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SodaStream International Ltd (SODA): What’s Next?

SodaStream International Ltd (NASDAQ:SODA) has a good problem. The demand for its products is rising at a higher pace than anticipated. The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) would love to trade places with it.

But the beverage giants have had their days of growth and now they have matured gracefully. They have built tremendous brands and emerged as global powerhouses. And they are still aiming for more. Sodastream International Ltd (NASDAQ:SODA) has miles to go before it can get anywhere close. But the journey promises to be exciting.

The company is getting ready to provide its quarterly report card tomorrow. Meanwhile, let us get our facts and figures ready so that we can decide whether it has passed the test or not.

Demand is a given

And this is due to constant product innovation, tapping of new markets, and entering into strategic tie-ups. Not to mention the company’s “razor/razor blade” business model by virtue of which sales of the basic soda maker creates future demand for consumables like CO2 refills, flavors, etc.

Sodastream International Ltd (NASDAQ:SODA)When a company more than doubles its revenue within a span of just two years it means that it is on target. Its products are well accepted and strategies are working. And this is Sodastream International Ltd (NASDAQ:SODA)’s story. It increased its revenue from $208 million in 2010 to $436 million in 2012. The good thing is that the growth has been wide-based, coming from all geographies and all product segments. Even sales in Europe, which is going through dire economic conditions, is witnessing growth.

Table 1: Product wise revenue break-up

2011 2012
Revenue (‘000$) Y-O-Y Growth Revenue (‘000$) Y-O-Y Growth
Soda makers and CO 2 cylinders 125,595 44% 185,875 48%
Consumables 156,959 38% 241,922 54%
Other 6,399 -19% 8,519 33%
Total 288,953 39% 436,316 51%

Source: SodaStream 20F

Table 2: Geography wise revenue break-up

2011 2012
Revenue (‘000$) Y-O-Y Growth Revenue (‘000$) Y-O-Y Growth
The Americas 83,894 105% 157,705 88%
Western Europe 153,174 18% 204,332 33%
Asia-Pacific 21,010 64% 42,367 102%
CEMEA 30,875 22% 31,912 3%
Consolidated 288,953 39% 436,316 51%

Source: SodaStream 20F

What’s next?

After the launch of the new “Source” and “Revolution” models, the next big thing that the company is debuting is SodaCaps. These are single-serve disposable capsules. One would just empty the “Cap” contents into carbonating bottles and sparkling soda would be ready.

The company is also talking about new bottle designs that would come out later in the year and new Source models made out of wood that would make their appearance next year.

It all boils down to the fact that Sodastream International Ltd (NASDAQ:SODA) has created an extremely trendy and stylish product range suited for different markets and varying needs. In the US itself the offerings vary from a basic plastic model with plastic carbonation bottle costing around $80 up to the high-end Penguin model with fancy steel components and glass carbonation bottles that fetch $200.

We would watch for the latest updates in the upcoming earnings release.

Focus is on margins

So we know that revenues will grow nicely. Analysts estimate revenue growth of no less than 28.70% in the first quarter. It is the margins that would be under the scanner. Analysts are expecting earnings of $0.54 per share compared to $0.48 a year ago.

Margins have been under pressure especially in the fourth quarter as the company had to resort to subcontracting some of the work to meet the high demand.

Table 3: Quarterly Gross Profit margins

2012 2011
1st Quarter 55% 53.5%
2nd Quarter 54.4% 53%
3rd Quarter 54.2% 53.5%
4th Quarter 53% 57.3%

Source: SodaStream 20F

Sodastream International Ltd (NASDAQ:SODA) is already building a new manufacturing facility in Israel and also increasing capacity in its existing plants. The company insists that it has the existing capability in place to meet the demand for this year and next.

What could be near-term boosts for the margins is the increase in proportion of consumables in the sales mix. This is where Sodastream International Ltd (NASDAQ:SODA)’s tie-ups with the likes of Kraft Foods, Campbell Soup, and Ocean Spray, to bring to the market exclusive flavors will come into play. The flavors and other consumables contain higher margins than the base soda makers.

The proportion of US sales will also be a key factor for the margins on account of two reasons. Firstly, the company directly distributes its products in the US as opposed to engaging third party distributors that it does in some other markets.

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