Israel’s Sarine Technologies reports that its net profit in the first half of this year rose 7% on the year to $1 million on slightly lower revenue.
The company, a leader in precision technology products for evaluating, planning, processing, measuring and the grading and trading of diamonds and gems, says that its profitability was driven by aggressive cost reduction measures.
The first half of 2024 presented significant challenges for the natural diamond manufacturing industry, the firm said in a statement. Persistently weak demand from China, the world's second-largest market for diamond jewelry, coupled with the ongoing, albeit slowing, disruption from lab-grown diamonds (LGDs) in the U.S. market, led to a downturn in demand for rough natural diamonds. This resulted in a slowdown in manufacturing activities.
The Lab-Grown Diamond Landscape
The lab-grown diamond sector is undergoing notable changes. With production surging and consumer adoption in the U.S. decelerating, wholesale prices for LGDs plummeted by 20% to 50% in the first half of 2024, depending on the size and quality of the stones. This intense competition among retailers has also driven retail prices down significantly, with one-carat and two-carat stones now selling for as little as $500 and $1,000, respectively.
As a result, U.S. retailers are seeing a sharp decline in profits from LGD sales, leading them to reassess their LGD offerings to maintain financial viability.
Financial Performance and Revenue Streams
The company reported revenues of $21.9 million in the first half of 2024, a 7.8% decrease compared to the same period last year. The challenging environment for natural diamond manufacturing led to a 37% drop in sales of traditional capital equipment.
However, this was somewhat offset by an 11% increase in recurring revenues, which now comprise over 70% of the Group's total revenue. Notably, trade-related recurring revenues, excluding manufacturing-related recurring streams like Galaxy® inclusion scanning, surged by approximately 44%, accounting for 26% of total revenue, up from 17% in H1 2023.
This growth in recurring revenues can be attributed to strategic initiatives introduced in early 2024. These include the launch of the Most Valuable Plan (MVP) for optimizing the planning of small natural rough diamonds, the adaptation of rough planning technologies to cater to LGDs, the establishment of a GCAL by Sarine lab in India to service the burgeoning Indian LGD industry, and the introduction of the AutoScan Plus and Sarine Diamond Journey solutions, which address ESG concerns and comply with G7 sanctions on Russian diamonds.
These initiatives have attracted new customers and generated new streams of recurring revenue. Consequently, revenues from LGD-related services experienced significant growth, and the group anticipates that this segment will contribute 15-20% of its annual revenue by the end of the year.
Profitability and Strategic Positioning
Despite the adverse market conditions, net profit rose by 7.2% to $1.02 million in H1 2024. This increase is attributed to active business streamlining and prudent expense management, which have enhanced profitability and strengthened the Group's strategic position for long-term growth.
While short-term challenges persist in the rough diamond market, the Group’s strategic initiatives are designed to promote sustained growth and solidify its market position in both the natural diamond and LGD sectors.
Outlook and Prospects
Looking ahead, the demand for rough natural diamonds is expected to remain subdued in the near term, largely due to weak demand in China and the growing prominence of LGDs.
However, industry dynamics are anticipated to evolve, with potential improvements in demand driven by innovative natural diamond marketing campaigns, increased post-COVID consumer engagement, and a shift in focus among U.S. retailers back to natural diamonds as they seek to maximize profitability.
Sarine's new recurring revenue-generating services, launched earlier in 2024, have gained significant traction and are expected to continue expanding as they are rolled out to both existing and new customers.
The Most Valuable Plan (MVP) paradigm, designed for the optimal planning of smaller rough natural diamonds, is witnessing rapid adoption, with further enhancements planned for Q3 2024. This service could also drive additional sales of Meteor and Meteorite Plus planning systems, expanding the Group's total addressable market.
The LGD rough planning services have also seen faster-than-expected adoption. The Group intends to continue expanding these services to its existing customer base and to tap into new LGD growers, generating additional streams of recurring revenue.
The new GCAL by Sarine grading lab in Surat, India, which focuses on on-site LGD grading, offers Indian manufacturers a cost-effective grading solution while maintaining GCAL’s high-quality standards.
The Group is already collaborating with new U.S. retail customers through their Indian suppliers and plans to further expand its grading capacity in the second half of 2024 and into FY 2025.
Dividend Declaration
In recognition of the Group's performance in H1 2024, the Board of Directors has recommended an interim dividend of 0.75 US cents per ordinary share, with the dividend expected to be paid on September 12, 2024.
The Group remains cautiously optimistic about the future, with a clear focus on leveraging its strategic initiatives to navigate the current market challenges and position itself for long-term success in both the natural diamond and LGD markets.
Abraham Dayan for Rough&Polished from Tel Aviv
