Q2 2020 SmileDirectClub Inc Earnings Call
Greetings and welcome to the Smile direct club second quarter 2020 earnings call.
Time, all participants Arnie listen only mode.
A question and answer session will follow the oral presentation, if anyone should require operator systems. During the conference. Please press star zero on your telephone keypad.
A reminder conference is being recorded.
It is now my pleasure to introduce your host Ms., Alison Sternberg, Vice President Investor Relations. Thank you you may begin.
Thank you operator good afternoon.
Before we begin let me remind you that this conference call include forward looking statements for additional information on Smile direct club. Please refer to the company's FCC filings, including the risks factors described Barrett.
Not rely on a forward looking statements such predictions of future events.
All forward looking statements that we make on this call are based on assumptions and beliefs as of today.
I refer you to our Q2 2020 earnings presentation for a description of certain forward looking statements. We undertake no obligation to update such information, except as required by applicable law.
In this conference call. We will also have a discussion of certain non-GAAP financial measures, including adjusted EBITDA and free cash flow.
For me as required by regulation G., if the exchange Act with respect to such non-GAAP financial measures is included in the presentation flights. This call, which can be obtained on our website. We also refer to this presentation for a reconciliation of certain non-GAAP financial measures.
<unk> GAAP measures I'm joined on the call today by Chairman and Chief Executive Officer, David Kaplan, and Chief Financial Officer, Kyle well.
Let me now turn the call over to David.
Thanks, Allison good afternoon, and thank you for joining us today during a very complex time I'm pleased to report the Q2 results exceeded expectations.
Demonstrate continued progress across the business.
Our performance in Q2 or more importantly, since the quarter reflects the strength of our tell dentistry platform.
Along with the flexibility and agility of our business model.
Both in the context of our covert 19 recovery efforts and our traction towards our long term growth and margin targets.
As stated in our prior earnings calls, we have always first and foremost tele health business.
We are excited to see the growing level of understanding in acceptances, Tele health, especially for dentistry.
We're seeing increased consumer a clinical adoption of the telehealth model.
We continue to invest in our proprietary platform to innovate against unmet consumer needs.
As Carl will discuss in further detail, we were especially pleased to see such robust demand new leads during a period and significantly reduced marketing.
This is an important reinforcement of the brand equity we have built.
Not only with our existing customers, but also with all consumers thinking about shrinking their teeth.
This is due to our unwavering commitment to continue to optimize an improved the customer experience.
Which is the cornerstone of our business at our North Star.
But today I'd like to first call out some of the notable highlights from the quarter followed by a summary of how we're tracking against our growth in cost initiatives.
Then touch on the regulatory environment before turning it over to call to walk through our financial results and current trends in more detail.
Turning to the results within the quarter Q2, we ship roughly 57000 unique a wider orders at an S.P. of 1800 $17.
Achieved 107 million in total revenue.
Saw continued strong performance in our smile pay program with delinquency rates and first pass credit card authorization rates remaining consistent with past history.
Generated negative 20 million of adjusted EBITDA for the quarter, a sequential improvement up 70%.
I would also like to highlight that marketing selling expenses came in at 35 million or 32% of net revenue in a quarter compared to 72% I'm not revenue in Q1 of 2020 at 72% of net revenue in Q4 2019.
As we noted on our Q1 call. This trend reflects the several years, we have spent investing in the customer experience and brand building alongside our continued focus on highly efficient acquisition channels.
It's also reinforces the strength in importance, our omni channel approach, which provides the ability to drive more demand through a fixed infrastructure overtime.
Lastly, this demonstrates what we have stated previously our small shops do not drive demand, but rather actors fulfillment centers.
Demand is driven through our website and enabled by our television industry platform.
It is important to point out that even with this reduced spend roughly 60% of club members who purchase the liners. In Q2 were first time leads which is close to where we have been historically.
Now turning to progress against our growth drivers. In addition to our core business, we saw great momentum in the quarter across the three growth drivers we had previously discussed.
As a reminder, they are expanding our customer acquisition channels, expanding our presence in the team demographic and continuing our international expansion.
On the first initiative expansion of our acquisition channels club members historically were driven to our website through aided awareness referrals and marketing where they would either book in appointment as he had a smile shop or request a doctor prescribed impression kit.
As we think about expanding our acquisition channels, we are focusing on accommodating new customer on ramps to our clear aligner therapy through the professional channel corporate partnerships in retail.
And we have made great progress across all three since the first quarter.
I was I will spend a bit more time on the professional channel, but first let me briefly touch on corporate partnerships in retail.
I corporate partnerships, we recently partnered with Aliansce, one of the most trusted and reputable leading insurance providers in the world.
Your insurance program launches this month in Germany, and allows German customers to instantly obtain insurance coverage for us he see aligner therapy right at the point of purchasing or Aligners.
This solution will replace STC smile pay option.
In countries, where the programs available.
All customers accepted into the program with a monthly payment option similar to our current monthly Smile pay program.
Tied to all the ounces dental insurance.
This new association with Aliansce is great for bringing credibility to our brand and increasing our cash flow.
On another note Q2, we expanded our insurance network in the U.S. with anthem Blue Cross Blue Shield and Empire Blue Cross Blue Shield insurance programs, joining United and then others that cover our customers within that work orthodontia coverage.
Now the retail side are all care products, which debuted at Walmart in January 2020 led category growth in several areas at Walmart.
These products not only provide consumer access premium for care products at an affordable price point.
But also raise brand awareness of our platform and increase the lifetime value of our existing club members.
In addition to Walmart. These products are now available in over 3000. She gets locations nationwide, we expect more retail partners in the near future both domestically and internationally.
Now turning to the professional channel in January of this year, we announced or intense end of the professional channel.
Enabling consumers to start the journey and the dental office.
Our new partnership with Smile brands with 450 dental offices across 18 states.
Represents a key step in our continued efforts to partner with G.P. and ortho practices and gives consumers another option at the start their STC Gerard.
This acquisition channels complementary to our current offering as Denis across the country want the ability to offer STC clear aligner therapy to their patients.
The segment of consumers, who want to start their journey in person at a dentist's office.
Given this we are testing into several go to market strategies with smile brands.
We will also make available to more dsos in dental offices overtime.
First we're opening small shops inside dental offices ticking over several operatory is and each practice with our own smile guides and shop managers.
This is similar to our small shop inside CBS or Walgreens.
Everything will be heavily branded STC.
This will enable us to accommodate leads who schedule appointments through our website for those that might want to see a dentist and person.
And drive additional new patient opportunities to our deal so partners, while also giving us access to the dental practices existing patients.
Second for existing patients on the dental practice seeking clear aligner therapy. The initial scanner impression will be conducted by the dental office.
Practice will then upload the data to our portal and the rest of the member journey will occur as it does today with one of our hundreds of affiliated Dennis North of data Center told dentistry platform reviewing that information and being fully responsible for all aspects of that members care throughout treatment.
This will allow us to capture existing dental practice leads us another acquisition channel will not taken up valuable chair time for the Dennis by club members with the ability to let their own Dennis started their journey.
Third we are enabling STC leads either need or prefer an in person doctor visit rather than doing an impression could at home.
Go through the initial assessment at a partner dental office.
Similar to the second approach to the practice will then upload the data to our portal and the rest of the number journey will occur as it does today.
This provides yet another option for consumers to start the journey inside of a dental office, while providing additional new patient opportunities to our idea so partners.
Lastly, in DNA is where we did not have a small shop, we will be hosting pop of events summer to our smile bus events at the dental practices.
This enables us to increase conversion in kit only be amazed and provides the dental practice the opportunity to convert new potential patients to their dental.
We can drive hundreds of new potential patients to our partner dental practices each week.
Covert in post cobot environment. This is a very compelling new revenue source for our dental partners.
All of these go to market strategies provide meaningful value to the dental practices by increasing practice revenue with minimal short time.
And providing the opportunity for a new dental home for STC club members.
Our partnership a smile brands is only the beginning of our professional channel expansion.
We look forward to continuing to partner with other dsos in dental and orthodontic offices, both domestically and abroad in the weeks and months to comp.
Our second growth driver is extending our value proposition across all age demographics with a new focus on teams who represent approximately 10% of our business today, yes, 75% of total industry case starts.
We recently launched Smile direct club team designed just for teens. This new product offers a more affordable and accessible alternative to metal braces, giving teens and parents the convenience of our tele health platform with 24, seven access to dental professionals, while still prices up to 60% less than traditional orthodontic products.
The third growth driver International expansion continues to progress well.
As we've alluded to before approximately 75% of our market opportunity is outside of the U.S., we continue to focus on expanding our international footprint.
Within the quarter, we announced our expansion into Singapore in Austria.
Entrance into these markets will further extend our international footprint. Following our successful launches in the UK, Ireland, Australia, New Zealand in Hong Kong in 2019, Canada in 2018.
Elsewhere in Europe, we have reopen shops in Germany and plan to launch into new locations in Europe, Latin America, and Asia Pacific throughout the rest of the year and into next year.
We also announced a partnership with Watson's in Asia, introducing our small shop concept to the leading health and beauty retailers location in Hong Kong.
With over 7800 stores, and 13 Asian, and European markets, Watson's is Asia's, leading health and beauty retailer.
They will also begin to carry our oral care products on shelf in their stores.
You can see we've made great progress on our growth initiatives since the first quarter and we will continue to update you in future quarters, as we can execute against them.
Turning to progress on the cost side of the business, you'll recall that we've been focus across three key areas to rightsize, our cost structure and we continue to make progress against those initiatives.
He's efforts were designed to keep us on track for adjusted EBITDA profitability in the fourth quarter 2020.
His efforts include the following.
Continued advancement in automating, our manufacturing entry and plenty operations to allow us to reduce our scrap and keep pace with consumer demand.
Our second generation automation production platform is on track to be producing aligners by Q4 this year.
Second continued discipline around the deployment of marketing and selling dollars, including a focus on pushing more demand for our existing small shop network and leveraging our referrals unaided awareness as demonstrated in the second quarter.
In Q2, we saw continued to see great performance against our long term sales and marketing targets as a percentage of revenue and we expect this trend to continue.
And last continued cost discipline across the business.
Yes, we have stated before we believe streamlining their cost profile through operational efficiencies when I only improve our margin profile, but more importantly will provide a consistently superior customer experience that meets our demand expectations.
This in turn will drive customer satisfaction scores, higher which will increase referrals and thereby reduce our acquisition cost by creating a higher percentage of organic leads.
It truly is a flywheel effect, which is why our member satisfaction as our true North Star.
Turning to the regulatory environment as we noted in our last earnings call. We are well positioned and our continued efforts to protect the access to care that consumers ones or.
We continue to see more states, passing tell dentistry friendly laws and refusing to pass laws that put a barriers to access to care.
In addition, we continue to see growth in the adoption and use of tell done issued by the dental and orthodontic industries.
Over 19 has made our lawmakers in the medical communities, including the dental and orthodontic communities acutely aware of the need for Tele health and telecom industry to be proactively permitted.
In summary, the foundational work, we have done to position the company to execute against the global opportunity is continuing to pay off.
And the second quarter, we achieved strong results driven by the strength of our told dentistry platform, along with the flexibility and agility of our business model.
All the competitive moat that we often speak of our complete end to end vertical integration with our med Tech platform.
Comedy Channel approach captive financing program and our strong brand equity with consumers continue to showcase their collective strength in its most recent quarter.
I growth, we're making great progress against our initiatives, including broadening our customer acquisition channels, expanding our share of the team market and continuing our international expansion.
I cost we remain on track to achieve adjusted EBITDA profitability by Q4, this year, which is enabled by our manufacturing automation initiatives, our sales and marketing leverage as demonstrated in Q2.
And our continued cost discipline across the business.
Lastly, with greater acceptance and adoption of tell dentistry, we're uniquely positioned to continue gaining market share.
We remain laser focused on our mission to democratize access to smile, each and every person laws that making it affordable and convenient for everyone.
Our most recent court keeps us well on our way to achieving that mission.
No this would be possible without the support of our team members club members and investors and we thank all of you for your support as we work to capture this massively underserved market.
And now I'll turn the call over the Kyle who will provide a detailed overview of our Q2 results in our financial outlook Kyle.
Thank you David as David mentioned, we're pleased with our accomplishments over the course of the corridor and since the quarter end that notwithstanding the continued fluidity in challenges on the overall operating environment.
Similar to the first quarter the flexibility of our business model served us well in Q2.
As David alluded to earlier in Q2, we made great progress against our growth initiatives remain on track to achieve our adjusted EBITDA profitability target.
Both of which continue what's on our path to what our long term revenue growth and margin targets.
Turning to our results for the quarter.
Revenue for the quarter was 107 million.
Which represents a decrease of 45% of a second quarter 2019.
This decrease was primarily driven by 53% year over year decrease in a lighter shipments which came in at 57136.
As discussed in our Q1 call. We ship 10500 ordered in April and averaged approximately 23000 shipments between May and June.
Very close to 22000 run rate that we discussed on our Q on call.
If demand over the past 30 day hold steady in Q3, we expect the shift between 83080 7000 aligner orders.
Again this is a prediction based on demand over the past 30 days and assumes no material changes in the current cobot operating environment.
ASP came in at $1817, which increased by approximately 3% year over year, and it's getting a slight benefit from deferred revenue over lower initial case starts.
As we previously discussed I.
I would expect us to be closer to $1770 for the remainder of the year.
One additional note on revenue.
In Q2, we Saar cancellations and creates from 5.3% 6.5% across a wider revenue.
Given this we're increasing our go forward cancellation reserve by 1.2% to 6.5% have reserved for that number in second quarter.
We do not believe that increase will be permanent however, we want to be conservative given the uncertainty ever operating environment.
Now turning to Smile pay in Q2 2020, 67% ever members elected the purchase using smile pay which is flat to Q2 2019.
First on its has also helped studies in Q2.
Overall small pay has continued to perform well and our delinquency rates in Q2, and since Q2 were flat to prior quarters.
Because we keep a credit card on file and have a lot monthly payment, we expect smile pay to continue to perform well.
Our success rates on credit card attempts, which is a proxy for monthly payments has seen no degradation.
Further since that same time.
We've seen only 2% of customers requesting a payment deferral, which is up from 1% as of our last earnings call.
Turning to expenses in margins.
Gross margin for the quarter was 54%.
Sequentially gross margin was down by approximately 1500 basis points.
This decline is largely attributable to the following areas first we had a decrease in unique aligner orders shipped a quarter over quarter, well midcourse corrections refinements shipments were equal to the average of the prior four quarters.
As a reminder, MCC and refinement shipments are based off of demand from 46 months ago when volume was higher.
At this implies that we need a team members direct materials and fixed assets to ship out MCC to refine that aligners without the associated revenue because there is no revenue associated with MCC and refined.
It's had approximately an 800 basis point impact on gross margin in Q2.
Second.
We had a higher percentage that are pressing kits compared to previous quarters.
Normalizing for impression hit increases gross margin what had been 700 basis points higher.
Lastly, retail represented a higher percentage of gross margin given the lower initial shipments, which had a 200 basis point impact on gross margin.
We expect gross margin to trend back to historical levels as normalized volumes return and we do not expect any change to the long term gross margin target of 85% that we have previously provided.
Additionally, as we have previously cited we continue to focus on streamlining our manufacturing facilities and as David indicated earlier, we remain on track for the rollout of second generation automation machines by Q4 this year.
Completing this roll out is a key component of our adjusted EBITDA positive goal in Q4.
Marketing and selling expenses came in at 35 million or 32% of net revenue in the quarter compared to 72% of net revenue in Q1.
Sequentially marketing and selling as percentage of revenue declined by approximately 55%.
As discussed in our Q1 call we started to see improvement in sales and marketing as a percentage of revenue in February and we're pleased to see this trend continue in Q2.
This affirms our belief in the cycle resistant nature of our business model and demonstrates the leverage and sales and marketing spend that we have discussed historically.
Importantly, as David highlighted earlier, even with this reduced spend approximately 60% of club members, who purchased the liners in Q2 when new leads.
This is close to where we have been historically, but achieved off of reduced sales and marketing spend and reflects the sustainability of lower sales and marketing spend to support our revenue growth going forward.
Lastly, it's important to point out that we have also seen strong performance in sales and marketing since the quarter.
However, I would not expect the remainder of 2020 to be comparable but second quarter in terms of sales and marketing as percentage of net revenue.
Well, we do expect to perform well against the long term targets that we had previously provided as we start to track closer to them in the quarters to come.
General and administrative expenses were 69 million in Q2 compared to 91 million in Q1 2020.
<unk> expenses were down 22 million sequentially.
To get more insight into the savings we observed over the course of the quarter.
<unk> expenses in April were down 12% for March down, 7% in May and down another 10% in June.
Year to date, our monthly GNS expenses declined at an average of seven per cent per month since December.
We plan to continue to stay vigilant with cost control throughout the remainder of the year and beyond and you can expect to see continued leverage from this line item.
In Q2, we had a onetime noncash charge of $25 million.
Associated with lease abandonment and impairment of long lived assets.
This noncash charge was mostly associated with the closure of our manufacturing facility in called Texas and the consolidation of several floors at our headquarters in Nashville, Tennessee.
Along with the impairment of right abuse assets and lease hold improvements.
Smile shops that we closed in the quarter.
Given the uncertainty ever operating environment and the shift to work from home, we made the strategic decision to align our rent costs, but the current needs of the business will also ensuring we have sufficient capacity to support future growth.
Additionally, in Q2, we had $4 million and other store closure expenses, mostly associated with short term lease termination fees and other store closure expenses.
Other expenses include interest the 10 million.
Tax benefit of 1.4 million.
Loss on extinguishment of debt of 13.8 million associate it with the refinancing of our JPM debt facility.
And the other gains of 1.8 million.
Which is mostly associated with currency gains and losses.
All the above produces a Q2 net loss of 95 million compared to $107 million net loss in Q1 2020.
I'll, just 95 million net loss in Q2 43 million is associated with onetime charges as noted above.
Moving to the balance sheet.
We ended the second quarter were 389 million in cash and cash equivalents.
Cash from operations for the second quarter was negative 15 million, which represents a 78% improvement in our cash burn rate quarter over quarter.
Cash spend on investing for the second quarter was 20 million.
Mainly associated with leasehold improvements capitalized software and building our manufacturing automation.
Cash spent on investing decreased $8 million quarter over quarter.
Free cash flow for the second quarter defined as cash from operations, What's cashman besting was negative 35 million, which represents a 64% improvement in our cash burn rate quarter over quarter.
In closing as David mentioned, our performance in the second quarter reflects strength of our teledyne's replatform, along with the flexibility and agility of our business model.
Both in the context of a cobot 19 recovery afterwards, and our traction towards our long term growth and margin targets.
The unprecedented events of Cobot 19 provided a number of learnings about our business and have enabled us to emerge from this crisis, even more well positioned in the global clear aligner market.
Although we won't be providing full year 2020 guidance until we better understand consumer behaviors in the months ahead I.
I would like to reiterate a few key highlights.
We've been encouraged by the level of recent demand at very efficient levels of sales and marketing spend.
As stated previously in Q3, assuming no changes in the Kogut environment, we expect to ship between 83080 7000 initial aligner orders, which is consistent with demand over the past 30 days.
On cost of goods sold.
We're making good progress on manufacturing automation and achieving our goals by the fourth quarter of 2020.
As we stated last quarter, we believe streamlining our cost profile through operational efficiencies well not only improve our margin profile, but more importantly will provide a consistently superior customer experience that meets our demanding expectations.
On sales and marketing.
Recall that our small shops function, primarily as fulfillment centers not sources of demand generation.
Accordingly in the second quarter were able to very quickly pivot to an impression kit only business and continue to serve new and existing club members with minimal disruption.
This reinforces the importance our differentiated omni channel approach with kits and small shops and positions us well for a future where virtual health care will be ever more important prevalent.
Since Q2, we've had a controlled approach to reopening our small shops, and we expect that to continue for many months.
Today, we have 71 shops opened in 57 cities across eight countries.
The flexibility of our small shop model provides us the opportunity to rebuild the much leaner small shop network compared to pre cobot, thereby enhancing the margin profile of our business.
As stated previously we're still tracking to be adjusted EBITDA positive by Q4 this year.
On liquidity, we're well positioned with almost 400 million of cash on our balance sheet.
This gives us ample liquidity to manage through a protracted kogut environment or alternatively, that's been faster and higher growth environment.
Lastly, I would like to reemphasize that our long term objectives have not changed we remain laser focused on providing the basket member experience and our mantra remains to drive controlled and profitable growth.
We remain the low cost provider with brand presence and no pricing pressure.
And increasingly favorable climate for telehealth.
As we've said in previous quarters and has recently demonstrated we will continue to make strategic investments into professional channel international growth and penetrating new demographics to drive controlled growth well also executing against our profitability goals.
We look forward to continuing to update you on progress on days and weeks to come.
Thank you everyone for joining today.
With that I'll turn the call back over to the operator for today.
Thank you we will now be conducting a question and answer session as the prior quarters, we will keep the call to 60 minutes. So in order to get through to everyone. We ask that you. Please limit yourself to one question.
If you would like to ask a question. Please press star one on your telephone keypad confirmation tonal indicate your line is in the question Q.
To start to if he'd like some of your question from the Q for participants you think speaker equipment, maybe necessary to pick up your hands that before pressing the star Keith One moment. Please poll for your question.
Our first question comes from the line of Alex Nowak with Craig Hallum Capital Group. Please proceed with your question.
Great. Good afternoon, everyone based on what you're seeing so far in July and August what you expected gross margins to be an estimate range here as Q3, and perhaps just provide some more color on the NCCN there were five and a lighter shipments and what could ultimately be done to limit the amount of correction shipment needed out I'd go forward basis.
Yeah happy to this and Kyle So David why don't I take that one that you can jump in as where so to answer. The first question you're looking at Q3 gross margin.
I would say if you look at our volumes that we guided to between 83000 87000 for the quarter Ah that's really at the midpoint of Q1 in Q2.
And so when you look at the volume based on on that in addition to a you know MCC than refinements as a percentage of total total Atlanta chips trending back in line with historical norms, we would expect Q3 likely to be in the low.
Mid Sixtys and as we returned to normal volume you know trending back towards that low to mid seventies, but.
But ultimately no change to the longer term targets that we put out there historically.
Thank you. Our next question comes from the line of Michael Ryskin with Bank of America. Please proceed with your question.
Hey, Thanks, Count I want to have I'm, just going to keep it to one but I want to.
Asked about what are the threeq outlook in some of the somewhat happened during the quarter. If we just look back to where you were in the late May and June you were kind of talking about 40000 to low fortys in terms of shipments for two Q. So clearly some real improvement towards the end there and then if you kind of take that in pro rate. It's a threeq you doesn't seem like your.
Really expecting it that much of a pickup.
So could you give us an indication of how what kind of evolved over the over the May and June timeline, what you've seen since then is there you know you're commenting on how consistent with recent demand are you seeing any continued pick up an acceleration from there or is it still sort of a working through some of the softness in the channel.
Yeah, So what we talked about on the Q1 call. So we shipped 10500 orders in April.
We averaged approximately 23000 shipments between May and June and so that's very close to 22000 run rate in terms of demand that we talked about on the Q1 call now it is better than our expected shipment target off at that 22000, So we're able to perform better than expectation on shipments.
I came in line slightly better with expectations and what we had talked about on our first quarter call. Yeah. I think just given the uncertainty of the overall operating environment. What we're really saying is if we look at the past 30 days and assume that our demands hold steady as a result of that we'd expect to be between 83000, an 80.
7000, a liar orders, a where liner shipments.
Within within Q3, and that's on average about 28500 per month.
Thank you. Our next question comes from the line of Robbie Marcus with JP Morgan. Please proceed with your question.
Thanks, you know not to beat a dead horse here, but naked.
Follow up on the last question you know what did you see year over year for liner shipments in June.
What did you see in July and you know what's that assuming it in.
I'll get since September you are you seeing any impact from some of these flare ups.
And if you could just break out and second quarter, and what you're expecting third quarter within those numbers and how that splits up in U.S. and outside the U.S. Thanks.
Yeah. So you know in terms of U.S. versus outside the U.S., that's not something that we're breaking you're breaking out yet I would expect in future quarters as it starts to become a bigger piece of the business Ah well start to break that out and report on it separately, but but we're not there yet.
In terms of month to month I think you know if you look at the commentary that that we provided a you know we're talking about averages between May and June. So we averaged 23000 between those two months. There's there's lots of puts and takes on a month to month basis. So I don't think it's really indicative of overall demand trend.
Moving from May into June, it's really better to look at what happened over the average of those prior two months. Obviously, if you look at July in particular, you know that's really based off of what we provide it which is that 28500 on average.
It's pretty close to what we've seen a you know over the past 30 days and representative of July Yes, we sit here today.
And we look at.
The expectation.
Off of that he was obviously a lot of uncertainty just given the overall operating environment and so we're looking at the past 30 days and extrapolating that forward and based on that.
We're expecting to be a 93000 down to 87000 range. So hopefully that's helpful.
Thank you. Our next question comes from the line of Jon Block with Stifel. Please proceed with your question.
Hey, guys. Good afternoon, I'll ask one maybe in two parts I guess, the first part as Kyle just the goal of EBITDA positive by the fourth quarter.
What's the implied gross margin in that assumption I mean quite honestly. If you were in the seventies. This quarter you would've been pretty darn close into Q. So maybe you could just be more specific EBITDA positive by Fourq you assumes what from a GM perspective, and then David just I didn't want to get the international number maybe just talk to the international business.
What markets had been the most promising how do you see the international contribution going forward and you may be as a byproduct of that when should we expect international has surpassed 10% of cells. Thanks guys.
Yes, I'm good David you want to take the international part first and then I can add some commentary on on a gross margin.
Sure.
Yeah, John as we open up these countries, where its age or Continental Europe.
Pretty much seen a a pent up demand like we saw in the U.S. When we started to six years ago their consumers are where the product.
They're looking for convenience and cost savings. So when we open up there's there's this pent up demand and we come out of the gate pretty strong we saw the in Singapore, where our shop was booked up we opened the second shop.
Germany, we opened right as cobot started and we had to shut down. So we just reopen there were opening up to more shops, we open up in Berlin.
Well open it up in Frankfurt and Munich next.
So we expect the same thing I look we over invest.
In these countries to make sure we get some awareness, so sales and marketing costs, a little bit high but overall within 12 months, we expect.
These countries to be contributing to profitably to EBITDA. So there isn't investment aspect.
And then they should be a contributing to a profitability as far as I'm reporting how can handle that but I assume it's probably going to be either Q4 Q1 of next year, because that ryka breaking it out correct, yes, I mean that the current expectation, obviously that that could change, but as we sit here today, that's what we're expecting.
And then on the first part of the question around sort of gross margin, here's what I'd say broadly John around profitability. So our focus really hasn't changed right, we're still focused on controlled and profitable growth.
As we said last quarter, we can be profitable off of our revenue today, but our objective is to really balance the the overall.
You know near term growth with profitability at the same time and that's the balance of being a growth company like STC and so as you look at profitability in Q4, I think as we demonstrated in the second quarter, there's lots of levers to that right, even with a lower gross margin a as you saw in the second quarter sales and marketing was.
The efficient we're getting great leverage out of DNA and so you know as I said it if you look at our volumes that we've talked about for the third quarter. Yeah. I would expect the gross margin in the low to mid Sixtys based on that as volumes return to more normalized levels.
Beyond that then I would expect gross margin to trend back to where it's been historically, which has been in in the low to mid seventies.
And you know as we demonstrated there's lots of levers outside of that to achieve that profitability in the fourth quarter.
With sales and marketing is one and GE in a as another as as we talked about and demonstrated and <unk> in the second quarter.
Thank you. Our next question comes from the line of Nathan Ritchie with Goldman Sachs. Please proceed with your question.
Hi, good afternoon. Thanks to the question I wanted to ask on the professional a channel strategy.
Could you maybe lay out you know like how many practices that you guys have partnered with or in so far.
Across the different kinds of opportunities that you laid out and then you know looking at the Smile brands partnership can you talk about that model and and what the economics of that look like from your standpoint.
Sure I can take that one a nascent so.
Well, we announced this in January that we're getting into what we called the wholesale channel the professional channel we were.
Gathering interest getting inbound calls primarily from a single office GPS, but few conversations with Dsos, but we have the four go to market strategies that I talked about today, we only really had the one and that was having a GP office start to brand Smile direct club within the office, let their existing customer.
Third base know that they can sell the product for the same price offer the same smile pay financing options and all we ask him to do is take a scan or impression get me. What you know the rest so that and that's and that's been going strong, but we've now put a team together.
We announced Chris Thompson as RVP, you've got real strong industry experience. He's built out the team and this this announcement that we made with Smile brands is we've now had the three other legs to.
For the school here and so what's happening is we're now going to take our smile shops, just like we have in Cvs Walgreens and we're going to put them inside not every single office. The a 450 locations, but a T large demographic areas. So we'll operate out of two or three of their operatory as they call where we'll have our.
Our team members are small guides and shop managers.
Others will still come to the web sites, a smile direct club and they'll have really three ways to decide to transact now they can buy an impression kitten start from home. They go to one of our smile shops independent of the GP office or if they want.
To see a GP or start there their journey off at a G.P. office. They can they can go to one of our partner location. So we're very excited about that.
And the other one that we talked about was these pop up shops that are similar to a smile bus we have not done any of those as well. These are usually in smaller demographic markets, where it you know it's just not large enough to have a full time shop. So we will rotate around to different dental offices.
You know within our network will have three and five day events with the whole thing for this and why I think the Dsos partners are excited about this is that we can drive besides the fact that there's there's fees associated with it.
Perfect for doing the work of scanning are taking the impression, but we're driving new customers into these these dental offices, which they're not used to seeing you know the average GP office grows in single digits, a year and in this environment with co but it could be even less we can we can fill these shops up to the tune of hundreds pace.
Every week.
And what we're going to try to do is for our club numbers.
Even though you know they obviously have some relationship with with a GP somewhere out there, but introducing to this to a smile brands or office and hopefully you know the service that they'll get from our smile guides and from the people at the dental office, though convert and make that their new dental so very exciting for the deal.
Oh partners to be able to get that level of new customer acquisition opportunities and for us.
Credibility factor you know, we ought we often hear that customers want to interact with the dental professional not necessarily on our teledesic platform, but more in a brick and mortar setting that's fine.
It's it's out there now.
If they choose to do that.
So I think and the inbound.
Response that we've seen from this with these new.
Opportunities new go to market strategies has been determined, especially cobot environment. You know most dental offices are down revenue.
They're not doing the same volumes of elective procedures that they were so there ever everyone's looking for ways to increase revenue increased patient count and we think that smile direct clubs offering is really tailor made for the GP office. So very excited about you know getting to work in getting this rolled out this has not happened yet today so is it.
It really starts in the next couple of weeks.
All these initiatives that we talked about.
Thank you. Our next question comes from the line of Courtney.
William Blair. Please proceed with your question.
Hi, guys. This is out quite you know I've forgotten Krieger. So what are the key growth drivers that you guys mentioned was a smile direct club teen offering I think you said that that currently like 10% of shipment volume I guess my question is kind of where do you guys see that percentage going over the long term for the business what are kind of like the puts and takes a route increase.
We think penetration in the key market, but you guys see and then I guess, what investments are you, making to be able to kind of service that market more so on like more so quickly given the tendency of those cases could be a bit more complex thing.
They are really good question, it's around 10% right now and in the future. We we hope that we know what will be higher than that we have some targets that were gonna be shooting towards come Q4 and is it into 2021, but it is the largest segments a worldwide. It's like Karl said, 75% of K starts are done in.
The team segment, and we really focused on the adult segment. When we launched over five years ago. We think the timing is right right now with the credibility of the of the Tele health platform. It's been it's more widely accepted.
Due to covert 24, seven coverage that we have over brick and mortar office, including video chats with dental professional.
The partnership program that we just talked about with the GP offices. So if a parent wants to 13 to start at a brick and mortar office, but by seeing the a dentist initially and then using our tele health platform. So that I have to go every month for office visits in this environment, it's very compelling and so the.
The timing was right. It was something we had the working towards anyways is as we get we got our feet under us and also our treatment planning a improvements that we've been making we are looking at mixed and tissue. We don't have that product today for the younger team, but that's something that we're going to be coming out with but just overall more a better I'm trying to play.
Panting. They also are in network insurance coverage, we keep talking about with all these insurance partners. There's a lot there is actually more insurance coverage or team ortho than there was adult weren't though so that's also compelling to parents you know our insurance coverage. So all that circles back to a focus on a very important segment that were very soon.
<unk>.
Launch and you'll be seeing marketing activities around that.
All kinds of ER reach out to our GP partners for that for the team market color you want to add anything there.
Oh, no Dave I think you covered it well.
Okay. Good.
Thank you. Our next question comes from the line, Steve Beuchaw with Wolfe Research. Please proceed with your question.
Oh, Hi, and thanks for the time here just on do you to L. apologize. These are kind of mundane questions relative to the really good questions that have been coming out so far but one is on shutting down the Kyle facility can you just talk about the thought process, there and what in terms.
As you might be getting out of the run rate savings I know it never really scaled up but just want to make sure we consider that.
In the model and then to maybe this is not the mundane could you talk about your go to market strategy in terms of the distribution of marketing dollars and how you evolve that over the last few months one of the thing that struck US is in some of the sort of channel work that we've seen we haven't seen as much smile direct activity.
As we haven't and some past period, but the volume certainly ramp back up so the real interesting to hear about how you're thinking about allocating marketing dollars, how that's evolving thanks a bunch.
Okay. That's probably a quoted for you to talk about yeah doesn't have you can you talk about cow right [laughter], Yeah sounds good so look our focus on on Kyle Texas has always been around redundancy right. It's never been about capacity to support demand.
I think you know just given cobot, we took a step back and really reassessed all aspects of of the business and Kyle was associated with that and with the facility that we have here in Tennessee, we've got sufficient capacity to be able to meet not only current demand, but but future demand as well.
And so as we looked at redundancy, especially given some of the recent natural disasters that hasn't happened here the Nashville area.
You know we wanted the ability to leverage our existing team members that we have in the time of of a disaster and so we're looking at facilities that are closer to Tennessee.
Well, we can leverage that team member footprint a in a much leaner way than what we could have done within called Texas as well and so that was the decision behind ultimately closing down that facility and looking somewhere else.
Yeah, I can take the the marketing Uh huh.
So your question on distribution and marketing dollars nothing's really changed as far as they actual distribution. Those dollars you know we've always been a.
Hey, Digital's, social player with Facebook Pantheris Snapchat surge.
We also do a lot of Ah advertising with Influencers in a big TV component as well what you've seen though is our total sales and marketing dollars, which got up to about 70% in past quarters is down to 32% now with the long term target at 45%.
And with.
What's happening here is the investments that we made over the last several years.
With all close to 50% aided awareness is paying off now so we will win cobot started back in mid March and April we turn marketing off and we were still doing volumes of business. So that people recognized us as a telehealth platform I could do it safely from home I left to go into.
For routine visits and so that paid off and I think what we're seeing here as we continue to advance here that our dollars are stretching further and so we don't need as many shops people willing to drive further so we're getting much higher utilization, how those shops and with our aided awareness our cost to acquire the customer.
It is really dropped as well so we believe that that will continue on into the future.
Thank you. Our next question comes from the line of Laura Champine with loop capital markets. Please proceed with your question.
Thanks for taking my question I'd like to get a better sense of what role that the smile shops are going to play in the future itself. We look at at the quarterly shop count going from I think for 18 to 42, how how much of a rebound should we look for in that count and over what timeframe.
Yeah.
Yes, Yes I'll go ahead go that's fine yes, so look at what I would say overall, so if you look at that where the businesses today, we've got 50% to 60% of the business today, that's coming from kits and the remainder is coming from scans.
If you look at that pre told me that was 85% to 90% that was coming from scans and if you look at that Jerry encoded a it was over 90% that was coming from kits and so I think overall, what that really demonstrates is one the importance of the omni channel approach.
Between kitchens cans, but to just the overall flexibility of a model at the same time, yeah. We've talked about there's a lot in the path and we talked about it on the call is well, but just as a reminder, our shops don't drive demand right or demand is coming from aided awareness from referrals and for marketing and the shops are really acting as fulfillment centers. So what weve, what we've learned.
And you know it historically based on the data that we have is that people are willing to commute people on the commute 30 to 45 minutes to get to their appointment.
There's 75 dnase around the country that have a population of of a million people are more.
And we know that those are good targets for us to to put a location and so if you're talking about today. We've got 71 locations opened that's across 57 cities and eight countries as well, but the main metric that we're looking at around their shops right. Now is what does the incrementality to the profitability that we have not DNA. So we look at the profitability will be.
Only had kits and that the May we then reassess it as we open up a smile shop as well and we're looking at the Incrementality associated with that so if you look at the targets that we put out there. We've always discussed the plan in terms of getting to that 40% to 45% of sales and marketing is driving more leverage through our shops in cold.
Good overall, there's really enabled us to accelerate that and so we're coming out of it with a much leaner footprint than we had pretty cold it really driving to that 40% to 45%. So you're not we're not giving a direct number as we sit here today, but hopefully that gives some some good guide rails.
As we think about 75 de amazing and how we look at our driving marketing through.
The balance of the omni channel approach that we take.
Yes, I just wanted to add one other thing to that too because this new professional channel partnership that we have is going to help with that as well. We were we had shops in d. amazed that were smaller than a million. We had chops dnase over 500000 population and part of that was because customers didn't want to transact and start to journey with a kit. So.
No. The kit is definitely more popular in a covert environment people are really doing more ecommerce are staying at home. However, with our partnership in these small rural areas. If someone doesn't want to do a kit we're going to have an dental office in almost every single market. Okay, 30, 50000 population and we can.
Send them in there. So we don't we don't have that fixed costs. We don't have all that labor overhead, we're going to pay that that dental professionals for doing the scan introduced at customer to their dental home hopefully will convert them a lot of these debt Dennis look at a oh customer lifetime value at almost $5000. So.
New faces into the dental home are.
Highly highly regarded.
So I think we can supplement where we used to have a lot of shops with our new dental partner chip and the smaller markets.
Thank you. Our next question comes from the line of ran and cool yard with Jefferies. Please proceed with your question.
Hey, Thanks, Good afternoon Cal just.
Quickly could you just speak to the Upticking cancellations in the second quarter, why you think that occurred and particularly why do you think that.
It is in fact temporary.
Yeah, absolutely. So we probably increase as we talked about it was about a 1% increase in total so I would say a small increase overall I think we saw really in the maturity of recent cohorts coming into as we are watching cohorts cohorts mature over the past several months and just given the uncertainty of co rig we want it to a increased that to be.
Conservative I think what gives us confidence is when we when we look broadly at that focus as a business that we have on net promoter scores you know David talked about that really being our true North star. There's there's a lot of no process improvements that we're making so I'll give you a great example, you know we know.
Satisfaction up a member if we shipped there aligners out in two weeks as a lot higher than if they get shipped out in five or six weeks a in those dozens of different data points like that across the entire funnel.
That give us confidence in that we'll be able to include that over time. So we've increased that within the Q2 numbers and we're expecting that.
In the near future, but the Blue still long term is that we'll be back closer to about 5.3% that you've been at historically.
Thank you. Our final question comes from the line of Chris Cooley with Stephens Inc. Please proceed with your question.
Good evening, Thanks for taking the question just from the would you speak too.
How clinical you view the expansion into professional to wholesale channel.
In terms of your success in penetrating the team market and arguably staving off some of the new competition, which is trying to align with.
Dentistry channel in office just be curious you know your thoughts there on <unk>.
Smile brands now, but I'm, assuming other partnerships over time. Thank you.
Yeah, I can take that one yeah, the the professional channel.
I think enhances the team offering that we have but it's not reliant <unk>.
Success is not relying upon.
We believe our team business has already started to increase where you've seen it and it's it's driven by you know more credibility better product.
Shorter duration less less frequent visits even if we wanted to covert environment to have to take your teen every month every couple of months to a.
Dental office is not convenient Oh, there's no question that this enhances it but parents you know most of the parents, especially ones. We're dealing with today because we never had this professional channel opportunity in front of those did not require 13 to start a with him in person visit to a data. So I think it's going to provide lots of opportunity.
These but.
Even without that we believe that the team the timing is right like I said fit for us to launch the 16 initiatives and it'll be successful with or without it.
Thank you we have reached the end of our question and answer session and the conclusion of today's call. Thank you all for your participation. You may disconnect. Your lines at this time and have a wonderful day.
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