, medication information and more “trustworthy research.” The emphasis will be on quality here to ensure this becomes a relied upon (and accurate) source of needed information.
While this product will not cost anything to use, this should serve as another top-of-funnel entry point into the GoodRx ecosystem to drive more traffic and revenue for the company. It also will serve as another marketing vehicle (of relevant consumers) for its branded pharma manufacturer partners to advertise discounts to.
The product’s main newsletter now has 5 million readers.
E. Co-CEO Trevor Bezdek Notes
On physician traction and telehealth:
25% of GoodRx’s visits are now from providers vs. 17% at the IPO; over 400,000 doctor offices now distribute GoodRx materials.
GoodRx care — the company’s direct to consumer telehealth product — enjoyed triple the demand it realized at the beginning of the pandemic with a 5 star rating.
65% of GoodRx Care visits are driving cross-selling activity vs. 60% sequentially and 30% year over year.
On the pipeline:
“During the quarter we started to build a promising pharma manufacturer solutions pipeline for 2022.”
F. CFO Karsten Voermann Conference Call Notes
The pharma manufacturer solutions segment’s revenue tripled again year over year while maintaining net revenue retention over 150%.
“There is the potential for large deals in the 4th quarter which could accelerate growth further.”
Non-prescription transaction revenue made up roughly 20% of sales in the quarter vs. 16% at the beginning of the year. This is expected to rise to 22%-24% next quarter.
G. My take
The company’s largest business segment remains challenged. Despite this, GoodRx still re-instated the guidance it offered at the beginning of the year which didn’t assume any of the macro-headwinds the company is facing today. I found that immensely encouraging and a sign that the new products are all continuing to work. The combination of growth and profitability that GoodRx provides is nothing short of elite — and I believe it will only get better from here.
My GoodRx deep dive will be published in the coming week.
2. Olo (OLO) — Earnings Review
Olo guided to $36-$36.5 million in revenue for the quarter. It posted $37.4 million in revenue beating its midpoint guidance by 3.2%.
Analysts at the beginning of the year expected Olo to add 9,000 active locations in all of 2021. It has now added 12,000 active locations through the first 9 months of the year.
Note that the pandemic, multiple rounds of stimulus checks and also seasonality represented dramatic demand tailwinds for Olo in previous quarters as it supports off-premise dining. As a result, this quarter featured a difficult sales comparison so it is encouraging to me to see 36% YoY growth and a return to sequential growth for this — predominately transaction revenue based — company. These difficult comps will continue into the first quarter of next year with revenue and order volume growth expected to further accelerate thereafter.
“We were pleased with the continued durability of digital orders during the 3rd quarter. Despite seasonality and a continued shift to in-person dining our volumes exceeded expectations.” — CFO Peter Benevides
Olo guided to $3.4-$3.8 million in non-GAAP operating income. It posted $5.1 million beating its midpoint guidance by 41.6%
Olo was expected to earn $0.02 per share in the quarter. It generated $0.03 per share beating expectations by $0.01.
The shrinking margin lines were as expected. Olo nearly quadrupled its general and administrative (G&A) expenses year over year to support “all of the new locations being added to the platform” and new product plans (Olo Pay is in beta testing). This rising G&A expense was also greatly boosted by a $7.9 million charitable stock donation which hit margins as well.
C. Guidance Updates
Olo guided to the following for the 4th quarter:
$38.8-$39.3 million in revenue. It was expected to guide to $38.6 million meaning this guide is 1.2% ahead of expectations.
$2.8-$3.2 million in Non-GAAP operating income.
Note that this raise to guidance includes a $1 million revenue contribution from Wisely. Without this benefit the revenue guidance would have represented a 1.5% raise. This guide also includes $800,000 in non-GAAP operating loss. Without this hit, Olo would have raised operating income guidance by 8.3%.
“We remain prudent in our approach to forecasting.” — CFO Peter Benevides
Order volume continued to remain durable and healthy into November according to Peter. Olo’s guide assumes more of a return to on-premise dining but digital ordering volumes continue to outperform even as vaccination rates rise.
D. Founder/CEO Noah Glass Conference Call Notes
As a reminder, Olo recently closed on its acquisition of Wisely. Click here to learn more about the decision and the company.
“With the acquisition of Wisely, our platform will harness data from all customer interactions including non-digital orders to enable brands to build better direct relationships with their customers.”
Olo has now eclipsed 500 restaurant brands as customers. It was “over 400” as of last quarter and 400 when it went public just 9 months ago.
“We continue to increase the critical mass of Olo’s exclusive network of marquee and must-have restaurants.”
On New Customer wins:
Bojangles added Olo’s Ordering module with a custom website and app — it had been an Olo Rails customer previously.
Denny’s added Olo Network — it had been an Olo Rails, Ordering and Dispatch customer.
As a reminder, Network allows for demand aggregation from non-marketplace channels. Olo is partnered with Google on this product to enable ordering through its search page.
CKE Restaurant Holdings — parent company to Carl’s Jr., Hardee’s and Dave’s Hot Chicken all purchased the Olo Ordering module. Dave’s Hot Chicken purchased every Olo module. CKE abandoned their legacy technology stack to fully integrate with Olo.
Dave’s Chicken is a rapidly growing brand with 14 stores open and 30 more openings planned for 2021. It has sold the rights to 400+ stores — and as Olo collects per-transaction and per-location revenue — this growth will directly benefit Olo’s business.
Olo added Nascar Refuel brands as a customer to support its virtual, delivery only dining experience. This allows Nascar fans to enjoy famous dishes associated with the sport from home.
Other notable virtual-only and rapidly growing customers include: Buddy V’s Cake Slice and Mr. Beef Burger
The power of Olo’s partnership and open integration network helped Olo to be named as one of 5 technology vendors for the rapidly growing “Roll em up Taquitos.”
This partnership network allows for a more customized, connected technology stack.
On products and competition:
Switchboard is gaining momentum thanks to the current labor shortage. This module allows for more organized, efficient and profitable management of phone orders by tapping into call center agencies and allowing them to place orders with the restaurant through Olo’s module.
Almost 10,000 locations are now using Olo Expo (not a core module) to improve “front of restaurant work flows” and to facilitate front and back of restaurant communication.
“We’ve seen no change in the competitive environment.”
Olo upgraded Rails during the period to “provide additional tools and capabilities to control capacity across all channels.”
On the partner network:
As previously announced, Olo added Uber Direct and “Waitr” to its Dispatch network to expand delivery access. This will help drive down costs further and diminish revenue concentration. Olo now has more than 2 dozen delivery service providers (DSPs) in its Dispatch ecosystem.
On Olo Pay:
Olo is still on track to debut the product next year. Olo hired a new Vice President and General Manager of Payments — Tor Opedal — to gear up for this launch during the quarter. Tor was previously a VP of US Market Development at Mastercard.
“We are encouraged by what we are seeing with the brands that are live on the Olo Pay pilot and heartened by the excitement from the broad client base. We have high conviction that this will be another successful product.”
D. CFO Peter Benevides Conference Call Notes
On the pipeline:
“We’ve never been more excited about our sales and deployment pipelines in terms of new location adds and up-selling activity emerging.”
On flat sequential ARPU and volumes:
Benevides was asked if the flattened sequential ARPU could be seen as a “point of stability” with that ARPU growth expected to accelerate in the future. Benevides affirmed that this would be the case. This is partially due to Wisely but also continued cross-selling momentum and future product debuts like Olo Pay.
“We see more stability and growth in ARPU looking ahead” — Benevides
Olo is continuing to invest more aggressively in “emerging enterprise” restaurant clients. These are chains under 100 locations but growing rapidly and marks an expansion of its massive-chain-only niche. Wisely — Olo’s new customer resource management (CRM) acquisition — also generally serves smaller chains than Olo does which offers us with more evidence that this is the case.
On DoorDash Revenue Concentration and Revenue Breakdown:
Rails module revenue from DoorDash accounted for 14.3% of total sales in the quarter. This rose slightly sequentially from 13.8% but fell sharply from 21.8% year over year. Overall, DoorDash represented 16% of total Olo revenue vs. 23% year over year. New Dispatch and Rails partners like GrubHub and Uber Direct should help erode this concentration further over time.
E. My Take
Solid quarter for Olo with a modest beat and raise across the board. Comparisons will get easier next year and growth will accelerate to coincide with its already stellar cash flow margins.
Click here for my Olo deep dive.
3. Duolingo (DUOL) — Earnings Review
“Our mission is to develop the best education in the world and make it universally available. We don’t plan on stopping with just languages. As I said in our S1, I plan to devote my life to this mission.” — Co-Founder/CEO Luis von Ahn
Duolingo guided to the following:
$58-$61.5 million in revenue. Analysts were expecting $60.5 million. The company posted $63.6 million beating its own midpoint by 6.4% and analyst estimates by 5.1%.
$63-$66 million in total bookings. It posted $73.1 million beating its own midpoint by 13.3%.
All 6 demand metrics saw sequential growth briskly accelerate:
8.2% vs. 0.9% last quarter for revenue
13.3% vs. (0.4%) last quarter for bookings
10.0% vs. (5%) last quarter for MAUs
7.7% vs. (4.2%) last quarter for DAUs
15.8% vs. 5.5% last quarter for subscribers
MAUs and DAUs (and all demand lines) benefited in the third quarter of 2020 from social distancing and lockdowns boosting demand for remote learning. Year over year comparisons were quite difficult which makes 40.4% top line growth all the more impressive to me.
Duolingo guided to a loss of $8-$12 million in Adjusted EBITDA for the quarter. It posted a loss of $6 million beating the midpoint of its guidance by $4 million.
The sequential reduction in gross profit margin was attributed to “adding additional test proctors and resources” for the Duolingo English Test (DET) business:
Research and development (R&D) spend rose from 34% of revenue to 40% of revenue year over year while sales and marketing (S&M) spend decreased from 24% of revenue to 23% of revenue year over year. Rising R&D spend hints at management seeing ample opportunity for more product iterations and innovation. The company expects to see S&M — as well as general and administrative (G&A) — expenses fall as a percentage of revenue over time.
Duolingo guided to $66.5-$69.5 million in revenue for the 4th quarter. Analysts were expecting $65.6 million meaning Duolingo’s midpoint represents a 3.6% beat.
D. Co-Founder/CEO Luis von Ahn Conference Call Notes
On user growth:
Duolingo’s MAUs have now re-surpassed its previous Q2 2020 high when lockdowns and the pandemic greatly boosted its traffic and operations. The company believes it is now back to its pre-pandemic user growth rates.
“Growth continues to be overwhelmingly organic and driven by word of mouth. Our high-quality mobile product that is free, fun and effective leads people to telling their friends about it and has made our apps synonymous with language learning.”
The company expects MAUs to slightly fall in November and December due to seasonality and then spike in January as people set New Year’s resolutions. That pattern is depicted above. The company also runs its once-per-year in-app subscription discount to coincide with this user spike in January which also boosts subscriber adds from Q4 to Q1.
Duolingo recently assembled a team for in-app purchases as it sees outsized growth here going forward.
Encouragingly, it saw the same user and engagement uptick during back-to-school season that it enjoyed pre-pandemic. As a reminder, the company’s “Duolingo for Schools” product was in 40% of U.S K-12 classrooms as of 2020. Duolingo continues to enjoy strong traction in the classroom with the return to in-school learning.
On product and marketing innovations:
Duolingo is expanding its marketing initiatives to influencers and “other targeted PR.” It also created a TikTok during the quarter and generated one million followers to drive more awareness with “no expenses whatsoever.”
The company just completed its first in-app animated short film about various customs in Spanish-speaking countries. It used 2 of the characters from this app to do so and plans to leverage the growing awareness and affection for these characters in more content-creating ways in the future. More of these films will be released in the “coming months.”
“This is how we are going to explain culture the Duolingo way. Instead of making learners read boring text, our characters will explain the culture of each language through fun, animated videos.”
Duolingo’s elementary school math product will likely be launched next year. The meaningful revenue contributions from this segment will not begin until 2023.
The company launched a contact sync feature to facilitate connecting with friends — 500,000 users opted in during the first few days this feature went live. 40% of DAUs now follow 1+ other user and these social integrations have been shown to drive enhanced engagement. Along the lines of social, Duolingo enjoyed a 160% increase in its daily active users “sending or receiving a kudos” — one of the various tools Duolingo leverages to keep users entertained and engaged. 8% of DAUs now do this daily.
Duolingo is working on a new country-based pricing model to drive subscription growth across the globe. Right now a subscriber in Columbia pays the same as one in the United States and Duolingo will be fixing that with a pricing system floating based on affluence of the given country. It has implemented this change in 4 countries and seen an uptick in bookings for each.
Annual plan subscribers produce 2X the lifetime value (LTV) vs. monthly subscribers and now 80% of Duolingo subscribers are on annual plans. Its recently rolled out family subscription plans are expected to produce even higher LTV than individual annual subscribers.
The 2 new subscriber features it announced during its “Duocon” event — the mistakes inbox and legendary mode — are already contributing to higher free user conversion. Subscription adds came in well ahead of all forecasts and this was the reason the company attributed that outperformance to.
5.5% of MAUs are now subscribers vs. 4.2% year over year and 5.1% just last quarter.
On Google Play:
In a post a few weeks ago I addressed the impact that the Google App store fee change would have specifically on Duolingo. Luis addressed this during the call:
“Last month, Google reported that on January 1st, 2022, they would be lowering their app store fees on subscription revenues collected from first-tier subscribers from 30% to 15%. This is a very positive development for us as around 20% of our revenue comes from Google Play.”
Duolingo expects to see this change meaningfully boost its gross margin starting next year. I believe this could be a 400 basis point gross profit margin tailwind.
“We are encouraged to see annual plan subscriber retention increase year over year this quarter. We ended the quarter with the highest September retention we’ve seen since 2018. — CFO Matt Skaruppa
Current user retention rates — retention across both paid and free users — is now 80% vs. 65% in recent years.
DAUs as a % of MAUs was 22.9% last quarter. That rose to 23.5% this quarter pointing to stronger engagement.
On an efficacy update:
Duolingo tracks listening and reading proficiency for its users to see how many Duolingo units replace how many university semesters. Previously it published data depicting that 5 Duolingo units equates to 4 university semesters in half the time. It now has data pointing to 7 Duolingo units being equal to 5 university semesters (also in half the time).
On the Duolingo English Test:
36000 universities now accept this test as an English proficiency substitute vs. just 3000 a few months ago. All top 25 U.S. universities ranked by international proficiency exam volume now accept the Duolingo English test.
E. My take
This was an excellent quarter for the company. Engagement has eclipsed pandemic times that directly boosted the company’s demand and the combination of strong organic growth and free cash flow remains wildly compelling. This company is in the early stages of becoming a dominant force in education — not just language learning — and this quarter was merely another sign it’s heading in that lucrative direction. Great job Duolingo.
Click here for my Duolingo deep dive.
4. CuriosityStream (CURI) — Earnings Review
“We provide annual guidance rather than quarterly guidance in part to limit timing constraints that could pose a risk to production quality,” — CFO Jason Eustace
CuriosityStream was expected to post $19.84 million in quarterly sales by analysts. Company does not guide to quarterly revenue but it did miss this estimate by 5.7%. Still, it also reaffirmed its 2021 annual guidance and even added that the guide is now “100% committed” vs. “over 90% committed” sequentially and “80%” three quarters ago.
Note that total subscriber growth is predominately driven by lumpy bundling deals. No large bundling deals were added during the quarter hence the near-flat growth. This number was also hurt by its international distribution partners actually losing subscribers during the period as the world opened back up — CuriosityStream’s contracts protect it from this risk. The growth was not actually flat, this is just due to the company rounding up last quarter and rounding down this quarter.
Direct subscribers grew at a lofty rate of 50% year over year.
The company was expected to lose $0.19 per share. It lost $0.14 beating expectations by $0.05. It was also expected to lose $11 million in EBITDA. It lost $7.9 million beating expectations by 28.2%.
Last quarter, CuriosityStream forecasted gross margin to fall into the “low 40% range for the next 2 quarters.” This was due to a large ramp in pre-sale business that can be recognized as sales but not gross profit during the same period. This hit is based on GAAP accounting and not the company’s profitability. Additionally, the 48.9% gross profit margin it posted was several hundred basis points ahead of its expectations due to a low churn rate and ARPU growth.
C. CEO Clint Stinchcomb Conference Call Notes
On licensing and growth:
Licensing deals that were supposed to begin in this quarter were pushed back to the 4th quarter due mainly to “editorial enhancements CuriosityStream chose to make.” Three of these deals are worth over $1.5 million in revenue which had been expected for the 3rd quarter but closed days after the period ended. The company still managed to post $6 million in licensing revenue vs. $50,000 a year ago.
CuriosityStream gets the rights to its content back after a finite licensing period. With factual content aging so much better than scripted, the company expects to generate more revenue from these licensed titles after the agreements expire.
“Factual content travels well internationally and these licensing agreements allow us to capitalize on the demand in markets where we have yet to develop a direct to consumer offering.”
This marked the 11th straight quarter of direct subscription growth over 50%. In the company’s original SPAC investor presentation, it predicted 35% direct subscriber growth for 2021. This metric has now grown by 80%, 56% and 50% in quarters 1-3 respectively — considering direct subscribers are the most lucrative customers for CuriosityStream this outperformance is important. The company continues to deliver on its promises when that has been far from the case for many post-merger SPACs.
CuriosityStream now offers 5000+ titles vs. 3000 YoY.
On ARPU and churn:
Stinchcomb expects ARPU to continue rising with “additional innovate subscription tiering” as well as through One Day University’s lectures and events.
“ARPU growth will start to become a significant driver of our top line growth.”
CuriosityStream enjoyed its “lowest churn in the company’s history” within the Direct-to-consumer segment. It also enjoyed its second straight sequential average revenue per user (ARPU) boost driven by less promotions. Lower churn at higher ARPU depicts real pricing power.
On the pipeline:
“Our pipeline of pre-sales agreements is strong and provides a solid foundation of revenue in the coming quarters. We like our hand going into next year with our partners… there are a lot of deals that are available to us.”
“They’re an excellent marketing partner of ours as they give us a straight line into a younger demographic.”
D. CFO Jason Eustace Conference Call Notes
On the guidance:
“We have only included in our full year 2021 guidance the pre-sales with expected delivery dates no later than mid-December to limit the potential for delays impacting our ability to meet or exceed guidance.”
Translation? Any pre-sales closing in late December should lead to a revenue beat for 2021.
The company also reallocated a portion of its 3rd quarter marketing budget for next quarter when their marketing is typically most productive.
“We continue to find opportunities to invest in marketing at attractive consumer acquisition costs.” — Eustace
The company is expecting 2021 gross profit margin in the mid 40% range.
E. My Take
The 2021 revenue guide was really my main focus going into this report and I was encouraged to see it now “100% committed.” The company continues to execute and for that reason I am not concerned with the stock’s performance and added to my stake this week. At likely 8 times 2022 gross profit and the rapid growth it continues to forecast, this is the definition of growth at a reasonable price. Time for me to be “greedy when others are fearful” as the great Warren Buffett tells us.
Click here for my broad overview of CuriosityStream’s business.
5. Green Thumb Industries (GTBIF) — Earnings Review
“We continue to believe it is day 1 for cannabis in the United States. We are laying the tracks for growth in 2022, 2023 and beyond” — CEO/Founder Ben Kovler
Green Thumb was expected to generate $232.4 million in sales. It posted $233.7 million beating expectations by 0.5%.
Note that Green Thumb (and Cresco) experienced tough sequential growth comparisons as the second quarter was a historically strong period thanks to stimulus checks. Any sequential growth is evidence of outperforming the market as a whole. Quarterly growth is fully expected to recover in the future.
The company’s revenues are 43% consumer packaged goods (CPG) and 57% retail — in line with last quarter. Note that this CPG revenue is all branded, there’s no bulk raw wholesaling going on here. CPG revenue grew 3% sequentially despite no new capacity coming online in the quarter and all facilities already having been run at capacity. This hints at pricing power.
Same store sales growth was 14% vs. 34% last quarter and 65% in the year over year period.
Profit estimates for the quarter were as follows:
$0.08 in earnings per share. Green Thumb reported in line results.
$82.7 million in adjusted EBITDA. It posted $81 million missing expectations by 2.1%.
Green Thumb delivered positive GAAP cash flow from operations for the 7th straight quarter and positive GAAP net income for the 5th straight quarter. The company now has $286 million in cash on the balance sheet. It drew down the remaining $33.2 million in debt from its 7% credit facility to fund “strategic investments and growth initiatives.” It has $206 million in debt outstanding
C. Founder/CEO Ben Kovler Conference Call Notes
On New York and CapEx:
Cultivation is now underway in its New York facility (where a federal prison used to be). This partially drove the large sequential increase in capital expenditures (roughly $70 million during the quarter) along with investments in Virginia and New Jersey.
On the Rise Mundelein Dispensary in Illinois:
“The Rise Mundelein dispensary is now the first location east of the Mississippi to offer on-site purchase and consumption of cannabis. It’s also the first store in Illinois that offers roll-through car-pickup service for medical patients.”
This drive-thru style has worked extremely well for players in Michigan — a state early to this trend.
On Virginia and M&A:
“We love the investment in Virginia due to its population and path to adult-use regulation. We look forward to working with the newly elected governor Glenn Youngkin to drive growth and opportunity for the people of Virginia. We have 2 stores open with 4 more in the works.”
There is some concern that the newly elected governor will not support legal cannabis.
“We sleep well at night knowing that regardless of when the federal government takes action on peoples’ freedom to choose cannabis we are built to prosper.”
“We do not believe the USA will ever end up looking like Canada. The US market is already a $24 billion industry that we believe will triple over the next decade.”
D. My Take
This was an uneventful yet solid quarter for Green Thumb. No large organic or inorganic projects came online and the company continues to aggressively invest in the markets it sees (and I see) as the most promising. This was an average quarter but there remains a long growth runway and Green Thumb has the strong cash flows, brand equity and liquidity to thrive for a long time to come.
Click here for my broad overview of the American Cannabis regulatory environment.
6. Cresco Labs (CRLBF) — Earnings Review
Cresco’s revenue was in line with consensus estimates.
Sequential growth was impacted by an operational shift in California away from 3rd party brands and towards embracing its own (succeeding) brands. This shift will enhance margins in the state for Cresco going forward but did result in a small sequential revenue decline in the state this quarter. Sequential growth was also impacted by stimulus checks — like with Green Thumb — in the second quarter driving stronger-than-trend growth. Any sequential growth for Cresco represents market outperformance.
Sunnyside retail shops (Cresco’s retail brand) now accounts for 97.2% of retail revenues for the company.
Cresco’s adjusted EBITDA was in line with estimates.
Net income margin was hit by a $290 million non-cash impairment charge in Q3 related to its Origin House acquisition — there were no impairment charges for Q2 2021 or Q3 2020. This was due to that same operational shift in California. Without accounting for this, net income margin was roughly (122.3%). Origin House employees now run all of Cresco’s cultivation in California so while the impairment is never good, the company is getting a lot out of this asset.
Note that the Q3 2020 GPM adjusted for acquired inventory is a rough guess based on Cresco’s accounting policies changing during the year. I added back impairment charges from Q3 2020 to the 50.1% GPM Cresco gave us for Q3 2020.
Cresco Labs guided to the following for the remainder of 2021:
50%+ GPM (reaffirmed)
30%+ adjusted EBITDA margin (reaffirmed)
$235-$245 million in revenue (reaffirmed)
D. CEO Charlie Bachtell Conference Call Notes
Some general highlights:
The company now has a top 2 market share position in 3, $1 billion+ markets. It had this in 2 markets last quarter and added Massachusetts to this list via M&A.
The company remains the number 1 wholesaler of branded cannabis products in the United States.
It remains the number 1 market share player in Pennsylvania. 70% of the highest velocity flower stock keeping units (SKUs) in Pennsylvania are Cresco’s with 50% of the top velocity concentrate SKUs being owned by Cresco.
Sunnyside remains the most productive national dispensary chain.
It will be in full production mode in Ohio and register its first sale of flower from grow projects in Michigan by year’s end.
The company’s Cresco Brand was the top selling cannabis brand in the USA. It has been since the beginning of the year.
Cresco will open its Sunnyside Wrigleyville dispensary next week. This is 300 feet away from where the Chicago Cubs play home games with 21 point of sale (pos) systems to handle heavy demand. This should be a very fun opening for the company.
Cresco’s Floracal brand jumped from 15th best-selling California brand to 12th best sequentially.
U.S. cannabis is pacing for 40% year over year growth in 2021 with Cresco Labs greatly outpacing that growth:
“We are excited about the future as we recognize contributions for growth initiatives over the last 2 years.”
Cresco’s branded wholesale is now reaching 1,100 retail stores vs. 1,000 last quarter. In the majority of Cresco’s 8 wholesale markets, its brands “have more than 75% wholesale market penetration with 3 markets over 95% penetration and 100% penetration in Illinois and Pennsylvania.”
“By adapting a traditional consumer packaged goods approach to cannabis, we’ve demonstrated our ability to reach and sustain number 1 market share positions in large markets. We are poised to repeat that success in multiple key states.”
On retail productivity:
Cresco’s average revenue per dispensary fell from $3.9 million to $3.1 million sequentially as it accelerated the pace of its new store openings through M&A and organically. Same store sales grew by 25%.
On M&A in a foggy regulatory world:
“We’re dedicated to achieving success in the framework that exists today and to winning in the long term. We continue to evaluate investment opportunities with both time horizons in mind… We’ve navigated difficult, evolving environments before and we will do it again. We are ready for what comes next.”
Cresco continues to focus on 12 key states — 7 with an over billion dollar run rate and 5 more with thriving medical markets poised for recreational legalization (Pennsylvania for example).
Summary of M&A during the quarter:
Bought Blair Wellness to expand further into Maryland retail.
Bought Cultivate and BL Real Estate to bolster its positioning in Massachusetts.
Bought Cure Penn and Laurel Harvest to expand further into Pennsylvania retail.
On New York and Florida:
“We’ve gotten enough information from the state to make us feel comfortable in pursuing it. We’ll be ready for adult-use as soon as it happens probably in 2023.”
“We’ve got some exciting news in the months ahead to strengthen our portfolio in Florida.” — Chief Commercial Officer Greg Butler
E. My take
Like with Green Thumb, this quarter was both uneventful and solid. I think the shift in California is the correct decision for the long term, despite the hit to sequential growth it led to this quarter. The long term thesis is very much so intact.
Click here for my broad overview of the American Cannabis regulatory environment.
7. Upstart (UPST) — 10Q Wrap-up
I posted a detailed summary of Upstart’s earnings report earlier in the week but the company doesn’t disclose revenue concentrations until it publishes its 10Q (normally a few days later). It’s now published and here are the updates:
Upstart collected 44% of its revenue from Credit Karma traffic over the 1st 9 months of 2021 vs. 52% year over year. This 44% also dropped from 49% over the first 6 months of 2021 pointing to strong channel diversification.
Over the first nine months of 2021, Cross Rivers Bank fees accounted for 59% of Upstart revenue vs. 65% year over year. This fall actually seems to be due to its 2nd largest banking partner growing to 25% of total revenue this quarter vs. 15% of total revenue in the year over year period. As a result, concentration risk here remains significant.
A third customer recently eclipsed 10% of Upstart’s total accounts receivable during the quarter as well.
Credit Karma is the bigger risk here as there are many substitutes for Cross River’s clearing function and Upstart’s partner list continues to rapidly grow. Credit Karma’s owner — Intuit — is venturing closer and closer into Upstart’s space. More product overlap in the future could incentivize Intuit to stop directing traffic to Upstart. It’s not likely but it’s not impossible. Seeing this concentration fall to 44% is very encouraging — and it needs to continue.
Another interesting note I found was Upstart holding nearly $100 million in loans on its balance sheet “for investment” vs. just 18.2 million as of the end of last year. It seems to be growing comfortable with assuming more credit risk. This raises risks and growth potential at the same time. Last December, roughly 75% of loans held on its balance sheet were for future sale vs. 25% for investment. That flip-flopped this quarter.
Upstart CEO Dave Girouard participated in an interesting interview this week. No information that I haven’t already shared with you came from the discussion, but if you’d like to watch it click here.
Click here for my broad overview of Upstart’s business.
8. Tattooed Chef (TTCF) — A Bad Day
Tattooed Chef delayed its earnings report just minutes before it was set to be published “to finalize financial statements.” For a company that has a history of accounting blunders, this is quite alarming to me.
The organization was already on the hot seat for me due to its shrinking gross profit margin guidance last quarter — I stopped adding to my stake months ago when this happened as I told my readers in my quarterly portfolio update. Still, I’m not ready to sell my shares — although I am quickly losing patience, to be candid.
9. Penn National Gaming (PENN) — New York
Barstool and Penn National Gaming were not awarded a gaming license in New York while 2 other bids (involving multiple prominent players) were approved. Despite the 51% tax rate expected this is not good.
I will be looking for the company to continue aggressively pursuing a license there (it already has a brick and mortar casino presence) either organically or through partnerships/M&A.
10. Ozon (OZON) — Russia News
The United States and its allies are considering the real possibility of a near-future invasion of Ukraine by Russia. While this shouldn’t have a drastic impact on Ozon’s e-commerce business in Russia, the heightened geopolitical risk could weigh on the stock. I will continue to hold and slowly add to my stake.
Click here for my broad overview of Ozon’s business.
11. Ayr Wellness (AYRWF) — Cash Raise
Ayr Wellness raised $150 million in senior secured notes to fund its growth. The raise is an extension of a previous Ayr debt offering and carries a 12.5% interest rate.
12. My activity
I published earnings reviews on Upstart, SoFi Technologies, The Trade Desk and Lemonade as standalone pieces during the week:
Click here to review Upstart.
Click here to review SoFi.
Click here to review The Trade Desk.
Click here to review Lemonade.
I added to my stakes in CuriosityStream and Upstart during the week.
Thank you for reading!