Tilray Inc. (TLRY.O) shares rose in post-market trading after the company reported revenue that beat estimates and a higher average selling price, though investor enthusiasm was dampened by weaker margins and a wider-than-expected loss.

The cannabis producer’s fourth-quarter revenue was US$15.5 million, triple the year-ago period and ahead of the average analyst estimate of US$15.1 million, as it sold more pot at higher prices. However, it lost US$31 million in the quarter, significantly more than the $3 million lost a year earlier, amid higher operating expenses.

Key Insights

Tilray reported an average net selling price per gram of US$7.52, up from US$6.21 in the prior quarter and US$7.13 a year ago. By comparison, Aurora Cannabis Inc.’s average selling price fell 26 per cent for dried cannabis and 18 per cent for cannabis extracts in the final quarter of the year.

Cost of sales rose to US$12.4 million from US$2.2 million a year earlier, the result of higher operating expenses related to growth initiatives, expansion of international teams, and financings and M&A activity, the company said.

Gross margins fell to 20 per cent from 57 per cent a year earlier as a result of costs related to securing cannabis supply from third parties, ramping up production and absorbing the tax for medical patients, Chief Financial Officer Mark Castaneda said on the company’s earnings call. He expects gross margins to rise back above 50 per cent in the longer term.

Tilray sold 2,053 kilograms of cannabis, up from 1,613 kilograms in the third quarter.

Management Commentary

Recreational marijuana sales accounted for about 30 per cent of total revenue, Chief Executive Officer Brendan Kennedy said in an interview.

“Originally we were projecting it to grow to be 40 to 50 per cent of our revenue for this year and we think it’ll actually be less than that, not because the numbers are smaller, but because revenue from other sources is actually going to be larger than we thought.” Kennedy said.

Those other sources include Tilray’s acquisition of Manitoba Harvest, higher global medical sales and projected revenue from CBD wellness products in the U.S.

Tilray doesn’t see much opportunity to do deals in Canada.

“The United States and European markets are orders of magnitude larger than Canada, so while Canada will continue to be an important market for us, we expect to focus the majority of future investments on the U.S. and Europe,” Kennedy said on the earnings call. “We will not purchase or invest in what we believe to be overpriced supply assets in Canada, which we believe will erode in value in the medium- to long-term as the market normalizes.”

Kennedy believes “we are a lot closer to federal legalization in the U.S. than most people realize”He also sees the number of countries with legal medical markets rising to 50 or 60 by the end of 2019 from 41 at the end of 2018.