A prominent name in the energy drink market, Monster Beverage (MNST, Financial) came out with its fiscal 2015 first quarter numbers recently. Despite revenue estimate beat, on the back of lower than expected earnings the stock a beating and dropped nearly 8%. While everything else looked fine and on track, the major drag was the issues the beverage giant is facing related to its partnership with Coca Cola (KO, Financial). Here’s a look at the quarter’s numbers, the impact of the deal, and why this temporary downturn shouldn’t shake you as an investor.
Numbers of the quarter
For the three month period, the Corona based company reported gross sales of $710.2 million. Of this $39.8 million came from acceleration of deferred revenue related to the partnership and transition with Coca Cola. Excluding this, gross revenue came to $670.4 million, up 9.2% compared to prior year period’s $613.7 million. Net sales for the period came to $626.8 million, and excluding acceleration of deferred revenue, net sales came to $587 million, up 9.5% from last year same period’s $536.1 million.
Monster’s operational performance during the quarter improved as its gross profit increased to 56.1%, up from last year’s 53.5%. Even operating income improved compared to 2014’s first quarter – excluding the impact of acceleration of deferred income, operating income surged 16.8% to $173.9 million, up from last year’s $148.9 million.
However, all this couldn’t trickle down to the bottom line and Monster reported earnings of $0.03 per diluted share and net income came to $4.4 million. Excluding the impact of acceleration of deferred revenue, earnings came to $0.62 per diluted share, lower than analyst estimates of $0.68 but 13.5% more than what was reported in prior year period. The beverage maker’s bottom-line was unfavorably impacted by termination obligation arising out of its new partnership with Coca Cola, and the negative impact of foreign currency exchange rates.
The burden of the new partnership
The deal between Monster and Coca Cola took place last year in August when Coca Cola decided to acquire a 16.7% stake in Monster Beverages. Under the agreements of the deal Coca Cola will get an equity stake in the latter and Monster will get the ownership of Coca Cola’s Energy business. However, Monster will have to transfer its non-Energy business to Coca Cola. Finally, Coca Cola and its partners will become the preferred distribution partners for Monster’s beverages across the globe, and Monster will become Coca Cola’s key player in the energy drink market.
While all this sound exciting, the transition is equally challenging and prone to inviting challenges. As a part of the deal Monster had to send termination notices to its distribution partners across the U.S., resulting in huge termination obligations – for the said quarter the termination obligation came to $206 million. Monster mentioned in its earnings release that the obligation has been expensed in full and has been included in the quarter’s operating expense. The good part about this whole activity was the recognized revenue worth $39.8 million amounting from acceleration of deferred revenue pertaining to the terminated obligations.
Now, outside the U.S. the pending transitions seems to have a greater impact compared to the U.S. markets. Even Monster management feels the international markets are a little more affected on the back of skepticism amongst the distributors and expectation of what the future will be like and whether they will continue to be a part of Monster’s distribution network.
No need to worry
Though the deal and the transitions related to it are causing trouble for Monster, industry experts and analysts believe this will eventually lead to a stronger company and accelerate Monster’s growth in the worldwide energy drink market.
In the words of CEO Rodney Sacks – “We are excited by the addition of The Coca-Cola Company Energy brands to our Monster Energy portfolio, which will provide us with complementary product offerings in many countries, access to new geographies as well as access to new channels, including vending and specialty accounts.”
The deal should help strategically align both the companies to benefit in the long-term – while Monster will benefit hugely from Coca Cola’s strong worldwide bottling system, Coca Cola will benefit from Monster’s expertise in energy drink and its dedicated focus on the beverage category.
The deal seems to be all set with every necessary approval in place. During the first quarter earnings call, Sacks commented, “all necessary approvals and consents from the relevant antitrust authorities around the world have been obtained. In anticipation of the closing of the transactions, to date, Monster has transitioned approximately 84% of its targeted distribution rights in the U.S. to The Coca-Cola Company and its bottling partners, and an additional 5% will be transitioned during May 2015.”
Even on the face of a tough economy the energy drink market continue to grow, thanks to the declining popularity of soda based drinks, and Monster is determined to make the most out of this opportunity. While Red Bull continues to be the top energy drink, Monster’s superb growth in the past few years can’t be over looked. Once the transition is complete and things straighten out, Monster has a real chance to go that extra mile and take the lead.
