Q3 2020 SmileDirectClub Inc Earnings Call
[music].
Greetings and welcome to the Smile direct club third quarter 2020 earnings call at.
At this time, all participants are in listen only mode.
A question and answer session will follow the presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please.
Please note that this conference is being recorded.
I will now turn the conference over to our host Alison Sternberg Vice President of Investor Relations. Thank you you may begin.
Thank you operator, good afternoon, and before we begin let me remind you that this conference call includes forward looking statements.
For additional information on Smile direct club, please refer to the company's SEC filings, including the risk factors described there and.
You should not rely on our forward looking statements as 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 Q3 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.
Information required by regulation G. B Exchange Act with respect to such non-GAAP financial measures is included in the presentation slides for this call, which can be obtained on our website.
We also refer you to this presentation for a reconciliation of certain non-GAAP financial measures to the appropriate GAAP measures.
I'm joined on the call today, I, Chairman and Chief Executive Officer, David Katzman and.
Chief Financial Officer, Kyle Wells.
Let me now turn the call over to David.
Thanks Allison.
Good afternoon, and thank you for joining us today.
I'm pleased to report the Q3 results exceeded expectations and demonstrate continued execution against our long term growth and margin targets.
Q3 was a pivotal quarter for us and were especially pleased to have reached on adjusted EBITDA profitability for the quarter well.
Well also outperforming our revenue growth expectations.
We achieved EBITDA profitability, one quarter ahead of plan and we're now focused on ramping towards our long term target of 25% to 30% adjusted.
Adjusted EBITDA margins over the next several years.
Our performance in Q3 was continued validation of the strength of our business model and the power on the competitive moat around our platform.
And also demonstrated our continued focus on controlled growth with profitability.
We outlined this strategy and Q4 of 2019.
And we have been executing against that and the three quarters since even with the cobot outbreak at the end of Q1.
As a reminder, our controlled growth plan is firmly what does it and the integrity of the customer experience and that is our central focus.
Yes, we are cited before we are still on the early innings of a massive opportunity and we believe our focus on the customer experience is the most efficient way for us to capture long term market share.
What's the strategy, we expect to achieve continued growth and to 2021 consistent with our long term targets along with profitability as reflected in our Q3 results.
We made good progress on this front within the quarter with referrals, reaching 23% of all orders, which is up from 21% in Q2.
And we also launched our second generation manufacturing and October as planned.
Both developments and only reflect meaningful advancement against our customer service ambitions, but also true to our margin profile.
I would also like to highlight and we continue to see favorable industry dynamics with broader acceptance of total health and specifically told on the street.
Minimal penetration against our total addressable market no.
No real competitor that provides an end to end vertically integrated platform for the consumer.
And clear Aligners, gaining share and the overall industry.
All these are powerful tailwinds that over time will help drive our controlled growth strategy forward off and increasingly efficient cost structure.
He's there nice tailwinds to have but they don't change our long term financial targets.
We construct and that plan off and the amount of growth. We believe we can achieve while optimizing our club member experience.
That may change and the future as we mature as a business, but for now you should expect outperformance as a result of these tailwinds to recruit and more efficient customer acquisition cost per.
<unk> outperformance against our 20% to 30% and otherwise revenue growth targets.
Again, we believe that is the right amount of growth to provide the optimal club member experience based on what we've seen in prior quarters.
For today I'd like to first call out some of the notable highlights from the third quarter, followed by a summary of how we're tracking against our growth and cost initiatives.
Well, then touch on the regulatory environment before turning it over to Kyle to walk through our financial results and current trends and more detail.
Turning to share results within the quarter.
In Q3, we shipped roughly 93000 unique line of orders, which is 10% on what the midpoint of the range that we provided on our Q2 earnings call.
Yes, Pete came in at seven to $894 flat with Q3 2019.
She is 169 million and total revenue up 57% sequentially and representing 94% of true three 2019 revenue with a much smaller expense structure.
So on continued strong performance on our Smile pay program with delinquency rates and first pass credit card authorization rates remaining consistent with past history.
Generated positive $3 million and adjusted EBITDA for the quarter, a $23 million sequential improvement and a $48 million improvement year over year.
And we attain profitability one quarter ahead of our plan.
I would also like to highlight that marketing and selling expenses came in at 67 million on 40% of net revenue on a quarter.
Compared to 73% of net revenue in Q3 of 2019.
Despite this reduced spend compared to Q3 2019, approximately 70% of club members who purchased in Q3 were first time leads this.
Yes, again validates the sustainability of lower sales and marketing spend to support growth.
Much like we saw in Q2.
Well it is extremely difficult to predict the future given our current macro environment I would like to try to provide some insight into Q4.
And your four we expect to see unique line order shipments of 100000 and revenue per 180 million, both up 7% sequentially and.
Tracking well against our long term targets.
This is over 90% of our Q4 2019 revenue, but that was a quarter, where we spent 72% of revenue on sales and marketing and EBITDA was negative 60 million.
This year, we expect to continue to see the efficiency and sales and marketing that we saw in Q3, and we also expect to remain profitable.
This is a dramatic change in a short period of time and positions us well to continue to execute against our long term targets.
I want to be very clear on this point, we are managing the business to drive towards our long term financial targets.
Which include 20% to 30% revenue growth per year with sustained profitability.
We're not managing to outsized growth at the price and profitability and the club member experience.
Controlled and profitable growth remains on track, which will also drive the best club member experience.
Now turning to progress against our growth drivers.
In addition to our core business, we saw continued momentum in the quarter across the three growth drivers we have previously discussed.
As a reminder, and they are expanding our customer acquisition channels expand.
Expanding our presence and the team demographic.
And continuing our international expansion.
And the first and there should have expansion of our acquisition channels. We continue to make good progress here, we have always been agnostic as to how consumers start their journey to Perjure sliders.
We started with doctor prescribed and pressure kits and smile shops, and now through our professional channel partnerships corporate and insurance partnerships and mass retail locations. We've expanded our reached a new segments of consumers. This.
This supports our mission of democratizing access to care, which is foundational to what we do.
And our corporate insurance partnerships, we continue to see progress across all of our programs, including those with Aliansce.
And some blue Cross Blue Shield, and power Blue Cross Blue shield, United and and others, but.
We continue to deepen our relationship with our existing partners. While also identifying other partnerships and we expect to announce more on this on the near future.
On the retail side, our oral care products, which are available at Walmart and CBS and soon to be available Walgreens and Sam's club continued to perform well and serve as a highly efficient lead source and brand building opportunity.
These products provide consumers access to premium on co products at an affordable price point, while also increasing the lifetime value of our club members.
Now turning to the professional channel and our true to call, we announced a partnership with Smile brands and.
Starting first step on our efforts to partner with GP and ortho providers.
With the recent addition of duck and dental and unified Smiles. Our partnership network has now extended across more than 1000 practices and United States.
And we have a deep sales pipeline, both domestically and internationally.
As we have highlighted before this acquisition channel is complementary to our current offering and represents a new on ramp for consumers, who want to start their journey and a dentist share.
This also allows dentists across the country the ability to offer smile direct club clear aligner therapy to their patients.
On our last earnings call, we detailed and Verisk go to market strategies, we are employing as we operationalize this channel.
Well each one accommodates a different use case, all our highly efficient margin accretive sources of lead flow for both STC and our partners.
Equally as important to suffered as again reinforce the flexibility and adaptability of our platform and accommodating a new and different segment of consumers.
We call that only 30% of GPS offer clear aligner therapy today, and most of the ones who do offer line or is our low volume provider. So we see ourselves at the very outset and incredible opportunity both domestically and abroad.
As these partnerships mature and grow we will continue to share more and future quarters.
Our efforts to extend our value proposition to the team demographic is also making progress bolstered by the launch in August of our first ever campaign targeted to this important segment.
Which saw over 4 billion impressions on tick tock, and which was executed across multiple digital social and broadcast channels.
On the international front within the quarter, we announced our expansion into Spain.
Entrance into this market further extends our international footprint and we plan to launch into additional locations and Europe, Latin America, and Asia Pacific throughout the remainder of the year and and snacks.
And you can see we've made very good progress on our growth initiatives since the second quarter and we will continue to update you on the future quarters as we execute against them.
Turning to progress on the cost side of the business, you'll recall that we've focused across three key areas to right size, our cost structure and we have made good progress against those initiatives. These efforts drove our outperformance on the adjusted EBITDA line this quarter and will continue to drive margin expansion going forward.
These efforts include the following day.
Continued advancement and automating, our manufacturing and true true to planning operations to allow us to reduce our scrap and keep pace with consumer demand.
Our second generation automation production platform is live and currently producing over 10% of our Aligners.
We expect this to increase meaningfully during Q4 and while still early in the rollout we are already seeing very positive trends we.
We expect these new capabilities to reduce our turnaround time reduce our scrap and provide a more consistent and superior product for our customers.
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 and awareness and highly efficient acquisition strategies as demonstrated in the third quarter.
All of these together allowed us to come in on the low end of our long term sales and marketing targets as a percentage brother.
And last continued cost discipline across the business, while we saw a modest sequential increase in this line item per.
Generally as a result of team members returning from furlough, she and I across the quarter largely remained stable and.
Resulting from our enterprise wide cost control initiatives.
One important factors that GE and a labor and other costs remained down 22% since Q4 2019.
We plan to remain vigilant on this front throughout the remainder of this year and be out as we continue to drive towards our long term target of 15% of revenue and GE and they spend it.
As we have stated before we believe streamlining our cost profile through operational efficiencies will not only improve our merger and profile, but more importantly, we'll provide a consistently superior customer experience that meets our expectations and the pulls our brand promise.
Turning to the regulatory environment.
As we've noted on prior earnings calls, we are well positioned and our continued efforts to protect the access to care that consumers ones are.
We continue to see more states passing tell of dentistry friendly laws refusing to pass laws and put up barriers to access to care.
In addition, we continue to see growth and the adoption and use of total dentistry by the debt on orthodontic industries.
This is understood even further by the expansion of our professional partnership with well established and respect and National Dsos, which is further testament and adoption of telehealth by the dental community.
In summary, Q3 represents continued execution against our controlled growth plan and meaningful progress towards our long term financial targets I.
Our growth we are making good progress against our and this shows and the professional channel. Although early is off to a good start with over 1000 practices adoption or partnership model.
On cost we achieved adjusted EBITDA profitability ahead of plan and.
And even by our manufacturing initiatives, our sales and marketing efficiency and our continued cost discipline across the business and we are now on our way to achieving our long term targets.
Lastly, and a very nice Tailwinds and said, we continue to see favorable industry day dynamics with broader acceptance and tele health and specifically told dentistry minimal.
Minimal penetration against our total addressable market and clear aligners, gaining share and the overall industry.
All of these trends, we expect to continue and position us well for long term success.
None of this would be possible without the support of our team members club members and investors and we think all of you for your support as we work to capture this massively underserved market.
We remain laser focused on our mission to democratize access to a smile, each and every person loves it and by making it affordable and convenient for everyone.
Our most recent quarter keeps us well on our way to achieving that mission.
And now I'll turn the call over to call, who will provide a detailed overview of our Q3 results and our financial outlook.
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Thank you David as David mentioned, we are pleased with our accomplishments over the course of the quarter and our continued progress against our plan of control growth with profitability.
Similar to the second quarter and.
Flexibility and scalability of our business model served us well and Q3.
As David alluded to earlier in Q3, we made progress against our growth initiatives and our advancement on the cost side a lot of the chart adjusted EBITDA profitable one quarter ahead of our plan.
Before turning to our results I want to remind everyone on the philosophy behind our controlled growth plan as laid out on our 2019 year and call. This past February.
At that time, we explained that the integrity of our club member experience is the cornerstone of our growth plan and.
And we have been executing against that plan ever since.
Over the last three quarters, we have continued to see positive momentum against all of the key revenue growth drivers and cost levers that we outlined in our plan.
We are managing the business to this plan and this is especially important to bear in mind and looking at the year over year comparisons versus quarter over quarter.
You will recall this plan positions us to generate the following.
Average revenue growth and 20 to 30 per cent per year for the next five years Ajay.
Adjusted EBITDA margins of 25% to 30% as we scale during that time period.
And now turning to our results for the quarter.
Revenue for the quarter was 169 million, which represents 94% of Q3 2019 revenue.
This was driven primarily by 93301 line or shipments, which is 10% higher than the midpoint of our guidance and ASP 17 94.
And on sequential basis. This was a 63% improvements and shipments and reflects continued recovery against Creek hope and levels.
Providing some details on the other revenue items.
And what's the price concessions were 9% across the line or revenue.
And we are expecting similar performance and Q4.
Reserves and other adjustments, which include some pressure on kit revenue refunds and sales tax came in at 10% of gross line or revenue.
And we are expecting similar performance in Q4.
Financing revenue, which is interest associated with the smell pay program came in at 12 million.
It's it's flat to Q2, and we expect similar performance and Q4.
Other revenue what adjustments, which includes net revenue related to retainers whitening and other ancillary products came in at 17 million, which was also flat to Q2 and again, we expect similar performance and Q4.
As David mentioned.
And it's extremely difficult to predict the future given the current macro environment.
That said our.
Our Q4 expectation of unique lighter order shipments of 100000 and revenue of 180 million represents a seven per cent sequential improvement on both metrics.
Even more notably this puts us at over 90% of our Q4 2019 revenue.
But off of a much more efficient cost structure, which is driving EPS to adjusted EBITDA profitability.
Now turning to smile pay.
In Q3, 2020 smile pay as a percentage of total aligners purchase was consistent with past quarters.
Overall.
I'll pay and continued to perform well and our delinquency rates and Q3 and since Q3 were flat to prior quarters.
Because we keep a credit card on file and have a low monthly payment, we expect small pay to continue to perform well.
Our success rates on credit card attempts, which is a proxy for monthly payments and see no degradation.
Authorization and continue to show improvement and we remain focused on improving operations and collection strategies.
Turning to expenses and margins.
Gross margin for the quarter was 70%, representing a 1600 basis point sequential improvement.
As previously noted on the gross margin pressure and Q2 was transitory and.
We're starting to see gross margin trend back to historical levels.
Lower initial aligner volume compared to history, it's still weighing on gross margins a little.
And this all lighters for 64% of a lighter shipped in Q3.
Compared to 61% and Q2 and.
On an average of 77% from Q3 2019 to one to 2020.
We expect gross margin to continue to strengthen as normalized volume return.
And we remain confident and our long term growth margin target for 85% that we previously provided.
Additionally, as we have also previously cited we continue to focus on streamlining our manufacturing facilities and as David indicated earlier, our second generation automation machines, and now alive and producing roughly 10% of the liners.
By the end of the year, we anticipate the majority of Berliners will be produced by the Gen. Two machines and we expect these new capabilities to reduce our turnaround time reduce our scrap and provide a more consistent and superior product.
This roll out has been a key component of our adjusted EBITDA positive results and the quarter and will continue to be a vital component of our traction towards our long term adjusted EBITDA margin target.
Marketing and selling expense you came in at 67 million.
Or 40% of net revenue on quarter compared.
Compared to 73% of net revenue in Q3 2019.
Even with this reduced spend.
Approximately 70% of club members you purchased the liners and Q3 when new weeds.
It's consistent with where we come in historically on this metric at 60% to 70%.
But achieved and reduced sales and marketing spend and underscores the sustainability of lower sales and marketing spend to support our revenue growth going forward.
Our efficient deployment and acquisition spend cash.
And youd advancements and aided awareness and referral rates, which continue to climb.
Access to highly efficient lead sources, and our network and small shops, which function as for film and centers position on that continue to perform well against our long term targets and quarters to come.
General and administrative expenses were 74 million in Q3.
Compared to 69 million in Q2 2020.
Gee and expenses were up 5 million sequentially, but labor and other Gi and expenses remained down 22% and Q4 of 2019.
Gee the expense is in July increased from June due to bringing back select team members from furlough to support the business.
After July junior debt remained flat through the balance of the quarter book.
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 Q3, we had a onetime charge of 6 million associated with lease abandonment and impairment on along with assets and we continue to optimize our shop footprint and corporate office portfolio and the new operating environment.
Other expenses include interest of 16 million related to the debt facility, we entered into and Q2.
Tax expense of 1.2 million due to the mix of earnings and losses and countries in which we operate.
And other gains of 1 billion.
Which is primarily associated with currency gains and losses recognized in the quarter.
All of the above produces and adjusted EBITDA positive $3 million in the quarter with an all in net loss of 44 million.
Compared to a 95 million net loss in Q2 2020.
And a net loss of 388 million in Q3 of 2019.
Oh this $44 million net loss in Q3 6 million and its associated with onetime charges that's not your book.
Moving to the balance sheet.
We ended the quarter with 373 million and cash and cash equivalents.
Cash from operations for the third quarter was positive 17 million.
Cash spent on investing for the third quarter was 21 million and.
Mainly associated with lease hold improvements capitalized software and building our manufacturing automation.
Free cash flow for the quarter.
And finally cash from operations less cash and investing was negative 4 million.
Which represents and 89% improvement and our cash burn rate quarter over quarter.
Looking at Q3, 2019, and has a 97% improvement or an improvement of $118 million on a year over year basis.
In closing.
As David mentioned, our performance in the third quarter reflects progress against our long term revenue and margin targets and supported by controlled growth plan.
I would like to reiterate a few key points.
Our efforts across all three of our main cost drivers has allowed us to turn adjusted EBITDA positive earlier than our plan and.
We expect this trend to continue.
We have been encouraged by our ability to execute against our growth targets and efficient levels of sales and marketing spend.
In Q4, assuming no changes and the cobot environment, we expect to ship 100000 initial on or orders, which is a 7% sequential improvement.
On cost of goods sold we're making good progress on manufacturing automation and our second Gen machines, now alive and producing approximately 10% of our liners.
We plan to increase that percentage significantly by the end of the year.
As we have often stated we believe streamlining our cost profile through operational efficiencies will not only improve our margin profile, but more importantly, we'll provide it consistently superior customer experience that meets our expectations and uphold our brand promise.
On sales and marketing, you'll recall that our small shops function, primarily answered filament centers not as sources of demand generation.
Today, we have 110 shops opened 76 of those and North America.
We continue to see our shops are performing well with higher utilization, which is a key part of meeting our long term financial targets.
On liquidity, we are well positioned with almost 375 million of cash on our balance sheet as of Q3.
This gives us ample liquidity to manage through a protracted cobot environment or alternatively to spend faster and higher growth environment.
Lastly, I would like to reemphasize that our long term objectives have not changed room.
We remain laser focused on providing the best club member experience and our mantra remains to drive controlled and profitable growth.
We remain the low cost provider, but brand presence no pricing pressure and no real competitor that provides an end to end vertically integrated platform for the consumer.
As we have said in previous quarters and as recently demonstrated we will continue to make strategic investments and the professional channel international growth and penetrating new demographics to drive control growth.
We're also executing against our profitability goals.
Lastly, we continue to see favorable industry dynamics with broader acceptance of Tele health and specifically total dentistry.
And then all penetration I guess their total addressable market and clear aligner is gaining share and your overall industry.
All of these position us well for long term success.
We look forward to continuing to update you on progress and days and weeks to come.
Thank you to everyone for joining today with that I'll turn the call back over to the operator for acuity.
Thank you at.
At this time on will be conducting our question and answer session.
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You May press the Star key followed by the number two if you would like to remove yourself from the queue.
Please limit yourself to one question and one follow up question.
So we could get as many questions and as we can.
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Our first question comes from Jon Block with Stifel. Please state your question.
Hi, This is Trevor on for John Thank you for taking my questions. Tom I've, just got two questions on put him out on upfront just first of all on case volume guidance column and 100000 case volume guide that you gave us some and what are some of the puts and takes to that and you know as we go through the fourth quarter and having some of those dynamics and prove through 2021.
And second question is going to be on on gross margin you called out manufacturing improvements you and.
In the fourth quarter here and you know how much of that do you expect to impact the gross margin in Fourq you and then how can we think about things and to the first quarter 2021. Thank you.
Yeah. Thanks, Trevor look I think as you look at 2021, just given the the macro state of the World right now is going to be difficult to to predict right, but on what I will.
Give some more detail on it is Q4 as you're asking so as you look at Q4 and 100000 shipments in particular, so that's up 7% sequentially over Q3.
Revenue of 180 million is also up 7% sequentially over the third quarter I think just as importantly, though we are doing it and in a profitable way and we're tracking very well against our long term targets and.
And as we said on the call that that's what we're focused on.
It's very difficult for us and and we get this question a lot but difficult to look at this on a month to month basis.
And the reason being is it really doesn't give a complete picture just given the complexity of our acquisition funnel right. So with the <unk> with the acquisition call that we have.
On the overall complexity behind that there's puts and takes on any given month and so you've got to look at this over a multi month period and that gives a much more accurate portrayal of the under underlying demand that we see and the business and when we look at it that way.
So effectively what we're guiding to Q to Q4.
She is the 100000 shipments and 7% sequentially like we talked about.
Looking at gross margin overall, and we talked about on the call. So Gen. Two is now live it's ramping up nicely.
It's currently doing about 10% of our orders overall and.
As I look at the fourth quarter with the volume that we're expecting I would expect gross margins to be in the mid seventies a as.
As we've talked about and still have a little bit up correction just from the balance of initial aligners versus MCC or refining and a lighter and that are shipped.
And so we expect a little bit of pickup from that and Q4, we expect we expect a little bit up and pick up from our gen two as well and.
And just overall volumes continuing to normalize so the three of those together and it really drive us back to the mid seventies.
Great. Thank you.
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Our next question comes from Robbie Marcus with Jpmorgan. Please state your question.
Hi, Thanks for taking my question and can grants on a good quarter on.
I was hoping you could give us a little more color on the progress during third quarter, you know how did that trend versus your exit rate and second quarter exiting third quarter and just trying to get a sense of you know is fourth quarter and maybe a step down as you're taking and I.
Decent amount of conservatism given what's going on around the world right now or is this still have we hit a plateau here given the amount of X gene a spending you're putting forward for advertisements just trying to get a you know understand how much is you pushing the throttle on F G and H.
And and its relationship to sales or conservatism, given rise and cope and rates.
Yes look as we as we think about it and just to go back to somewhat some of the quarterly numbers that you mentioned, so we shipped just over 57000 shipments and the second quarter.
We grew that about 60% and the third quarter to about 93000.
We're expecting to be up sequentially again about 7% on a quarter over quarter basis to 100000, a and and if you. If you really look at what we talked about on the call and what we're focused on it goes back to executing against the plan that we put in place and Q4 of last year.
That's focused on controlled growth with profitability.
And so we're driving to that plan on.
The top line, if you extrapolate out that 7% on an annual basis.
That gets you in line with the top line, 20% to 30% growth that we're expecting on a year over year basis, but we're doing it on a profitable way, so gross margin and 75% driving that to our longer term target over the next several years of 85% sales.
Sales and marketing in line with our expectations of 40% to 45%.
And GE and a also continuing to get leverage out of a bit as well so.
That's what we're really focused on executing against the plan that we've we put out and Q4 of last year and.
And as we look at Q4 of this year and 100000 shipments that were expecting a it's directly in line with executing against that plan.
And the other thing that stood out to me was the adjusted EBITDA profitability and within spitting distance of free cash flow profitable you know how should we think about those trends going forward is there a possibility and my back track as you ramp up spending as the economy.
He starts to open post vaccine or do you think this is now you're going in one direction and that's positive from here. Thanks.
Yeah. Good question Robbie I would say, we're you know we're speaking with one direction and it's positive we've laid out a longer term target of 25% to 30% EBITDA margins.
This is our first quarter that were profitable and now we're looking forward to ramping or EBITDA margins against that on a quarter after quarter basis. So you should expect that to occur again and in the fourth quarter off and the 100000 shipments that we've outlined and $180 million that we've outlined as well and.
In terms of overall free cash flow I would expect capex to be in line with where it's been historically, which is about that that 25 million dollar range and total.
Thanks, a lot.
Yes.
Our next question comes from Neath and rich with Goldman Sachs. Please state your question.
Hi, good afternoon, and thanks for the questions on Kyle on it.
Sorry to go back to the fourth quarter guidance, but I guess you know when we looked at I think how the third quarter of progress I think you kind of had talked about 28 and a half thousand cases, I believe in July and obvious.
The coming in and 93000 per quarter, you saw on sequential improvement over the course of the third quarter, but I guess when you look at the fourth quarter guidance and it doesn't seem like much sequential improvement there I kind of get that can you know maybe isolate each month, but I think as we think about the fourth quarter can you kind of and the talk about.
Some of the puts and takes that informed on the guidance that you gave.
Yes, well you know.
Obviously, we're six weeks into the quarter and so we have we have pretty good insight into.
What we've seen thus far and.
We have pretty good insight into what we expect to see for the remainder of the quarter you know based on on the demand that we're seeing in the business and the overall acquisition funnel that we see and the puts and takes around that acquisition Paul.
And so we have good insight into 100000, what I would say at a at a at a bigger picture is going back to what I, what I had said before what we're what we're really focused on and the 100000 shipments that we have that we've outlined here, which is up about 7% on a quarter over quarter basis is executing our top line against the long term plan that we've outlined on long term per.
And that we outlined and Q4 of last year was a plan they really focused on controlled growth and profitability. I think you saw that and the third quarter I think what the guide that we've outlined you're seeing it again and the fourth quarter and if you extrapolate the guidance that we put out there based on that it's directly in line with the 20 or 30% top line growth that we should expect to see a inc.
In future years.
And so that's how that's how we're thinking about the fourth quarter.
Makes sense and just to clarify what you just said so you know it seems like the business is on track to kind of active this year and a revenue run rate on the over 700 million and would you expect the growth next year to be in line with that 20% to 30%.
Longer term range that start given the factors that you've got about line.
Yeah, I would say overall, it it's very difficult to predict.
Predict overall, what 2021 is going to look like just given the nature of the macro environment.
What I would say you on the 20 or 30% that we outlined was not a limitation on the market factor or the ability to grow for at the 20 or 30% that we set in Q4 of last year when that plan was enacted.
It was really driven by what we believe we can grow the business by based on what we've seen from a fulfillment perspective and from a customer service perspective, and so at that point in time, what we had talked about is putting the club member experience first and as we do that that's really what is going to drive and optimize the long term growth that we expect to see as a business.
Yes.
And so although it's difficult to.
Predict what 2021 would look like our expectation is for it to be within that 20 or 30%.
Based on the controlled growth plan that we put in place and that's a controlled growth plan that we have been active for the next five years and and it's a plan that we're focused on.
Both from a top line perspective, and up and a bottom line perspective as well.
Thanks for the comments.
Yes.
Our next question comes from John Kreger with William Blair. Please state your question.
Thanks, very much on hoping you could expand a little bit on the professional channel I know, that's a fairly new strategy for you. It sounds like you've got maybe a couple of additional partnerships, where where do you stand on that is that have you sort of optimize the economic model and are we on a rollout phase or would you still characterize it as more of a pilot phase at this point.
Yeah, I can take that one child, so no we're definitely on a pilot phase.
Very early innings for this program, but we've seen good adoption that some of the key DS So leaders step forward and and go from pilot now we're going to start rolling out and so all their offices it started out as a pilot.
And we just we just signed debt could dental unified Smile. We're also working on some large dsos and the UK, Australia as well so we.
We we actually just had a call today about ramp up on on the sales team. The internal June 18 to support those so.
We're very excited about it the GPS and some ortho offices as well have had really adopted this.
Ah I think that you know the timing was right.
Whole blood and Tele health, having much more broad acceptance. So gpus are like in this program and also I think what is really unique to and is that it allows the dentist and ortho for.
For the second product to continue and not have to give up share time. So we're we're using our tele health platform to take care of these customers were also introducing new customers to their dental home for care, so increasing traffic increasing patient count is something especially right now when revenue is day.
And for a lot of Gpus is very important so we.
We are we're putting a plan together to to roll. This to start rolling this out out of pilot mode, and hiring and up and staffing up. So you will see more of this and 2021.
Great. Thanks, David that's helpful.
On another follow up.
Where do you feel a international stands at this point how has that been ramping relative to your expectations and are you going to be handling fulfillment and customer service out of your U.S.
Our production capabilities or will you be looking to add facilities and Europe. Thanks.
Yeah. So as of now we're all of our production and shipments are coming out of the U.S.. There's no plans until we get to a much larger scale to put any kind of manufacturing facility.
In Europe and Asia.
Even during the call and environment, we continued to expand we opened up Spain.
And we've got two shops open there.
Doing very well, we also opened up and Singapore recently doing well and we're going to be announcing several more countries. We've got we've got a really great international team that has dated all these various countries and you'll continue to see those rollout and the future as far as customer care goes we do.
Have facilities, there's one and Greece, that's serving Germany.
And as we open up the and other ones and then we also have the Philippines that we just opened up that is servicing.
Asia.
Great. Thank you.
Our next question comes from Glen Santangelo with Guggenheim. Please state your question.
Oh, yeah. Thanks for taking my question, Hey, Dave and I, just wanted to follow up on the sales and marketing issue a little bit more certainly a big change and the company in the past couple of quarters in terms of customer acquisition costs. It's obviously, a pretty big inflection you know two quarters ago. We had over 400 small shops that number has been cut by over 70.
So I'm kind of curious on your mind, what were the biggest drivers of that inflection and does that mean net sales and marketing should stay in this 40% to 45% range going forward as we think about.
For Q, and 2021, which I think is kind of consistent your long term targets and that 40 to 45 range and just want to be clear in terms of what you're thinking in terms of the near term expectations versus your long term targets. Thanks.
Yes, so during cold and we we actually shut down all of our shops and we rebuilt from the ground up we have spent a lot of time with our analytics team.
And really understanding the incrementality of those shops as we've stated many times.
They're not demand drivers there really fulfillment centers, they're really there have incrementality above the kits and a market where customer doesn't want to start their journey with a kid.
So we've we've become very proficient now and understanding and covert allowed us to do that how.
How many companies shops, do we need and a market.
Where are those shop should be and so we've been strategically opening them and we're not we're not done but you.
The bigger markets the largest 75 D. amaze Weve opened up the shops, we're now incrementally opening up a few more here and there.
But as far as the 40%, which is a big part of that because we're getting the utilization we're getting out of the shops now is much much higher than we had pre total but and so.
So there.
That's accruing to the bottom line at 40%, 40% to 45% is where we are going to be on sales and marketing. That's it that's a key driver to our our controlled growth and profitability. We will not go over that number that's that's not part of the plan and that's in all countries. So.
You'll continue to see that and I think you know, what's what's you're seeing two with some of the clear aligner Tailwinds, that's going on here where consumers.
Who may have been looking at braces and the past as an option for two straightening and because of cobot and amount of office visits that are required with braces are looking more to clear aligner therapy.
We're seeing that and we will continue to see that and more efficient sales and marketing spend.
So expect that and the future as well.
Carl you want to add anything to that.
Yes, I think you said, it very well day, but that the okay targets that we've outlined our consistent with where we expect to be in future quarters I would expect in the fourth quarter to be on the higher end of that range as we continue to ramp up spend.
In preparation for Q1 and as David said as we look at the very favorable industry dynamics that we're seeing across the industry, we're enabling that to accrue to our bottom line and we're seeing that efficiency and the sales and marketing spend as a percentage of revenue.
Maybe if I could just as one quick question on the balance sheet I mean, you're you're talking a lot more about controlled profitable growth and it's great. The company has crossed.
Profitable EBITDA and now here a quarter early but as you think about the opportunity I mean, it seems like.
The balance sheet would support a more aggressive strategy and so how are you thinking about you know back.
Balancing that going forward with respect to you know sort of the needs of the business versus you know and the current cash burn I mean, where do you see that the path and free cash flow generation relative you know today.
I think it was 373 million and cash you still have on the balance sheet do you see and need to have to raise additional capital to sort of hit your goals or do you feel like you know.
You know you can do and based on your outlook for free cash flow going forward.
Yes, I don't see us having to raise additional capital and with a 375 million we have on the balance sheets that puts us in a really good position and be it in resurgence of coated and and things slow down again on the alternative and a faster growth environment as well I think that puts us in a good position if you look at our cash.
Well overall as we become EBITDA positive like like we were and third quarter overall EBITDA less capex is a great proxy for our free cash flow, we're expecting to spend about 25 million per quarter on Capex and we've got about 15 million per quarter with our new debt facility as.
As well and as I look at our overall cash burn.
At least within the foreseeable future I would expect us to be in the range of approximately 15 million.
Per month.
As you look at the fourth quarter of this year, so sufficient cash and sufficient liquidity to.
To support the long term growth needs and the business.
Thank you.
Our next question comes from Michael Ryskin with Bank of America. Please state your question.
Hey, guys. Thanks for taking the question.
I want to follow up on something that would kind of came up tangentially, a few times and prior questions about the sort of the go to market strategy and the various channel to pursuing now I mean as you said the small shops are starting to come back you up to 92 of the on a quarter. I think you said you're at around 110, now and clearly ramping that back up but you've also got the dental.
Office on via that Dsos, and you've got the referral networks and there's a bunch of different channels and year pursuant to go after after the customer that's out there.
If I was just sort of take a step back and look forward a couple of years.
How would you stratify these opportunities for you and.
And what does goes it feeds into sort of the question on where the spend is going to go which channel and got push the most is it going on are you really waiting on the on the digital channel is going to go back to the.
To the small shops.
More just sort of general sales and marketing to get the referrals up.
Is there is there any particular way you can stratify. These help us think about the go to market strategy longer term.
Yeah and not at this point in time, and the core business and how we operate with kits and scans that that's how we started that's what was delivered to us off the shelf one of things we haven't talked about on this call is innovation and R&D.
And we are really focused on including myself, but with the team on new ways of going to market.
Beyond a smile shop, and a scanner and <unk> and <unk> and pressuring party kit that goes to the home. So hopefully some of that those things will come to fruition and 2021, if not 2022, it's on a better.
Yes, it's a matter of when <unk>.
Those types of things that are you know are not and our plan, we're working very very hard on which and make it easier and less friction for the customer I'd say today you know all these channels, we're supporting we're investing in and so.
Hard to say two years from now which is going to be the main driver but.
We're optimizing all of them today. It is a kitten scanning business and that and that's why we're making sense of that with our 40 to 45 per cent sales and marketing target.
This new acquisition channel and the professional channel is very exciting to us.
So that could be a something that could really really take off come 2021, but our projections are pretty conservative on that right now, even though we're seeing good adoption and.
And.
So I would say its really where we're at today and as things change quarter by quarter will definitely keep keep you informed.
All right. Thank you Yep <unk>, Michael I would just add to that a little bit as well I think it's important to remember, we're agnostic and where consumers want to start their journey right, whether it's a kit or smile shopper and dental office, we're driving consumers to the web site and we're empowering them to make that decision and that's I think you can look at Q2.
Through now a in a prior to Cobra and we were doing 90% of the business and smile shops during.
During the second quarter, it was 90% true kits and today its back more to 50% to 60% split between the two and so what that really demonstrates is just the overall importance of the omni channel approach and the flexibility of the business model overall, and because we're driving that demand to the web site and.
And empowering that consumers and decide how they want to start the journey.
We're pretty agnostic to which channel they choose a it's more about providing the on ramps for them to be able to start that journey.
Thanks, Yes, exactly that swing from 90% on one way to knives and the other way and I was kind of getting out but I appreciate that color and.
The update on where you are now thanks.
Yeah.
Our next question comes from Kevin Caliendo with you B.S. Please state your question.
Hi, Thanks for taking my call I guess I, just want to make sure I understand the commentary around the 20% to 30% long term growth targets and the context of 2021 and I'm not asking you to guide for 2021, but given the easier comps.
And you experienced because the coated and.
I mean is it is.
Is it still that sort of range that you're expecting or do you expect maybe something better if Colgate goes away you upped your spending a little bit like can you talk us through how we should think about that because obviously twoq you is a pretty easy copied and threeq, you should be and pretty easy comp for you. Despite the solid.
Order that you just put up.
Yeah look what I would say overall, if you look at Threeq you. Yeah, we were almost 95% of where we were last year, but we did it in a in a much more profitable way, whereas last year, we had an EBITDA loss of 45 million.
And so as you're thinking about sort of comps and and ramping from there and that's growing again, 7% sequentially into Q4 and both for shipments and per overall revenue. It's it's very difficult just given the macro environment for us to be able to predict what 2021 is going to look like.
I think what I would focus on overall is that sequential growth that we're seeing and the business from Q3, and the Q4 and.
If you look at the long term targets and growth targets that we're expecting to see a we're still expecting that 20% to 30% growth on on a year over year basis, a year and year out for for the next five years and again, it's not to say it might be slightly higher than that as the cobot environment.
Gets better, but if you recall that that entire plan was designed around a and for us capturing market share, but most importantly, not forfeiting the integrity of our customer experience and.
And so I would expect us to be in that 20% to 30% range at year end and and year out based on that because that's the amount that we believe we can grow the business by it and do it in a profitable way, but more importantly, I do it in a way that's not going to forfeit the integrity of the customer experience.
Understood. That's helpful and my follow up is it you mentioned the credit facility any update on that I know that was a a goal for the company to to maybe get a new credit facility improved terms.
Where are we with that I would I would think that given the profitability in the quarter that maybe there.
There was some progress made on that regard.
Yeah, what we're always looking at different options around that so we signed that deal in Q2 and this year we.
We do have a non call provision under that credit facility, where we could call. It a.
But the the rate at which we would have to do that would be a pretty high penalty per for that so I would look more at the Q2 timeframe of next year for.
For when we would look at potentially refinancing that and as you point out I think given.
EBITDA profitability that we're seeing it opens up a lot of different avenues for us to look at refinancing that facility.
And we also continue to look at and factoring relationships as well. So if you look at the performance of Smile pay it performed very well and in the third quarter, our delinquency rates continue to improve our credit card authorization rates continue to improve.
And so that that sets us up well to also looked at and look at a variety of factoring scenarios as well.
Got it thanks, so much.
Our next question comes from Steve Both channel with Wolfe Research. Please state your question.
Hi, Thanks for the time here I'll ask a two parter on retail and and just one follow up on it so.
We try to try to fill and the rest of the model up you mentioned on and your prepared remarks that you have two additional partners coming on here and the fairly near term Walgreens and Sam's club. So wonder first could you talk about within the efforts that you've you've got through so far with Walmart and how close are you.
To to getting full.
Full exposure there all the shelf space on the impact that you want and should we think about Walgreens and Sam's club as being incremental to that effort and at a scale that you know at least in the ballpark of what we've seen so far within Walmart and then I do have on fall.
Yeah, I can take that so at Walmart.
We feel that we've done very well for us.
Brand.
Going and last year, especially on the whitening category, we went in with with a variety of oral care products, but on the whitening is really taken on.
And so we're coming up with a lot of new innovative whitening products that will be introduced back into Walmart next year and the year. After good partners to have CBS also were and 3000 doors, so not quite complete.
Out.
70000 doors.
But also a good partner, so Walgreens and we look it as incremental as well Sam's club and doing the I believe it's a 200 store test and we'll see how that goes on and we're talking to other retailers as well so for us look and it's a nice business and continues to grow its really a lead channels. We look at it for four teeth what.
I'm sorry for T. straightening.
And and we're starting to track that is customers, who get introduced to Smile direct club bye.
By being in a retail store and then shifting after they like the products and to tease straight and so we're doing things to get emails get leads offer coupons inside the packaging and things like that so and we're also looking at this internationally Watson's and Asia, we're going to be launching on working and program there and were talking on.
Other retailers and.
Okay and other countries.
Okay I appreciate the color and then the the one thing in my model. The one line on my model that we haven't talked about your and Q and and his team and I know, it's very early on.
I Wonder if you could just give any color commentary around what you're seeing in terms of the receptivity with and teen market and how long you think it takes two to get that part of the business to being a material contributor. Thanks a bunch.
[laughter] yeah. So.
So really we just launched team this year right before co bid on we're very excited about it I think it's a long term process to shift over to teens and it was less than 10% of our total business and we have seen that ramp now.
It does represents and 5% of case starts and the industry. So there's a lot of opportunity there that we when we first launched Smile direct club, we were not going to after we you know some of the things that we put together for for this program.
Total case for the for the team the ability for parents to get notifications and I want to change on the Aligners guaranteed replacement program and the team loses the line or all these kinds of things are helping to get adoption. I. Also we're also very excited that with the professional channel. So a lot of parents.
Juan 13 to start it and Dennis share Ortho chair and so by having this partnership with them, we're starting to see teens coming through that on ramps. So I think more of that to come we're committed to it. It's one of our pillars of book.
Growth initiatives, and we're going to continue to penetrate that channel.
Thank you.
Ladies and gentlemen, that's all the time, we have for questions today.
All parties May now disconnect have a great day. Thank you.