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UPDATE 3-Canopy Growth posts smaller-than-expected loss, to cut more costs

(Adds analyst comment, share price)

Feb 14 (Reuters) - Canopy Growth Corp reported a smaller-than-expected loss in the third quarter on Friday, as the Canadian cannabis company kept a tight lid on costs, and its share price surged 20%.

The company, whose operating costs fell 14% from the prior quarter, and gross margin expanded, said it would take further steps to cut costs and streamline its business.

“The company demonstrated positive progression across several key areas, the pace of which was better than we had anticipated,” Jesse Pytlak, an analyst at Cormark Securities, said by email. “While there still remains some very heavy lifting that the company needs to complete, in our view, these initial results are encouraging.”

Canopy shares surged 20.5% to C$31.24 in early trade in Toronto, their biggest one-day gain since August 2018.

Canopy’s upbeat results also boosted other pot stocks, with CannTrust Holdings, Aphria, Aurora Cannabis and Cronos Group all posting gains. The Horizons Marijuana Life Sciences Index ETF rose 7.1%.

More than a year after Canada legalized recreational weed, most producers have failed to turn profitable because of fewer-than-expected retail stores and oversupply issues, while a cash crunch threatens many companies’ survival.

To soothe jittery investors, pot producers including Aurora Cannabis, Hexo and Tilray have announced a range of cost-cutting measures. Last week, Aurora cut 500 jobs and Tilray about 140 jobs, or about 10% of its total workforce.

Last year, Canopy said its major shareholder Constellation Brands’ finance head David Klein would take the helm, months after the Corona beer maker expressed disappointment over Canopy’s heavy losses the in 2018.

“Actions taken earlier this year are expected to meaningfully reduce stock-based compensation in FY21, and we have started to implement tighter cost controls across the organization,” Canopy Chief Financial Officer Mike Lee said in a statement.

Excluding items, Canopy posted a loss of 35 Canadian cents per share in the quarter ended Dec. 31, smaller than the average analyst estimate of 49 Canadian cents.

Its net revenue of C$123.8 million also beat estimates of C$105.1 million, according to IBES data from Refinitiv. Gross margin before fair-value adjustments widened to 34% from 26% a year ago.

Canopy said its cash and cash equivalents were C$1.56 billion at Dec. 31, down from C$2.48 billion at March 31, 2019.

$1 = 1.3241 Canadian dollars Reporting by Shariq Khan in Bengaluru; Additional reporting by Nichola Saminather in Toronto; Editing by Shinjini Ganguli, Anil D’Silva and David Gregorio