Q4 2020 Eargo Inc Earnings Call
Ladies and gentlemen, thank you for standing by it won't come to the year ago fourth quarter 2020 earnings conference call. At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question at that time. Please press Star then one on your Touchtone telephone as a reminder, today's program babies.
A recorded I would now like to introduce your host for today's program, Nick Koch Vice President of Investor Relations. Please go ahead.
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Good afternoon, everyone and welcome to the year ago fourth quarter and full year 2020 earnings conference call.
Press release and slides to accompany this call are available on our Investor Relations website.
On our dot year ago Dot com.
As a reminder, both brick block call and on digital replay will be available on our IR website joining.
Joining me on today's call on all of our Christian Gorman, President and Chief Executive Officer, and Adam low bonus Chief Financial Officer.
Christian Adam will provide prepared remarks, and then we will open the call for Q&A.
Before we begin I'd like to remind you that some of the matters discussed in this conference call will contain forward looking statements regarding future events as outlined in our slides.
We wish to caution you that such statements are based on management's current expectations and beliefs.
We're looking in nature and are subject to risks and uncertainties and actual events or results may differ materially.
The factors that could cause actual results or events to differ materially include but are not limited to.
Factors referenced in our press release today.
Our filings with the SEC.
We will also be discussing certain non-GAAP financial results on today's call. Please refer to today's press release and slide deck for a full GAAP to non-GAAP reconciliation.
With that said I will.
Now I'll turn the call over to Christian Thank.
Thank you Nick and good afternoon, everyone.
Very pleased with our fourth quarter on full year, 2020 performance, which caps off a truly incredible year for <unk>.
On that note I would like to thank all of my colleagues at year ago. So that's focused on execution, despite the challenging circumstances for everyone.
Yeah.
Given that we pre announced our fourth quarter 2020, net revenues and gross system chips I will summarize the drivers of that performance and then turn it over to Adam who will provide a more detailed review of our fourth quarter financial performance and then provide full year 'twenty and 'twenty one guidance.
Starting on slide five.
We delivered fourth quarter net revenue growth of approximately 111% gross systems shipped growth of approximately 68% and a return accrual rate of approximately 24% down nearly 10 points year over year.
Revenue and volume growth into fourth quarter.
Were driven by several factors first and as expected we saw increased consumer demand during the holiday buying season.
Typical increase in interest around the holidays was magnified by our broad on media Rich Beach combined with the sheer scale of online shopping in the U S.
Abroad on media reach was driven by strong performance of on National television advertising, which we believe continues to succeed.
Large because of our differentiated focus on creativity, and empower and messaging compared to others in the hearing aid space.
As expected television advertising rates came down from that peaks during the presidential election.
As we saw the rates decline to more normalized levels rebrand media spend accordingly.
Buying with holiday promotions assets drove high quality leads and then Bob calls.
Increased national advertising also attracted an increased number of insurance customers, enabling continued penetration of large SaaS growing and mostly untapped segment of the hearing aid market. As a reminder, we typically target insurance customers with call outs on our Nash.
On all advertising building awareness that can chew, what's may be eligible for a hearing aid at low or no cost.
However, the magnitude of insurance orders, we received as a result of holiday advertising was ahead of our expectations particular in a quarter that is seasonally more cash pay weight.
And lastly, the consumer adoption of hearing AIDS and receiving clinical support online continue to increase.
2020 has taught us anything it's that tullow.
<unk> is here to stay.
We are excited to lead the hearing aid industry and the growing shift of consumer preferences. We believe ergo has on most established telecast support and service infrastructure and the hearing industry.
Built through over three years of interactions with the consumer and a real time feedback loop that we constantly use to improve the user experience. We are committed to further on investing in telecom clinical support.
To help our customers solve fallback hearing loss and further increase this important competitive advantage.
Moving to slide six.
As we've stated we've developed but yogurt business model to grow at the lowest cost of customer acquisition possible.
I'm incredibly pleased with the extent to which we diversified our customer base in 2020 from largely a cash paid business to one with a healthy mix of insurance and repeat customers on.
All largely driven by the same media and <unk>.
<unk> and repeat customers generally convert at higher rates and return at low rates, which helps with multiplying benefit of driving up net revenue growth, while driving down our overall cost of customer acquisition.
Looking specifically at our insurance opportunity.
We believe there are approximately 12 million adults on the U S. Over 50, who have both hearing loss and access to hearing a benefits under certain health insurance clients. We are currently targeting approximately one $3 million of that total and have only scratched the surface of that market opportunity.
That's it.
As of December 31, 2020, our insurance customer installed base represents approximately 1% of our current addressable insurance market, providing what we believe is a multi year runway continued efficient growth.
Let me now turn it over to Adam for his review of our financial results.
Thanks Christian.
Given Christians thorough discussion of revenue drivers I will start with gross system shift.
As a reminder, we define gross system to hearing AIDS are charging case and starter accessories ship as a single unit.
Fourth quarter gross system shipped were 12096.
67, 7% year over year.
20% sequentially.
Given by increased consumer demand during holiday buying season.
Strong performance of National advertising.
Increased penetration of insurance market and strong growth from repeat customers.
Fourth quarter return accrual rate was 24, 4% comp.
Compared to 34.0% in the fourth quarter of 2019.
From 22% net third quarter of 2020.
The nine six point.
Year over year reduction in our return rate was driven by the mix shift in volume towards lower returning insurance and repeat customers.
Moving to non-GAAP gross margin and operating expenses.
We exclude stock based compensation expenses.
These refer to our GAAP to non-GAAP reconciliation included in today's earnings release.
Fourth quarter non-GAAP gross margin was 78% compared to 55, 3% in the fourth quarter of 2019 and.
72% in the third quarter of 2020.
The year over year gross margin expansion was primarily due to higher customer ESP driven by the mix shift to new high Si.
Lower return accrual rates and lower Cogs.
Fourth quarter, non-GAAP sales and marketing expenses were $14 $5 million.
Our 64, 6% on net revenues.
<unk> to $11 million or 103% of net revenues in the fourth quarter of 2019.
We continued to invest in sales and marketing to expand our teams and deploy new media, while generating significant leverage driven.
Driven by a more efficient media spend and improved customer mix.
Non-GAAP research and development expenses were $3 9 million.
Or 17, 4% on net revenues compared to $4 1 million or 37, eight percentage of net revenues in the fourth quarter of 2019.
We are rebuilding some of our long term R&D capabilities.
And ramping personnel hiring after slowdown these initiatives during the initial uncertainty related to the COVID-19 pandemic.
We also had some year ago five design verification build cost in Q4 that contributed to R&D costs.
We expect to continue to increase our R&D spend going forward to fuel long term growth and ensure we stay ahead of the innovation curve.
Non-GAAP general and administrative expenses were $4 7 million or 21% on net revenues compared to $3 5 million or 32, seven percentage of net revenues in the fourth quarter of 2019.
We saw an increase in G&A expense due to higher cost associated with being a public company.
Non-GAAP net operating loss from the fourth quarter of 2020.
It is $7 2 million compared to a non-GAAP net loss of negative $12 6 million in the fourth quarter of 2019.
Cash and cash equivalents as of December 31, 2020, or 12, $212 2 million.
This includes approximately $148 million on net proceeds from our IPO completed in October of 2020.
We believe our cash on hand is sufficient to fund our current operating plan as well as the investing in initiatives across sales and marketing and R&D debt, we have outlined during our recent public offering.
Now turning to 2021 guidance.
We expect net revenue for the full year of 2021 to be in a range between $87 million and $93 million.
This reflects our confidence in the continued customer adoption of year ago led by robust volume growth.
Stable customer Asp's and stable return accrual rates as compared to the full year of 2020.
Given our better than expected revenues from the fourth quarter of 2020, we expect first quarter 2021, net revenues to be down sequentially.
We remain on track to launch a year ago five in the second quarter of 2021 with material revenue contribution from <unk> five to begin ramping in the third quarter of 2021.
Moving to non-GAAP gross margin guidance, we expect our ability to refurbished returned to ergo five units will begin to drive gross margin expansion in the back half of the year.
Therefore, we expect full year 2021, non-GAAP gross margin to be between 70% and 72%.
Moving to operating expenses.
While we are not providing specific operating expense guidance, we do anticipate full year 2021 stock based compensation expense of approximately 20 million to $25 million up from approximately $5 million for.
For the full year of 2020.
We plan to disclose the quarterly amounts of stock based compensation expenses by line item on our quarterly earnings releases in 2021.
I would now like to turn it back to Christian for summary, and closing remarks.
Thanks, Adam.
But net net but I'm proud of our execution on financial metrics, including the leverage that we're creating on our investments.
On slide nine we take a step back and review our accomplishments in 2020, which was quite simply.
Good year for year ago across all key performance measures. The one theme that underpins 2020 is innovation where you.
I believe we have proven we can innovate the entire hearing aid experience for consumers through every facet of that journey.
From a product perspective, we launched the highest quality best sounding hearing aid in our history with our fourth generation <unk>, Neil Hi Fi.
And awareness generation, we launched innovative new creative and national TV that speaks to the consumer and their language.
In clinical support we fair about investing in tulloch hair and added new tools for consumers to engage with us digitally further distancing our competitive lead in telecom support for hearing loss.
Distribution we.
We opened a new channel for consumers to acquire hearing AIDS at low on low cost through insurance driving down our return rates and improving the efficiency of our business and lastly, we raised significant capital to support the execution of our business plan and the opportunity to help ease.
More people hear better.
Our accomplishments in 2020 give us high confidence in our ability to deliver on our 2021 business plan and financial objectives.
We believe our improved customer mix sophisticated demand generation capabilities continued scale up of national advertising and the launch vehicle five will result in another year of robust consumer adoption and more importantly, the cross functional innovation.
We saw on 2020 gives us confidence we will continue to innovate this large on.
<unk> penetrated sharing these market over the next several years in summary, we could not be more excited about what the future holds from year ago. As we remained focused on our mission of helping more people hear better.
That concludes my prepared remarks, and I would like to turn the call back to the operator for Q&A.
Certainly ladies and gentlemen, if you have any questions. At this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key our first question comes from the line of Robbie Marcus from Jpmorgan. Your question. Please.
I'm on this is Sarah on for Robbie.
Congrats on the great quarter.
So on young gave some.
Commentary here on the guidance, but.
Can you just help me understand what's built into your assumptions here in terms of your base case for 2021 guidance and quarterly first quarter revenue sequential decline.
I can understand that COVID-19 benefits of input benefits on the case will pick up in your benefit you on this case those come back so it's sort of a win win but just what's involved sort of in your base case here.
Okay.
Again, thank you for for profit question here on <unk>.
Let me, let me start overall, what our all our guidance is built on on add on is going to give the details for for Q1.
But overall.
I think we've been pretty clear on our communication, but all our guidance is based on what we have already done. So it's really driven off what we know we can do in terms of driving awareness and driving demand through advertising.
Number one how we can continue to penetrate the federal insurance opportunity, that's driving a big part of our growth.
The product launches that we had been doing historically and we know what coming of course also included in our in our guidance.
And then really.
How on especially coming into 'twenty one.
The lever of repeat customers. So that's what's in the model, we're not modeling any of the additional opportunities that we see in this marketplace. So that's not included in our guidance on further expansion of insurance international et cetera, EBIT physical retail experiences none.
<unk> factors are included in our guidance.
Adam do you want to yes sure thanks, Chris from a state.
On the line.
The idea here is in Q1, we actually have a pretty big.
Sequential ramp up if you look at where we are versus prior year, we had.
Our first quarter insurance volume in Q.
2020, and really we see that growth in 2020 grew on the sequential on a 140% so we.
Obviously on there is a difficult comp there as well the other thing to keep in mind as we did in last year. We did have sequential from Q4 to Q1 that 19 to 20, but we also have the launch of the Wi Fi on we'll be launching.
The five here in Q.
Q2 2021.
If you look at the full year and you kind of think about the sequential performance, we expect sequential improvement each quarter going forward. After Q1 on so I would expect it to be about a 47% to 52% on that back half split in terms of definitely correct.
And of course that would entail a significant year over year growth in Q1, so although sequentially down from our record quarter, it's still a very strong year over year gross.
Great. Thank you and just one follow up on the year ago five launch.
Net coming around just around the corner here, what kind of impact do you think that's sort of going to have on the on the P&L.
Could we expect any fluctuations in return rates says some people upgrade from from their existing systems on the five.
Yes.
Yes.
And Mary cycle on our focus is really is how are we going to drive the best user experience and business what makes us. So excited about year ago, five, but we truly believe has a lot of revolutionary benefits. That's not the main emphasis here. So we're really focused on how are we going to bring this to market.
And the best possible way.
Will there be some short term movements on our Kpis for sure and I know Adam has basically a run down of those but long term.
<unk> five is a new platform that will enable further improvements on operating metrics, but that's more on a long term basis on I think more short term variations here Adam.
And I think we've talked about a fair amount, but obviously one of the things we're really excited about year ago, five the ability to refurbish and use refurbished products.
When there are returns that will help drive a tailwind to gross margin that will take a number of months to ramp up. So we expect guidance back to really be more felt towards the fourth quarter. So on the short term we do expect.
Modest.
Gross profit headwinds in terms of the <unk> launch and the kind of ramping in duty using up some of the initial inventory.
Prototype parts before we act.
Return on the debt.
Refurbishment capabilities as we progress throughout the year in terms of the revenue implications right now we're modeling it to be obviously, we're going to have that theres going to be some benefits from repeat customers.
By more than a year ago five.
And we expect that to continue to ramp throughout the year, but we haven't modeled in a changing return rates specifically around here.
Obviously, we expect to see a benefit there, but we have not pulled guidance.
Alright, thank you.
Okay.
Thank you. Our next question comes from the line of Bob Hopkins from Bank of America. Your question. Please.
You might have on your phone on mute.
It looks like he might have disconnected.
Larry.
Olson from Wells Fargo. Your question. Please.
Hi, Lee calling in for Larry and Thanks for taking my question.
Just on the on the.
Revenue guidance for 2021 can you give any color around that relative growth of the three segments.
Parent cash page.
Key business and I have a follow up to that.
No no overall I think we've spoken about we see an opportunity to grow all are all on all our customer types here. So that's really the emphasis and Thats also inherently I think in terms of more detailed guidance.
Add on whatever you're comfortable sharing here.
And the way we thought we actually in the back half of 2020 had roughly 45%. The volume came from insurance a little bit more than that in Q3 on a little bit less in Q4. The way. We're modeling 2021 is to basically a continuation of that similar behavior in terms of the insurance too.
Mix percentage of the business. So we expect it to continue to grow on all through savings as Christian said, we expect the mix to be kind of weighted towards about 45% insurance profit.
Okay. That's helpful.
And then just on the rest of the P&L you mentioned.
Gross margin impact from that refurbishment will be later in the year.
It sounds like should we expect down.
Down in the gross margin kind of net.
Early part of year and then.
Turn to the higher end of the range towards the latter part and also any commentary around spending cadence. This year given the launch that you have thanks.
That's great.
The commentary on I think you look I mean, obviously, we felt really good about the gross margins in Q4, and I would expect Q1 and the <unk>.
Beginning part of Q2 to be in line with kind of where we've been trending in the middle of the range I expected debt to kind of launches are always one week can affect the quarter on launch timing by expect a slight debt in Q2 and into Q3 as we had the prototype parts.
Refurbishment and then exiting Q4 at the upper end or maybe even slightly a tick above the range for Q4 versus the full year in terms of gross margin looking down the P&L.
<unk> focus is questions I'll have a status on the guidance, we're going to be responsible about our growth, but we don't want to do I mean, we our main focus is making sure as we drive growth. We are also seeing contribution improvement. So we don't want to see on any of our metrics as a percentage of revenue go the opposite direction year on year. So we're mindful of that but we're also mindful that on.
The primary focus is driving the growth and we just want to make sure. We continue to keep an eye on.
We see increasing total towards profitability and long term debt.
And just a minor addition to Adam's commentary here around prototypes around.
<unk> launch of course went up launching on prototypes, but we are spending obviously.
Currently on prototypes to be to do detailed user testing, we will be expensing those as part of the launch right. So that's more where it's coming from of course, all the products are going to be on volume production parts, and we feel great about that but we need to flush through.
The P&L.
Around the exact launch timing.
Okay. Thanks, Ken.
Yes.
Thank you. Our next question comes from the line of Margaret Kaczor from William Blair. Your question. Please.
Hey, guys. Good afternoon, thanks for taking the time today.
I wanted to follow up on insurance, obviously, it's been a huge success since launch and then it only seems to get better. So I was hoping to get some color around whether that scale is associated with ramp in advertising versus better awareness versus better targeting and then if you guys can also give us a comment on kind of the broader trend and hearing.
<unk> coverage.
My understanding is that kind of coverage is starting to improve broadly nationally, but you tell me.
Yes.
Alright.
Margaret Thank.
No.
Clearly the highlight of Q4 in terms of the.
On a pretty significant beat became out the outperformance of insurance.
We went out.
In Q4, as we spoke about on our on our early early guidance, but we went out with <unk>.
Pretty aggressive added media given the holiday promotions.
Focused on the cash pay and we saw a nice sequential growth on cash pay.
As expected, but what read it.
Positively surprised us was the impact of insurance, we saw insurance follow and we actually saw.
Nice sequential growth remember Q3 was a very strong insurance quarter had where you were.
Very pleased with but also on certain on whether we would maintain that momentum and we managed to accelerate that momentum.
So I think.
The key thing behind reinsurance that we're looking at right now the federal employees as awareness. So when we are on more on National media, we see it's driving awareness.
Basically having people call in and contact us to understand their potential eligibility. So it's really about driving awareness. So so how do we think the scales of business of course, something that we're looking very very carefully at looking into into this year and forward.
No from an overall penetration point of view as I covered in the prepared remarks, we have bad.
Barely scratched the surface, we have on approximately 1% penetration.
That specific opportunity. So we know about them off but we also know that it is an awareness game. So how are we going to be driving this efficiently. So that's why we're absolutely being conservative around how fast we can ramp it and grow it we feel very good with the guidance that we're giving but of course it is.
A key key area for us to work on so that was on the scaling in terms of trends on coverage on.
A lot of talk about it I think there's also a lot of enrollment but has been happening.
Concretely, we're not really seeing any specific added benefits to specific health plans. It is an area that we're starting to look into but also remember right now we're not selling.
Two general health.
Health care plans, our Medicare advantage plans. So it's an area we're looking into it but we're not necessarily seeing increased coverage I think we're seeing more focus and attention on hearing as a category and we believe that vast potential but.
We haven't seen anything that indicates that coverage is necessarily going up.
Okay, Yeah, it useful and then.
Wanted to talk about return rates as well.
Understand the majority of the decrease in return rates from 2020 was attributed to mix.
But are you seeing return rates within the individuals segment categories, Paul as well.
I guess more specifically what did you see here out of that in 2020, and what are you assuming in 'twenty one.
Marty that's a great question and just kind of provide color on that.
The majority of the movement by far the vast if that mix shift and so we did see modest improvements in cash.
Cash pay and even insurance throughout the year as we continue to refine but that would be measured.
And a fraction of the.
Total improvement we haven't modeled the business in 2021 to see improvements in any one of the customer types.
Held on mix relatively stable. So most of our revenue growth is really attributable to volume growth from 2021 model.
Okay got it.
Just kind of longer term, where do you guys expect that return rate too.
Yep Yep Yep.
Realizing that that makes sense is one factor, but maybe you guys can do other things in terms of close rates and so on that improve it. Thanks guys.
I don't know.
Back to how we built the model I think we have been tracking ahead of where we believe we are.
We're almost at the level where.
Where we can where we can see ourselves ending up it doesn't mean that we think there is no more opportunities because this is ultimately a user experience and but low or the.
Churn rates goes it's a better user experience. So it's something we will that will always be a top priority for us.
So we are at that level, obviously business is going to be impacted as we expand on our channel structure and focus more on omni channel. We know repeat it is going to come in that's going to help us give us more tailwind to driving it down but also looking longer term hopefully.
Getting more into retail opportunities on other areas, that's going to be changing sort of the nature of it but right. Now we are essentially we're already leading the hearing industry in terms of return rates. So we're doing really well, but it's going to be a continued focus but we're not guiding any further.
<unk> on return rates.
Perfect. Thanks, guys.
Yes.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Nick <unk> for any further remarks.
Thanks, operator, and thank you everyone that joined US on the call. Today. This concludes the year ago quarter and full year 2020 earnings conference call.
Thank you, ladies and gentlemen for your participation on today's conference. This does conclude the program you may now disconnect good day.
Okay.
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