Q4 2020 SmileDirectClub Inc Earnings Call
Greetings and welcome to the Smile direct club fourth quarter 2000, and 'twenty earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During this conference. Please.
Press Star Zero on your telephone keypad. Please note. This conference is being recorded.
I'll now turn the conference over to our host Alison Sternberg, Vice President Investor Relations. Thank you you may begin.
Thank you operator, good afternoon before we begin let me remind you. The this conference call includes forward looking statements.
For additional information and 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 and 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 Q4, 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.
And this conference call.
And also have a discussion of certain non-GAAP financial measures, including adjusted EBITDA and free cash flow infill.
Information required by regulation G of the Exchange Act with respect of 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 by Chairman and Chief Executive Officer, David Katzman, and Chief Financial Officer, Kyle Wailes, let.
Let me now turn the call over to David.
Thanks, Alison and good afternoon, and thank you for joining US today I'm pleased to report. The Q4 results came in ahead of expectations and are consistent with the cadence of our control growth plan.
Which was enacted almost one year ago.
Our fourth quarter was a solid finish to a year characterized by an unprecedented operating environment and I'm extremely proud of the progress of our teammates throughout 2020.
Despite the swift onset of the pandemic and the macro uncertainty throughout 2020, our performance throughout the year was continued validation of the strength of our business model.
And the power of the competitive moats around our platform.
It also demonstrated our ability to deliver on our continued focus and controlled growth with profitability.
We outlined the strategy and Q4 of 2019, and we have been executing against it and the four quarters since.
As a reminder of our control of growth plan is firmly rooted in the integrity of the customer experience and that remains our central focus.
As we have cited before we are still and the early stages of a massive opportunity.
And we believe our focus on the customer experience is the most efficient way for us to capture of long term market share.
With this strategy, we expect to achieve continued growth into 2020, one consistent with our long term targets, while also executing against our long term margin goals.
I would also like to reiterate what we highlighted last quarter that we continue to see favorable industry dynamics, and even broader acceptance of telehealth and specifically tell of dentistry.
Minimal penetration against our total addressable market.
No real competitor that provides and end to end vertically integrated platform for the consumer.
And clear aligner is continuing to gain share and the overall industry.
All of these are powerful tailwind is that over time will help drive our control and growth strategy forward, often increasingly efficient cost structure.
These are a nice tailwind to have but they don't change our long term financial targets.
We constructed the plan off of the amount of growth. We believe we can achieve while optimizing our club member experience.
It may change and the future as we mature as a business, but for now you should expect outperformance is a result of these tailwind is to accrue more efficient customer acquisition costs versus outperformance against our 20th of 30% annualized revenue growth targets.
Again, we believe that this is the right amount of growth to provide the optimal club member experience based on what we have seen in prior quarters.
For today's call I'd like the first call out some of the notable financial highlights from the quarter then the highlights from the past year, followed by a summary of industry dynamics and.
Finally, I will touch on the regulatory environment before turning it over to Kyle to walk through our growth initiatives Q4 results and our financial outlook.
Now turning to results within the quarter and Q4, we achieved a 185 million and total revenue.
Up 10% sequentially and 3% higher than the guidance, we provided on our Q3 earnings call.
And roughly 102000 unique aligner orders up 9% sequentially.
A S. P came in and 1800 and $20, which is up 1% and a sequential basis.
We saw continued strong performance and our smile pay program with delinquency rates remaining consistent with past history.
We generated positive $7 million of adjusted EBITDA for the quarter of $4 million sequential improvement and of $67 million of improvement year over year.
I would also like the highlight that marketing and selling the expenses came in at 79 million or 43 per cent of net revenue and the quarter.
Compared to 72 per cent of net revenue in Q4 of 2019 of massive swing.
While it is extremely difficult to predict the future given our current macro environment I would like to try to provide some insights into the first quarter.
And Q1, and we expect revenue to be in line with our long term targets on a sequential basis, meaning up five 7% over Q4, 2020.
We expect adjusted EBITDA to be profitable, but not necessarily focused of the level of Q4 2020 as.
As we continue to ramp marketing spend and quarters like Q1, where the average or lower and we can build our lead funnel, which we expect to pay off in future quarters.
As a reminder, marketing dollars, we spend now have a long tail over 15% of our orders in Q4 became of lead at least 24 months ago.
I will elaborate more on this later.
And looking back at 2020, it was a pivotal year for Us D. C. The agility of our business model is truly puts and the test.
It forced us to stay nimble and innovate against the customer experience and we achieved that while making great strides towards our long term growth and margin targets.
We have always first and foremost spin of telehealth business. We are excited to see the growing level of understanding acceptance and use of telehealth, especially for orthodontics.
Some notable twenty-twenty of accomplishments.
The focus on improving the club member experience at every touch point.
This is the cornerstone of what we do and our Northstar. We made good improvements on this and online consumer sentiment for S. D. C is at an all time high.
We surpassed more than one point to millions of smiles made.
Established the Smile direct club partner network and have quickly grown to over 1000 affiliated doctors' offices with robust pipeline for additional partners, both domestically and abroad.
Okay.
We launched in Germany, and Singapore, Australia, and Spain, and bringing us to 11 countries globally at the end of the year.
We expect four to six additional country launches in 2020 one.
Including our recent launch and the Netherlands.
The kicked off S. P C team with plans to aggressively go after the segment in 2020, one and beyond as it represents 75% of of the market opportunity, but only approximately 10 per cent of our current business.
We launched our innovative second generation of manufacturing technology to offer the most advanced made and the USA of liners in the marketplace.
The rollout of liners with comfort Sensus technology, and making clear aligner is more comfortable and tooth movement more predictable.
We disrupted the oral care industry with products available at 6800, Walmart and Cvs stores, and now Walgreens and expanding our oral care of product footprint over 10000 retail stores nationwide.
And 2020 STC was another one growth can share contributor to the U S whitening category and the U S power Floss category.
And we now have the number one whitening gel product and the U S market.
We launched insurance coverage on it.
And network basis, with anthem, and Metlife and others. So that we are now in network with most major dental insurance payers and the U S.
And many new patents issued to add to our portfolio of cross manufacturing and scanning oral care products and our small shops.
This brings our total the 18 patents and our portfolio with many more pending.
We launched our enhanced total dentistry platform with advanced features including the new update of consumer App and video chat to improve the clinical experience for our members.
Formalized our independent clinical Advisory Board, which is made up of some of the best Orthodontists and dentists around the globe.
And we achieve adjusted EBITDA profitability in Q3, one quarter ahead of plan and laid the foundation to execute against our long term margin targets.
Turning to our position within the market I wanted to take a moment to remind everyone of our mission.
To democratize access to a smile, each and every person loves by making it affordable and convenient for everyone.
Execution against this massive unmet need requires and unwavering commitment to of superior customer experience.
Innovation and product development are also foundational to this.
We are seeing great momentum across the business on these fronts and they will continue to be an important investment area for us as we execute against our long term plan.
For too long and straightening teeth by orthodontists with invisible liners of embraces is meant pain of huge three time Marco.
Orthodontists and traditionally purchased the visible liners from a wholesaler or manufacturer.
Marked up the cost by three times, and then sold them to the consumer for five to 8000 hours.
Our proprietary technology and platform offers consumers the ability to get the same clinically safe and effective treatment, but without the three time Marco.
We do of by providing a doctor directed digital and to an experienced and tele dentistry of 24, seven access to dental care.
And it also comes with a lifetime of smell of guarantee as long as our members are compliant with treatment protocols, we will guarantee their smile for life.
This is the value proposition, we are providing to consumers so that our mission and B comes the reality doctor directed and visible aligner therapy with the ability to get the same clinically safe and effective treatment, but without the three time market.
We took out the middleman markup and now provide a superior service.
This is the same disintermediation that Amazon and created but and a much more complex health care procedure.
That is what makes the barriers and moat. So great and there's also a story that is just beginning to be told.
Turning to the regulatory environment as we've noted in prior earnings calls, we are well positioned and our continued efforts to protect the access to care of the consumers want and deserve.
We continue to see more states, passing tele dentistry friendly laws and refusing the pass laws that put up artificial and clinically unsupportive mirrors the access to care.
In addition, we continue to see growth and the adoption and use of tele dentistry by the dental and orthodontic industries.
This is underscored even further by the expansion of our professional partnership with well established and respected national Dsos.
Which is further testament to the adoption of telehealth by the dental community.
In addition, we are seeing acceptance of of the use of telehealth for orthodontia by insurance providers dental boards and associations as well as the 88.
The updated their guidelines to expand the use of tell of dentistry, and and two state that insurance providers should be cover and remote treatment by Dennis.
In summary of the most recent quarter brings a strong close to a year of demonstrated the disciplined execution against our control growth plan and.
And meaningful progress towards our long term financial targets.
And growth, we're making good progress against our initiatives and we are executing against our long term revenue growth targets.
And of course, we saw continued margin expansion and the quarter enabled by our manufacturing initiatives, our sales and marketing efficiency and our continued cost discipline across the business and.
And we are on our way to achieving our long term targets.
Lastly, we continue to see favorable industry dynamics with broader acceptance of telehealth, and specifically tell of dentistry minimal penetration.
Initiation of against our total addressable market and.
And clearer liners gained 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 unwavering team members club members and investors and we thank all of you for your support as we work to capture this massively underserved market.
We remain laser focused on our mission to provide doctor directed T straightening and without the three time markups. So that everyone has access to a smile, they love and making it affordable and convenient for everyone.
Now I'll turn the call over to Kyle who will provide a detailed overview of our growth initiatives Q4 results and our financial outlook Kyle.
Thank you David.
Our results and the fourth quarter closeout of year, where we made meaningful progress against our plan of controlled growth with profitability.
Similar to the rest of 2020 and Q4, the flexibility and scalability of our business model served us well allow.
Allowing us to come in ahead of expectations and on track towards our long term financial targets.
Before turning the progress against our growth drivers and our results.
One of them again remind everyone of the philosophy behind our controlled growth plan.
And as laid out on our 2019 year and call one year ago.
At that time, we explained that the integrity of our club member experience is the cornerstone of our growth plan we.
And we've been executing against that plan ever since.
Over the course of the last year and every quarter. 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 of this plan, which you'll recall positions us to generate the following <unk>.
<unk> revenue growth of 20% to 30% per year for the next five years.
Adjusted EBITDA margins of 25% to 30% as we scale during that time period.
This is driven by and 85% gross margin.
And 40% to 45% sales and marketing margin and.
15% G&A margin.
Now I'll turn the progress against our growth drivers.
In addition to our core business, we saw continued momentum and the quarter and.
Since then across the three growth drivers we have previously discussed.
As a reminder, Eric.
We are expanding our customer acquisition channels, and expanding our presence and the team demographic and continuing our international expansion.
And the first initiative expansion of our acquisition channels.
Continue to make good progress here.
We have always been and remain agnostic as to how consumers start their journey of the purchase of liners.
We started with doctor prescribed impression kits and smiles shops, and now through a professional channel partnerships corporate insurance partnerships.
With retail locations and pop up events.
And we've expanded our reach the new segments of consumers.
This supports our mission of democratizing access to care, which is foundational to what we do.
And corporate and insurance partnerships, we continue to build out our partner roster with Metlife joining in the quarter and with the more recent addition of Greenfield, Canada, the first insurer and Canada to cover our clear aligner therapy and network.
Additionally, we continue to see progress across all of our existing programs, including those with Allianz anthem, BCBS Empire, B C B S, United and Aetna and others.
We continue to deepen our relationships with our existing partners.
Also identifying other potential partnerships and we expect to announce more on this and in the near future.
On the retail side of it.
Oh care products, which are available at Walmart UBS, and now Walgreens and Sam's club.
And you did perform well and serve as highly efficient lead source and brand building opportunity.
By the end of this year, our ancillary product portfolio will be available every retail channel across the country, including drug stores grocery stores club stores mass retailers and through E Commerce.
On the professional channel we continue to extend our partnership network with the steady cadence of additions within the quarter and.
Including unified Smiles all.
The as health care platinum dental services.
And just recently national dental, which was a nice win from a competitive incumbents.
Our network is now extended across more than 1000 practices and the United States and we have of deep sales pipeline, both domestically and internationally.
As we've highlighted before this acquisition channel and complementary to our current operating and.
And represents a new on ramps of consumers, who want to start their journey and a dentist's chair.
This allows dentists across the country of the ability to offer FTC clear aligner therapy to their patients.
On the recent earnings calls we have detailed the various go to market strategies, we're employing as we operationalize this channel.
Well each one of accommodates the different use case all of our highly efficient margin accretive sources of lead flow for both S. D C and our partners.
Equally as important this after it is again reinforced the flexibility and adaptability of our platform and.
And accommodating of new segment of consumers.
Recall that only 30% of G. P <unk> off of clear aligner therapy today, and most of the ones who do offer of liners are low volume providers. So we see ourselves at the very outset of an incredible opportunity both domestically and abroad.
And as these partnerships mature and grow we.
We will continue to share updates in future quarters, and although it is early and our rollout we are encouraged by the results thus far.
Our efforts with of the teen demographics are also making progress as we continue to innovate on our core product offering by adjusting to the unique needs of teams and.
Similar to the professional channel.
Although early and a rollout we are encouraged by the results thus far.
On the international front, the same problems that exist the North America and access convenience and cost also exist globally.
We lost into our first country outside of North America, and the second quarter of 2019.
And the rest of the world countries already represent 13% of revenue for the full year 2020.
That said the international market represents approximately <unk> 75 per cent of our global opportunity.
We're still in the early stages of the penetration.
Our recent launch into the Netherlands further expands our footprint and we are now and 12 overseas markets with plans to launch into additional locations in Europe, Latin America, and Asia Pacific throughout the year.
As you can see we continue to make great progress on our growth initiatives.
And we will continue to update you in future quarters, as we execute against that.
Turning to the progress on the cost side of the business.
You'll recall that we've been focused across three key areas to right size, our cost structure and we have made consistent progress against those initiatives.
Similar to the third quarter. These efforts drove our outperformance out of adjusted EBITDA in Q4.
And we expect them to continue to support our long term margin targets going forward.
These efforts include the following.
Continued advancement in automating our manufacturer and the treatment planning operations to allow us to reduce our scrap and keep pace with consumer demand.
Our second generation automation production platform launched late in 2020.
And it's currently producing approximately 70 per cent of airliners.
Consistent with expectations, we are seeing very positive trends with the consistency and of turnaround time.
The productivity per team member.
Reduction of scrap and most important and more consistent and superior product for our club members.
Second <unk>.
Continued discipline around the deployment of marketing and selling dollars, including a focus on leveraging our referrals aided awareness and highly efficient acquisition strategies as demonstrated in the fourth quarter.
All of these together allowed us to come well within our long term sales and marketing targets as a percentage of revenue.
And last continued G&A cost discipline across the business.
Backing out onetime items G&A across the quarter largely remained stable.
<unk> from our enterprise wide cost control initiatives.
We plan to remain vigilant on this front throughout 2021 and beyond as we continue to drive towards our long term margin target of 15% of revenue and G&A spending.
As we have stated before we believe streamlining our cost profile through operational efficiencies will not only improve our margin profile, but more importantly will provide a consistently superior customer experience that meets our expectations and upholds our brand promise.
Now turning to our results for the quarter.
Revenue for the quarter was $185 million.
Which is of 10% sequential improvement over Q3.
This was driven primarily by 102000 of lighter shipments at an ASP of $1820.
On a sequential basis. This was the 9% improvement and shipments and reflects continued execution against the long term targets.
Providing some details and other revenue items.
And what's the price concessions were 9% of gross of line of revenue.
And we're expecting similar performance in Q1.
Reserves and other adjustments, which includes impression kit revenue refunds and sales tax you.
And you made at 9% of gross of the line of revenue and.
And we're expecting similar performance in Q1.
The financing revenue, which is of interest associated with the Smile pay program came in at $12 million.
This is flat to Q3, and we're expecting similar performance in Q1.
Other revenue and adjustments, which includes net revenue related to retainers whitening and other ancillary products.
And then at $18 million, which is consistent with Q3 and again, we're expecting similar performance in Q1.
Now turning to smile pay.
And Q4, 2020.
Smile pay purchases as a percentage of total purchases were.
And we're down slightly relative to past quarters.
Which came in at 60 per cent of initial aligner purchases.
For 65 per cent historically.
However, overall.
Myopia is continued to perform well and our.
The delinquency rates and Q4 and since Q4 were flat the prior quarters.
Because we keep of credit card on file and have a low monthly payment, we expect smile pay the continued to perform well.
Credit card authorization and continue to perform well and.
And we remain focused on improving operations and collection strategies.
Turning to expenses and margins.
Gross margin for the quarter was <unk> 74 per cent.
Representing a 323 basis points sequential improvement.
Which was supported by the increase of a liner produced using our second generation of automated manufacturing.
We expect growth margin to continue strengthening as volumes grow and.
And we remain confident and our long term growth margin target of 85 per cent that we have previously outlined.
Additionally.
We continue to focus on streamlining our manufacturing facilities for our second generation of automation machines, and allies and producing roughly 60 per cent of the lighters.
While still early these new capabilities have already begun to reduce our scrap and provided more consistent and superior product.
This rollout has been a key component of our adjusted EBIT of positive results over the last two quarters and will continue to be a vital component of our traction towards our long term adjusted EBITDA margin target.
Marketing and selling expenses came in at $79 million or.
And were 43 per cent of net revenue and the corner.
Compared to 72 per cent of net revenue in Q4 2019.
Our efficient deployment of acquisition spend continued advancements and aided awareness and referral rates and.
Access the highly efficient lead sources and our highly curated network of small shops.
And have positioned us to continue to perform well against our long term targets and the quarters to come.
And small shops, we had 114 permanent locations as of quarter and.
And how of 100 and for a couple of events over the course of the quarter.
For a total of 218 location sites.
These pop up events are a critical component of supporting our demand function and the same capacity of the permanent smile shop, and enable us to fully leverage our small shop resources to fulfill demand that is coming through aided awareness referrals and marketing.
General and administrative expenses were 78 million and Q4 compared to 74 million and Q3 2020.
G&A expenses were up 4 million sequentially.
But included 5 million and one time expenses, primarily associated with the nonrecurring legal settlement.
Adjusting for this G&A expenses were down 1 million on the quarter over quarter basis.
Excluding D&A and stock based compensation and other one time items G&A expenses remain down 10 million of 14% versus Q4 of 2019.
We plan to continue to stay vigilant with cost control throughout the remainder of the year and beyond and.
And you can expect to see continued leverage from this line item.
Other expenses include interest expense of $15 million related to our debt facility tax expense of $1 4 million due to the mix of earnings and losses in the countries and which we operate.
The gain on lease abandonment and impairment of long way of assets of $3 1 million per.
<unk> related to the settlement of lease liabilities that were previously recognized as expense in Q2 and.
Associated with the Pal, Texas facility.
Other store closure and restructuring costs of <unk> 8 million.
Weighted to optimizing our shop footprint post COVID-19.
And the other income of $3 million, which is associated with currency gains and losses recognized in the quarter.
All of the above producers and adjusted EBITDA of positive $7 2 million and in the quarter with.
And with an all in net loss of $33 million.
Compared to a 43 million net loss in Q3, 2020.
And the net loss of 97 million and Q4 of 2019.
Moving to the balance sheet.
Ended the fourth quarter with $317 million of cash and cash equivalents.
Cash from operations for the fourth quarter was negative $15 million.
Cash spent on investing for the fourth quarter was $28 million mainly.
Mainly associated with leasehold improvements capitalized software and building our manufacturing automation.
Free cash flow for the fourth quarter to find the cash from operations less cash from investing was negative $43 million.
Looking at Q4 2019, this represents a 76% improvement of $138 million compared to the prior year quarter.
And early February we elected to pursue our convertible note offering.
We launched the deal of the size of 350 million, which we later upsides of the $650 million during the strong institutional demand.
In addition, the book runners exercise of their full green true option to purchase $97 5 million convertible notes.
Bringing the full offering size of the $747 5 million.
The notes were priced with a zero coupon.
And a 40% conversion premium.
In conjunction with the convert we entered into a capped call and that was fully offset any potential equity to lose from come to conversion of the notes.
Two of stock price of $25 80 per share.
Which was up 100 per cent from the closing price of the convert.
Minimizing equity dilution was an important component per house and.
And the cap call enabled us to do that.
The all in cost of capital, including the capped call is approximately 2% at a 100% conversion premium.
This convertible debt financing strengthens our balance sheet with minimal equity dilution and fortify the us against the protracted COVID-19 environment.
While also enabling us to execute against our growth strategy over the coming years.
It also enables us to continue investing in R&D innovation and other business development opportunities.
This transaction was met with strong institutional demand and is consistent with our ongoing focus the optimize our cost of capital.
After repaying our outstanding debt facility.
We will have approximately $500 million of cash and the balance sheet.
In closing as David mentioned.
Our performance and the fourth quarter reflects progress against our long term revenue growth and margin targets and.
The support of our controlled growth plan.
I would like to reiterate a few key points, which are consistent with prior quarters.
Overall and.
David alluded earlier, we continue to execute against the long term targets outlined in our controlled growth plan.
Accordingly, and Q1, we expect revenue to be in line with our long term targets of a sequential basis.
Meaning up 5% to 7% over Q4, 2020.
We expect adjusted EBITDA to be profitable, but not necessarily focused on the level of Q4, 2020, and we continue to ramp marketing spend and quarters like Q1, where the AD rates are lower and we can build our lead flow, which we expect to pay off in future quarters.
As a reminder, marketing dollars, we spend now of a long tail over.
Over 15% of our orders in Q4 became the lead at least 24 months ago.
On cost of goods sold we're making good progress on manufacturing automation and with our second Gen machines, now live and producing approximately 60 per cent of airliners.
We plan to increase that percentage of significantly over the course of the year.
And we expect over 90% by the end of Q2.
And as we've often stated we believe streamlining our cost profile through operational efficiencies.
Not only improve our margin profile, but more importantly will provide a consistently superior customer experience that meets our expectations and uphold the brand promise.
On sales and marketing, you'll recall that our small shops function primarily of fulfillment centers not as sources of demand generation as the.
Quarter end.
114 permanent shops opened with 82 of those and North America and.
Hell of 104 of pop up events over the course of the quarter.
For a total of 218 location sites.
We continue to see our shops, performing well with higher utilization.
As a key part of meeting our long term financial targets.
Additionally, we have seen great success with our strategy of pop up locations, which allow us to fulfill demand without the addition of fixed locations and associated costs.
And liquidity, we're well positioned with approximately $500 million of cash and our balance sheet after repaying our outstanding debt facility.
Gives us ample liquidity to manage through a protracted COVID-19 environment or alternatively to spend faster and a higher growth environment, while also investing and strategic initiatives R&D and innovation.
Lastly.
I would like to again reiterate what I've said in prior quarters and reemphasize that our long term objectives have not changed.
We remain laser focused on providing the best club member experience and our mantra remains the drag controlled and profitable growth.
We remain the low cost provider with brand presence and no pricing pressure and.
And no real competitor that provides and 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 and penetrating new demographics the drive controlled growth of.
Also executing against the profitability goals.
Lastly, we continue to see favorable industry dynamics with broader acceptance of telehealth and such.
Typically tell of dentistry.
Minimal penetration against the total addressable market and <unk>.
Clear aligner is gaining share and the overall industry.
All of these position us well for long term success.
We look forward to continuing to update you on progress and the days and weeks to come thank.
Thank you to everyone for joining today with that I'll turn the call back over to the operator for Q&A.
Thank you.
And at this time of it would be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad and that's the star key followed by the number one key on your telephone keypad. The confirmation tone will indicate that your line is and the question queue. You May press. The star key followed by the number two if you would like to remove your question from the queue from participants using speaker equipment.
And may be necessary to pick up your handset before pressing the star keys and.
And the interest of time and so we can get to everyone. Please limit yourselves to one question and one follow up thank you.
Our first question comes from Jon Block with Stifel. Please state your question.
Thanks, guys good afternoon.
A lot of good color I'll keep it to that one and one follow up I guess, if he has any more details on the DSO of partnerships to push of bad you know how many of those practices are alive call. It how should that trend throughout 2021 and is there a way to think about the DSO contribution the case volume growth over the.
Next 12, or so months and then I've got a follow up.
Yeah, I can I can take part of that and call you can address how it's going to contribute to revenue.
And 2021, but as far as pilots going and we started out.
And early 'twenty to 'twenty, and 'twenty with more of a pilot and mentality and.
And that has really shifted as we onboard new dsos of GP offices.
They are coming on as a full rollout, it's a matter of whether one of them.
Starting out of certain areas of the country.
But whether it's small brands was one of the first pioneers who adopted this program with us great partner or some of the newer ones of Deca and some of the others. It's really more of a of a rollout and strategically.
Many of their best shops are the best of offices up first of all the original training that's required and we have to go and.
And get them trained on our portal and the process. So I think right now we have a little over a thousand of offices and certainly a whole lot more as far as.
Dsos that have purposes within there there are footprint so.
By the end of the year I think our goal is to of at least 10000 offices up and running colleagues and fact check me on that but also from a revenue standpoint, and I think it's hugely meaningful and 'twenty 'twenty, one and it's going to be more of a 2020. Two we believe but I think and Q4 and we're starting to see some of those kind of.
Uh huh.
Yeah. That's right you know I would look at this as a sort of of longer term growth opportunity as we think about it so we've sold.
No 1000 practices today, and it's actually slightly slightly above that now are the.
The biggest bottleneck that we have and it's really the team that the training these practices and getting them live right and implement any of them and getting them submitting cases, and so that's ramping up nicely, but it's still and the very early stages of that so from a P&L perspective.
And would think about this as having a bigger impact more so and in 2022 and beyond and as we think about just the overall unit economics of profitability associated with it at least for today I would think about it is comparable to two of the core business or the traditional business. We do think long term there is some upside to that but as we scale this business and I would model the at least for now.
Now with the same unit economics, as we as we have with the with the core business.
Okay, Great. That's very helpful. And then call for you and the second question and the 5% to 7% sequential revenue growth and sort.
The land around $850 million for the year top line and when we think about the long term EBITDA margin of 25% to 30%.
And that linear in other words do we think about 500 bps give or take per annum and if so does that get you in and around $40 million and adjusted EBITDA for this year. Thanks guys.
Yeah. So the the full year is obviously difficult to predict so we're not giving full year guidance at this point just given the state of the the macro environment. What I will say is if there was nothing that would change from today in terms of the macroeconomics and we would continue to expect on a quarter over quarter basis, as you pointed out 5% to 7%.
Sequential growth on the growth on the topline and if.
If you think about that in terms of profitability and it would have us exiting Q4 in and around 5% to 7% adjusted EBITDA, that's driven by about 75 per cent gross margin and I would say if you look at sales and marketing and how we're spending and ramping there and that would still be on the higher end of the longer term targets, maybe slightly even ahead of that as we can continue to build.
And the lead funnel of which will pay off in future quarters and future years, and so I would expect that to be on the low end of around 45%, which is the higher end of the targets and on the higher end and 48%.
Which is closer to where we would expect it to be for Q1 and just the overall on G&A consistent with where we were throughout Q4, we're gonna stay vigilant there and on cost control. So the net of all of that is about a 5% to 7% exit margin and then I.
And as you as you think about that for future years. I think is as you know as you alluded to that that is a good assumption of at least for now which as you know around five per cent per year, which takes us to that 25% to 30% over the next five years, which is which of their goal.
Perfect. That's it from me thanks, guys.
Yeah. Thanks, Joe.
Our next question comes from Robbie Marcus with JP Morgan. Please go ahead.
Great and thanks for taking the question.
And.
I'm not sure Kyle or David if you want to split the sore or one of you want to grab it but you know as you think about the world of reopening and a large part of a portion of the facts.
The large portion of the population and getting vaccinated here in the U S. It seems like Europe and rest of world the little a little behind but especially in the U S. How are you thinking about the cadence throughout the year anything to point out in terms of assets.
Seasonality throughout the year that we should be thinking about within the 20% to 38% growth range and then.
And anything geographically, we should be paying attention to whether it was in fourth quarter or going forward in 2020 one.
Yeah, I'll take part of that you know it's.
And so hard to predict Robby.
You turn on one news channel and you are we're going to flow out of the wood in the spring and another one says hang on because of the second wave of.
And some new.
Virus.
It's coming and so as far as we're seeing we are getting more adoption today right now from our small shops, so it's starting to shift a little bit.
And where it was and the early stages of Covid. It was predominantly the kit business. So I think that's sort of a.
A leading indicator as to how the how the communities feel about getting out and who doesn't know.
Small shop so we're.
We're not planning for any real seasonality.
It's just it's a steady drumbeat of quarter over quarter to merge on some of the things that will add to revenue as we go on and in the quarters is adding five or six new countries. Some of the countries that we added in 2020 maturing and starting to get from our other initiatives from the partner network sort of trying to get some of that revenue.
And Q4, but it isn't it isn't very lumpy and it's not and Theres a lot of seasonality to it and did it coming out of Covid call you wanted anyway.
Yeah.
Yeah, I think that's exactly right. So you know I think as you look at coming out of Covid and kind of similar to how we've looked at the tailwind Robby. So if you look at the broader tailwind that we've seen across the entire industry over the course of the back half of 2020, we saw the broader acceptance of telehealth and specifically call of dentistry and obviously, we're still in the early stages of a massive market.
Going after and we've talked about the competitive dynamics, there before but those tailwind dynamics don't necessarily change our top line growth on a sequential basis quarter over quarter, and that's really because of that topline was really driven by the amount of growth that we believe we can achieve and most importantly, optimize our club member experience which for us.
And as what it's all about so you should still expect the 5% to 7% top line on a quarter over quarter basis.
Regardless of sort of macro recovery here as we as we come out of Covid and if we truly do see broad impact of that I would expect more of that to accrue to the bottom line through sales and marketing efficiency.
And then driving sort of top line growth.
And and just to answer the second part of your question around sort of country dynamics. So obviously this is the first time, we've broken out our international revenue.
It came in at about 13% of full year 2020 revenue. So we're seeing that business, obviously growth grow nicely nicely, but you know growth is truly fungible right. So we've set our target of 5% to 7% on a sequential basis and obviously, our international business is going to be a faster component and growth.
Versus the U S and Canada, and that's really a function of all of US as we look about it you know now is truly the right time for us to get a foothold and in these markets as we think about the great head start that we have here and the U S. We really invest at the gain market share over a short period of time, and we see similar dynamics on and international basis, and so we believe now is the right time to start getting.
Foothold, which will support those longer term growth targets that we've put out there over the next five years as well and so you should expect that business is it just the overall percentage to continue to grow and if you look at total industry case starts it's call it.
<unk> 40, and 50% are outside the U S and it's 75 per cent of the the global opportunity. We think is outside the U S. So that that business will continue to ramp up like it has.
Great and if you think about you know you definitely talked about adjusted EBITDA profitability, a ground and throughout the year how.
How do you think about some of.
The a more impactful or different ways, you can spend your marketing and in 2021, obviously the world is going to be a little different than it was in 2020 are there any changes you're expecting in terms of where your your dollars are going and and you know just any material increases or <unk>.
Creases, we should be thinking about throughout the year. Thanks.
Yeah, I can take that one Robert.
As you know the mix is pretty much the same we use a lot of different platforms and software as one of his of mixed media model by Neustar and the percentages of the T V.
Digital and possibly.
Possibly a little out of home out of home as you know and Billboards and things where people are out and about.
And actually killed all of that obviously in 2020, but that's it was a small part of our spend I think the mix is about the same we're just spending the last week. We don't anticipate kind of said you know of 40 to 45 per cent a little bit more in Q1, because the rates are good and we can build a really good lease pool right now.
But I think we're just more efficient and our marketing and we're getting more referrals of referrals off of about 23 per cent now they're trying to hit a goal of 30, it's almost one and three people who come to Smile direct club will be of referral, which is obviously going to reduce our sales and marketing spending and also our footprint and and shops, which is much smaller footprint.
All of being smarter about these pop ups, you'll you'll continue to hear more about that where we leverage our small shop labor to go to another market for a few days to capture that demand, but it doesn't really cost us anything because of these people are or 40 hours a week anyways. So it's it's it's the.
We're very excited about the call at the hub and spoke and it's it's really it's been piloted and now we're starting to launch and rolling it out in March.
Great. Thanks.
Thanks.
Our next question comes from Nathan Rich with Goldman Sachs. Please state your question.
Good afternoon, and thanks, thanks for the questions.
And maybe I wanted to follow up on your comment about 15 per cent of orders you know became the lead over two years ago. I was just wondering if you could give us any more detail on what that conversion curve look like you know if you will do you see kind of most we convert kind of immediately you know call of the FERC like three to six months, the and they kind of tailed off to that.
18% or is it more of kind of like bell curve, where it might take a little bit of of time you know once you get the lead for.
Then the decided to move forward with treatment and it just be I'd, just be curious to get kind of.
A better view on the on the pace of conversion that you guys typically see.
Yeah happy to happy to address that so you know without giving sort of too much specifics around numbers I can give you a sort of directionality and we've.
We've talked about this and the past as well so it truly is a highly considered purchase right. So this has been for many people a lifelong problem, where they've had crowding of the spacing and for whatever reason and have not been able to fix their teeth, and so and typically they become of lead.
At some point, which is driven by some sort of event right. So something is driving them and say now is the right time for me to straighten my teeth that could be you know.
A wedding or the new year as an example, which is also an attractive time kind of it comes sort of the new year and you effect and what happens is about half of those people who become leads our members who've become leads convert relatively quickly. So it's within the first few months and and the other half there's a pretty long tail, where it it comes in over over 24 months and even beyond and so.
The 15% is of Great example of that where.
The over 15% or is from over 24 months ago and as we continue to grow that lead pool that number slightly continues to grow over time as well just because we have of millions of millions of people now are in that lead pool, which have which is growing over time and so that's sort of of the directionality of and it's kind of half of that happens pretty quickly after they become a lead and.
And has that has a pretty long tail over a few year period.
That's helpful. And then just a quick follow up on gross margin as you shift more cases to the the Gen. Two manufacturing what type of gross margin progression I guess should we see over the course of the year as you get to that 90% target.
Of of liners that are being produced by Gen. Two of them I think around midyear.
Yeah. So we talked about this a little bit last year and when it's fully ramped up we'd expect a couple of hundred basis point impact as a result of Gen two coming online.
We're at about 60 per cent of orders today that are being produced on Gen. Two and it's a little bit behind where we want it to be but it is and I would say overall is ramping up nicely in terms of quality and getting to the numbers that we're ultimately looking to achieve long term. So we're expecting that to be about 90 per cent by by the end of Q2 in terms of the liners produced but the real metric that's going to drive.
The profitability there is associated with just the overall productivity and all of those lines and that's going to take time ultimately the ramp up so as you think about the cadence for this year I would still be modeling in and around that mid seventy's for gross margin for the remainder of the year and you know over time as productivity ramps, there's likely a little bit of upside from that but I would.
About that more of a 2020, two and beyond upside and then there'll be additional components of automation around that right. So call. It Gen. Three if you will we're not done automating the lines that we have and those capabilities along with treatment plant automation and just the overall economies of scale will drive us to that 85% or over the next five years.
Which is the long term target.
And and it worked that way with Gen. One as well if you think about Gen. One and it took us well over a year to get to the the productivity levels that we saw when we moved towards Gen. Two and so I'd be.
Thinking about it is the mid Seventy's for now around gross margin.
That's helpful. Thank you.
Yes.
Our next question comes from Dylan Carden with William Blair. Please state your question.
Thank you very much I guess first just to sort of the modeling housekeeping question is there any sense you can give it to the.
Scale of the marketing and how much of that range back up and.
And the quarter.
And as we think about sequential and should we think of marketing and go forward it sort of the seasonal lineup.
The line item, whereby there are certain quarters, where you would expect to see some sequential shifts that don't necessarily follow the top line.
Yeah. So as you think about Q1 and the way I would think about it is well let me start on on Q4. So Q4, we came out at 43% slightly under where we want it to be and that's driven by some of the the broader tailwind that we saw throughout the quarter as we've talked about if you look at what we had guided to around that is sort of.
The sort of mid forties, so of around 45% of of revenue is the target that we are driving to when we get into to the new year. What happens is AD rates are lower and we can build our lead funnel and a more efficient way you know and particular in January but really over the course of of Q1 and and we expect that to pay off as I as I mentioned.
And over multiple quarters.
And in and for 15 per cent of the orders of over over a multiyear period as well and so I would think about really Q1 of this year around that 48% level and then I would think about it between that and the lower end and 45 per cent on the higher end and 48% really for the rest of the year as we think about rebuilding that lead pool.
If you look at Q2 in particular, obviously with the business being lower with Covid.
You know as we think about rebuilding that to support future growth I would think about it in and around that sort of 45% to 48% and that'll drive us as I said before to exiting the year from an EBITDA perspective around 5% to 7%.
And I wouldn't model, it that way and future years as well, even as we start to.
Be on the lower end of the longer term targets of say, 40% I would think about Q1 as being a little bit higher than that as we spend into the quarter generate leads and have those pay off in future quarters.
Excellent. Thank you and then.
Kind of bigger picture here at <unk>.
The name the long term targets.
And.
Can you hear me by the way I'm gains from credit card and that's one of the check your mute yeah, I'm here I'm getting it as well, but I can hear you okay.
Okay, I'll try to the gentle here.
So as you think about sort of both topline and marketing and long term targets I'm wondering how much you envision or how much has been sort of the pact and when it comes to automation and some of the the partnerships you have both on our product and DSO side and.
And I guess from and automation and sort of front and customer service level I would think of the product is better and you just mentioned the.
Secondly, the automation of assets sort of greater efficiency should that naturally drift due to the higher end of your long term revenue targets and then on the marketing side again, you're already and this quarter I get the theres been sort of artificial things going on but you're already kind of at the midpoint of of the marketing.
I get the the drift back up but again as you kind of think about these newer partnerships. These newer sort of acquisition channels.
Could you even come in below that over a longer horizon that makes sense.
It does yes, so as you know as I think about to your point and automation. So we're at a call.
Call. It mid 70 is today around 75%.
Gross margin overall, and what drives us to that 85 per cent overtime.
And it's continued manufacturing automation and so there's a little bit of upside from that mid seventies. As I said before is the result of Gen. Two and just continued automation, but what drives us from 75 to 85 is the combination of continued manufacturing automation true.
And plant automation as well right, it's a pretty manual process, perhaps still today around true and planning and just so we're all sort of general purchasing power as we scale of the business and get leverage from our volume. It's really those three factors together that drive us to that.
And then in terms of just the overall sales and marketing I think for now of 40 to 45 per cent is is a good target and we'll continue to spend.
The spend into that level of it and keep it around that level.
As I look at opportunities from some of the partnerships as you pointed out we do think there is potential upside from that and we're certainly not factoring that into our models. Today. So you know if all.
And if.
And if our professional channel business.
Certainly scales and were seeing great great efficiencies from that and that's something that we might look to alter the long term targets and the future I would say for now I would expect it in and around that 40 to 45 per cent of revenue.
Excellent. Thank you very much.
Yeah.
Our next question comes from Derik de Bruin with Bank of America and skin state your questions.
Hi, Good afternoon. So just one from me and you talked about being more in network with the insurance are you seeing any benefit from that higher adoption.
And it just drivers there just some color on sort of what it's meeting to sort of be and the deep.
More and network. Thank you.
Yeah, So and I look at the at the insurance overall, it's part of our really of longer term strategy. As we go in network. So we've always accepted insurance right. It's just been a very manual process for the club member where they would have to pay offs and we would help them ultimately get reimbursed from the insurance company.
By going in network, it's a much better experience and and it's the member can pay offs only what they owe so if they would I would say on average six to $800 out of pocket. They can pay the $2 50 down they can finance the remainder of using smile pay and so it's a very cost attractive option for that member and we collect the remainder of that direct.
And the insurance companies. So there is a benefit there as we do go and network for the consumer with insurance companies. The real driver, though as we look at it as part of a multi year strategy.
Think about the broader industry. There's you know call. It approximately 120 million covered lives that have dental insurance and maybe $25 million approximately about half of ortho coverage of lot of those ortho coverage lives, though our teams that are covered and it's not.
Its not adult ortho coverage and so this strategy is part of our multiyear strategy, we're going to continue to go and network and partner with insurance companies really to have self insured larger employers continue to adopt the ortho coverage without age caps as part of there as part of the policy. So that's part of our multiyear strategy for now it's still.
Five per cent or less of orders are coming through of insurance so of relatively small portion.
And we're sort of building the infrastructure to have that pay off and in 2022 and beyond.
Great. Thank you.
Yep.
Thank you and we have time for one more question and our final question comes from Steve Bouchard with Wolfe Research. Please state your question.
Thanks for letting me run of the anchor leg here and it's a lot of responsibility.
And so all of us to and then I'll get back in queue.
Oh, I suppose Theres Nokia remaining one is on the the whitening and broader oral care line. This year. The Theres just been a lot of progress in terms of getting into a new destinations.
But then when I look at that line it sounds like you're looking for that to be sequentially flat and the first quarter and I understand getting into new locations. It takes a little time it'd be helpful. If you could give us a sense of how much of a growth driver this year out of that five to seven day.
At the initiative is.
And then the second one I was going to ask is sort of revisiting the question on international.
You gave a really helpful statistic in your prepared remarks, I believe it was 13%.
On the international mix I wonder if you'd be comfortable talking about what that statistic was exiting.
Exiting the year and and how much of the five to seven and that we're seeing here prospectively in terms of quarter to quarter growth would be international and again. Thank you very much for fitting me in here.
Yeah, no problem, so and I'll take the first part of the call you can handle the international so on the.
It's Kevin.
Yeah on the the oral care products.
Both adding new retailers that were making good progress on the you'll hear announcements on launches like how sort of the grocery chain.
Space and we have not not cash.
Yes.
More mass more reach more drugs.
But it's also it's not just about more doors. It's also about the more products and we've got we've just launched the new products all of our our pro whitening system.
And upgrades and.
So based on the demand and and the appetite for the widened product and kind of reinvigorated category. Our retail partners are asking us to innovate to come up with more and.
Advanced products and we're working on and so I think let's look at it it's a really good business and it's gonna grow but some of the you know from a billion dollar revenue business and it's not that meaningful it's more about the house of Legion and then.
<unk> introduced to the brand having the brand on shelf, we're getting really good positioning and so when people walk by.
Walmart or Walgreens, or Cvs, and we're getting a really a nice amount of space on the shelf all of that we believe and we're sitting.
The section is the lead Gen for the Aligner sales down the road.
So that's that's the way the effort and why we're excited about and it's also because of lifetime value.
All of millions of three.
The numbers now we're going through our platform.
Really the adoption of this after while the go into treatment and then after it's been probably better than we expected and so forth.
He brushed toothpaste whitening and all of it.
It's a nice lifetime value prop for our members and probably won't take the election.
Yeah.
Yeah sounds good so yeah as you pointed out the per.
For all of 'twenty, and 'twenty call, it 13 or so percent.
International revenue as a percentage of total of as we look at exiting the year and obviously, it's higher than that and Q4 as that business has continued to grow throughout the year, so without giving specifics I would say around 15% is a good estimate as to where that's the accident and we'll start to report on that so the expectation is we'll break that out in terms of revenue for Q1.
And that's the metric that will will provide going forward, but as we think about it that's really part of the the three initiatives that we've talked about so professional channel team and international are the three growth initiatives that we've.
Rent a lot of time investing in and supporting the the longer term growth of the business and.
And as I think about it in terms of the 5% to 7%. It is completely fungible right. We have a fixed amount that we believe we can grow the business at to support.
To meet that longer term growth expectation, but most importantly, do it in a way that's meeting the the club member satisfaction standards that we you know we make is sort of of our true North star and the most important point and so I would think about that international growth truly of as fungible and within that 5% to 7% and as we look at the.
The market dynamics, and I think I've said this before and now it's truly the right time for us to continue to grow that business and get a foothold around the world because as we look at the the dynamics and the U S versus on the international basis, We've got a great head start and the U S. We've we've over invested for many many years and and we're seeing that pay off in terms of aided awareness.
Yes.
And in overall referrals and and margin expansion as well.
And so now we're investing into that international business, which obviously is the drag on margins as we do ramp that up but all of that is included within.
The topline targets that we've put out being 5% to 7% on a quarter over quarter basis, So 20 of 30% per year.
And then ramping to that 25% to 30% EBITDA target over the next five years.
Really appreciate the perspective there.
Yep Okay.
Thank you and that's all the questions for today and.
And that concludes our conference for today all parties may disconnect have a great day.