Q1 2021 SmileDirectClub Inc Earnings Call
Greetings and welcome to the Smile direct club the first quarter 2021 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the final presentation Ben Your line.
The operator systems during the conference. Please press Star Zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host Alison Sternberg Ms. Sternberg you may begin.
Thank you operator, good afternoon 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 therein and you should not rely on our forward looking statements as predictions for future of them.
All forward looking statements that we make on this call are based on assumptions and beliefs as of today.
For you to our Q1 2021 earnings presentation for a description of certain forward looking statements.
We undertake no obligation to update such information.
As required by applicable law.
In this conference call of people also have a discussion of certain non-GAAP financial measures, including adjusted EBITDA and free cash flow.
Information required by regulation G of the Exchange Act with respect of such non-GAAP financial measures is included in the presentation slides for the 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, everyone.
Thank you for joining us today I'm pleased to report the Q1 results came in ahead of expectations.
Similar to recent quarters are consistent with the cadence of our controlled growth plan.
As a reminder of our controlled growth plan was enacted that for Q4 of 2019.
And positions the integrity of our club member experience as the centerpiece of the plan.
Over the past five quarters, we have continued to lay of the infrastructure to execute against this long term strategy.
Which positions us to generate average revenue growth of 20 to 30 per cent per year for the next five years.
And adjusted EBITDA margins of 25% to 30 per cent by the end of that time period.
Before digging into the quarter I do want to take a moment to remind everyone. Why it is we do what we do.
Above all else for mission is to democratize access to a smile each of your personal allows by making it affordable and convenient for everyone.
We deliver on this mission by providing the Doctor directed digital end to end the experience until the dentistry with 24, seven access the orthodontic care and the backing of our lifetimes smile guarantee.
We have always first and foremost been of telehealth business and we're excited to see the growing level of understanding and acceptance of telehealth, especially for dentistry.
We believe there will only be increased consumer and clinical adoption of the telehealth model from here and.
And we continue to invest in our proprietary platform and features to innovate against unmet consumer needs and pain points.
For todays call like the first call out the high level results from the quarter, followed by an overview of some recent key developments.
Before turning to how we're continuing to execute against the long term revenue growth and margin targets.
I will then turn it over the call to walk through our growth initiatives of Q1 financial results and outlook in more detail.
Specifically in Q1, we achieved an all time high of $199 5 million of total revenue up 8% sequentially Q1 over Q4.
We shipped roughly 106000 unique aligner orders up four five per cent sequentially.
Our E. S. P came in at 1800, and $60, which is up 2% of the sequential basis.
We saw continued strong performance in our smile pay program and.
And generated positive for point 9 million of adjusted EBITDA for the quarter. This was slightly ahead of our expectations, but down 2 million over Q4 of 2020 of reflects two dynamics.
First an increase the appointment of marketing spend given the attractive seasonal average from Q1 that allow us to build our lead funnel early in the year and.
And second continued investment outside of the U S and Canada as we scale of business globally.
You'll recall that we see 75 per cent of the total market opportunity outside of the U S and Canada and we continue the meaningfully invest in building our brand of those markets.
This is reflected in our adjusted EBITDA by region, which came in at $11 6 million for USA, and Canada or seven per cent of revenue, but negative $6 7 million for the rest of the world as we have expanded into 13 countries.
Since Q1, we've also had other important developments specifically, we launched in Latin America for the first time with our entrance into the Mexico.
While still early we are seeing good booking volume since the opening of our first two small shops in Mexico City in early April.
We grew our professional network of dental partners over 50 of Hunter locations. We've also have a strong pipeline of potential partners, both domestically and abroad, and we're starting to see healthy appointment volumes across our network of clinical partners.
We saw continued momentum across our ancillary product portfolio of putting our successful launch of the Walmart, Canada and shoppers drug Mart late in Q1.
Canadian Shoppers me now purchased Smile direct club's award winning all care products for more than 400, Walmart locations and over 1000 of shoppers drug Mart locations.
Across U S of Canada, our oral care product footprint now stands over 12500 retail stores.
We debuted our lifetime of smell of guarantee and industry first offering the guarantees of our customers of street of smiles for life.
That's the worst of complete clear aligner therapy through our platform in order to retainers per year will qualify for the program of which ensures customers can obtain one free touch up treatment if needed on an annual basis to maintain the members desired results.
Our lifetimes lager and T ensures our club members can keep the new smell for life of Rip the additional benefits from a lifelong straighter smile.
We appointed Ted Ward to our board of directors tenets of highly respected marketing executive with over three decades of experience. Most recently as chief marketing officer with insurance giant Geico.
And brings invaluable expertise in guiding the challenger brand to unseat the incumbent market leader.
Ted joins us at of pivotal time, as we continue to educate consumers on the clinically safe and effective treatment Smile direct club offers.
For too long straightening teeth by orthodontists with invisible liners of races is meant paying of huge markup.
Orthodontists have traditionally purchase of invisible line or is from a wholesaler of manufacturer market. The costs by three times and then for them to consumers for five to $8000.
Our proprietary technology and platform offer consumers the ability to get a clinically safe and effective treatment, but without the three time Marco.
Before I tried to provide some insight into our expert patients for Q2 I'd like to take a moment to address the systems outage that was caused by of cyber security instead of April 14th as mentioned in our recent 8-K filings.
On the day of the attack, we immediately mobilized our internal engineering security team and promptly implemented a series of containment remediation measures to address the attack, including temporarily isolating the shutting down the affected systems and related manufacturing operations.
We've also engaged the leading forensic information technology firm to assist with our investigation into the incident.
As a result of these efforts we were able to successfully block the attack no ransom was paid and.
In S. D C systems and operations are back on line and performing normally.
I am very proud of the team for their efforts in identifying containing and Remediated. This attack as quickly as possible.
As a result of the cyberattack. It is very difficult to predict how are conversion curves will mature in the near future hour. However, I would like to try to provide some high level of insight into the second quarter, Inc.
In Q2 without the cyberattack, we expect the revenue to be in line with our long term targets on a sequential basis, meaning up 5% to 7% over Q1, 2020 one.
We also expected adjusted EBITDA to come in slightly ahead of Q1 levels as we continue to invest marketing dollars to build brand equity outside of the U S and Canada.
In light of the cyber attack and the associated business and the disruption we are adjusting our revenue expectations for Q2 based on our best estimates of the possible impact.
As of today, we expect Q2 revenue to be approximately of $195 million to $200 million and adjusted EBITDA to be approximately breakeven as we recover from the cyber attack, Inc. Continue to lean into marketing spend and international markets.
As you can see we are estimating approximately of $10 million to $15 million sales impact in the quarter from the cyber attack and the associated downtime, we had in treatment planning for manufacturing.
We maintain insurance coverage for certain expenses and potential liabilities that may be associated with the attack and we plan to pursue coverage for all applicable of expenses and liabilities.
Now before I turn it over to Kyle I wanted to take a moment to discuss the customer experience and how we are evaluating our progress on that front.
As we've said it before our controlled growth plan is rooted in the delivery of the World Class Club member experience.
Our long term revenue targets reflect that we believe to be the right cadence of growth to capture market share for.
The letting our customers at every touch point.
Our persistent focus on this is paying off and we have seen continued growth in aided awareness amongst consumers, which currently sits at approximately 50%.
Additionally, as we've continued to roll out our Gen. Two automated lines. We're also seeing our Google review ratings registered at the 96 per cent positive, which is an all time high.
We've also worked to enact the higher touch approach to customer service and our customer contact center.
Including the recent appointment of Alvin Stokes, who is our chief customer contact officer.
Alvin joins us with a distinguished career of homework by developing and executing topflight customer experience strategies, the personalization platforms across multiple industries.
All of them will be responsible for leading our efforts to deliver a world class experience for our customers globally with.
With oversight of a large multi site team of accomplishing inside sales customer care dental ex sports club member experience in our center of excellence in both the U S in Costa Rica.
As well as several of outsource locations, the Malaysia, Greece in the Philippines.
While there is still plenty of work ahead of US we are already seeing the benefits of these efforts.
Our analysis of trends and consumer sentiment across multiple channels, including reviews of news coverage blogs, Twitter and other online forums show significant positive trends in online consumer sentiment is at an all time high.
Additionally, we have seen an almost 45 per cent reduction of negative mentioned this year over year.
Referral rates also remained healthy at a roughly 21%.
Lastly, all of these efforts are impacting consumer perception around credibility.
One of the core pillars of our brand alongside cost of comfort certainty inconvenience.
And our most recent independent U S branch record consumer survey, which pulls the general population.
62 per cent of consumers believe our network of dentists and Orthodontists provides the best possible care for customers up 20% since year end 2019.
Additionally, 62 per cent of respondents survey noted that the view S. D C. As a trusted brands up over 25% over Q2 of 2020.
The strengthening of the brand awareness consideration of credibility demonstrates smile direct club's transition from disruptor, the orthodontic challenger as we make significant gains in this area closing the gap the only a few percentage points versus invisalign.
There's a great improvement in a short period of time and largely attributable to our heightened focus on our club members and our industry first Doctor directed telehealth platform.
We are pleased with the progress on this front over the past few quarters and continue to focus on building the awareness of our brand product and the benefits of remote dentistry.
In summary of the most recent quarter represents continued advancement towards our long term targets of growth, we are making good progress against our initiatives and excluding the impact of the cyber attack in Q2.
We are executing against our long term revenue growth targets.
Costs. We saw continued gross margin expansion of the quarter enabled by our manufacturing initiatives. This in combination with our sales and marketing efficiency and our continued cost discipline across the business puts us well on our way to achieving our once the long term targets.
Since the enactment of our control of growth plan in Q4 of 2019.
We have completely reset the cost profile of the business.
This is further demonstrated by the U S. Adjusted EBITDA margins in the quarter.
One year ago, we lost $67 million of adjusted EBITDA in the first quarter.
This past quarter, we made for $9 million of adjusted EBITDA, which includes the loss of $6 7 million for investments since of the expansion of our international markets. This.
This is quite an accomplishment by our team members in the short period of time.
Lastly, we continue to see favorable industry dynamics with broader acceptance of telehealth and specifically tell of dentistry.
Minimal penetration against our total addressable market and clear liners, gaining share in the overall industry.
All of these are trends, we expect to continue and position us well for long term success.
I would also like to again highlight the fantastic cross functional efforts of our team of identifying containing and remediated the cyber attack.
These efforts ensure that even despite the business disruption no data was lost or breached.
Definitely we maintain insurance coverage for certain expenses and we do plan to pursue coverage of all applicable of expenses and liabilities.
None of this would be possible without the support of our team members our 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 democratize access to a smile, each every person loves, but making it affordable and convenient for everyone.
And now I will turn the call over to Kyle who will provide a detailed overview of our growth initiatives Q1 results and our financial outlook call.
Thank you David.
Our results in the first quarter marked continued progress against our plan of controlled growth with profitability.
In every quarter since the enactment of this plan, we have seen positive momentum against all of the key growth drivers and cost levers that we have outlined in our first quarter was no exception.
We are managing the business for this plan, which has the customer experience as its centerpiece and which positions us to generate the following.
Average revenue growth of 20 to 30 per cent per year for the next five years of.
Adjusted EBITDA margins of 25 to 30 per cent as we scale during that time period.
This is driven by an 85% growth margin.
40% to 45% sales and marketing margin of 15% G&A margin.
Now turning to progress against our growth drivers.
In addition to our core business, we saw continued momentum in the quarter and since then across the three growth drivers we have previously discussed.
As a reminder, they are expanding our customer acquisition channels, expanding our presence in the team demographic and continuing our international expansion.
On the first initiative expansion of our acquisition channels. We continue to make good progress here, we have always been and remain agnostic as to how consumers start their journey to purchase of the liners.
We started with doctor prescribed impression kits.
And smiles shops, and now for our professional channel partnerships corporate insurance partnerships mass retail locations and pop up events, we have expanded our reach to new segments of consumers.
The supports our mission of democratizing access to care, which is foundational to what we do.
On a corporate and insurance partnerships, we continue to build out of a robust pipeline of potential new partnerships. While also deepening our relationships with existing partners, including Allianz and from B C. B S Empire B C B S, United Aetna and others.
We are very focused on how our club members and potential club members experienced the benefits of these partnerships and expect to announce more on this in the near future.
On the retail side.
Oh care products, which are now available at over 12500 retail stores nationwide, including Walmart Cvs Walgreens and Sam's club.
Continue to perform well and serve as a highly efficient lead source and brand building opportunity.
As David mentioned earlier.
We have also recently added to our retail partnerships with the rollout of our product portfolio, and Walmart and shoppers drug Mart locations across Canada.
By the end of this year, our ancillary product portfolio will be available through every retail channel, including drug stores grocery stores club stores mass retailers enter e-commerce.
Additionally, we continue to drive record growth in categories historically dominated by one market player.
Including the U S widening in the U S power of loss categories.
We are the number one growth contributor in the category of reverse of years of declines.
On the professional channel we continue to extend our partnership network and anticipate a strong cadence of additions over the ensuing weeks and months.
We have started to schedule of pop up events to drive club members through our clinical partners and their net.
Work has now extended across more than 1500 practices in the United States.
Over the last six months, we have seen healthy patients scheduling volumes with our clinical partners and we have of deep sales pipeline, both domestically and internationally.
As we've highlighted before this acquisition channel the complimentary to our existing offering and.
And represents a new on ramp for consumers, who want to start their journey in a dentist's chair.
It also allows dentists across the country the ability to offer STC clear aligner therapy to their patients.
On the reach at the earnings calls we have detailed the various go to market strategies, we are employing as we operationalize this channel.
Well each one of accommodates of different use cases, all of our highly efficient margin accretive sources of lead flow for both the SDC and our partners.
Equally as important this effort has again reinforced the flexibility and adaptability of our platform and accommodating of new segment of consumers.
Recall, the only 30% of G piece off of clear aligner therapy today.
And most of the ones, who do offer of liners or the low volume providers. So we see ourselves at the very outset of an incredible opportunity both domestically and abroad.
As these partnerships mature and grow we will continue to share updates in future quarters and although it is early in our rollout.
We are encouraged by the results, thus far and the feedback we've received from our clinical partners.
This initiative is fueled by continuing to build our brand credibility with parents and product development.
Both of which are critical components of the capturing this market on this point our brand credibility of improving as.
As evidenced by the stats that David mentioned earlier.
Similar to the professional channel. We believe we are well positioned to drive greater levels of adoption as we evolve and customize our offerings for the unique needs of teams.
On the international front, the same problems that exist the North America around access convenience and cost also exist globally.
We launched into our first country outside of North America in the second quarter of 2019.
And the rest of world countries already represents 16, 7% of our revenue in Q1.
That said the international market represents approximately 75 per cent of our global opportunity.
So we are clearly still in the early stages of the penetration.
Our recent launch into Mexico further expands our footprint and we are now in 13 overseas markets with <unk>.
Since the launch into additional locations in Europe, Latin America, and Asia Pacific throughout the year.
We believe now is the time to invest heavily in the brand building across these important regions in order to maximize our long term share gains.
You will see this reflected in our sales and marketing line item for the quarter, although of long term sales and marketing targets remain intact.
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 them.
Turning to progress on the cost side of the business.
You'll recall that we've been focused across three key areas to rightsize, our cost structure and we have made consistent progress against those initiatives.
These efforts drove continued outperformance out of adjusted EBITDA in Q1, 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 manufacturing of treatment planning operations to allow us to reduce our scrap and keep pace with consumer demand.
Our second generation of automation production platform launched at the late in 2020, and it's currently producing approximately 70 per cent of airliners.
We expect this percentage of the ramp to approximately 90% by the end of Q2.
Consistent with expectations, we are seeing very positive trends in our turnaround time higher productivity per team member reduction in scrap and most importantly, a more consistent and superior product for our club members.
Second continued discipline around the deployment of marketing and selling dollars <unk>.
Putting a focus on leveraging our referrals aided awareness and highly efficient acquisition strategies, while also making strategic investments to drive brand awareness and consumer adoption in the international markets.
And lastly continue G&A cost discipline across the business.
G&A expenses were up $2 9 million sequentially due to one time higher stock based compensation.
Adjusting for this G&A expenses were down $6 million on a quarter over quarter basis.
The thing from our enterprise wide cost control initiatives.
Excluding depreciation and amortization stock based compensation and onetime items G&A expenses remain down $11 million or 15% versus Q1 of 2020.
We plan to remain vigilant on this front throughout 2021 and beyond as we continue to drive towards our long term target of 15 per cent of revenue and G&A spending.
As we have stated before we believe streamlining our cost profile for operational efficiencies will not only improve our margin profile, but more importantly provide of consistently superior customer experience that meets our expectations and uphold their brand promise.
Now turning to our results for the quarter.
Revenue for the quarter was $199 5 million, which is an 8% sequential improvement over Q4 and above the high end of the range of our long term targets.
It is also of the first quarter of year over year revenue growth since the start of the pandemic and a record revenue quarter for the company overall.
This was driven primarily by 106000 aligner shipments at an ASP of $1860.
On a sequential basis. This was the four five per cent improvement in shipments provide.
Providing some details on the other revenue items implicit price concessions were 7% of gross of line of revenue.
And we are expecting is to trend back to historical levels in Q2 at approximately 9% of revenue.
Although our total reserves related to revenue were consistent with prior periods, we maintain separate reserved for IPC and cancellations.
We analyze and rebalance of those reserves on a regular basis. The net effect in the current quarter was the lower IPC reserve amount offset by higher cancellations reserve.
Reserves and other adjustments, which includes impression kit revenue refunds and sales tax.
At 9% of grocery line of revenue.
And we're expecting similar performance in Q2.
Financing revenue, which is interest associated with their smile pay program came in at of approximately $11 million.
This is flat to Q4, and we expect similar performance in Q2.
Other revenue and adjustments, which includes net revenue related to retainers whitening and other ancillary products came in at a record $21 million driven primarily by the continued expansion of our oral care products and we expect similar performance in Q2.
Yeah.
Now turning the smile pay.
In Q1, 2021 small type of purchases came in at 61% of initial line of purchases.
This is slightly higher than Q4 and slightly below historical levels. However, overall small pay of continued to perform well and our delinquency rates in the quarter and since Q1 were flat the prior quarters.
Because we keep of credit card on file and have a low monthly payment, we expect smile pay to continue to perform well.
Credit card authorizations continue to perform well and we remain focused on improving operations and collection strategies.
Now turning to expenses of margins.
Gross margin for the quarter was 76%, representing a 225 basis points sequential improvement and of 640 basis point improvement versus Q1 2020.
This was supported by the increasing of liners produced using of second generation automated manufacturing.
We expect gross margin to continue to strengthen as volumes grow and we remain confident in our long term gross margin target of 85 per cent that we had previously provided.
Additionally, we continue to focus on streamlining our manufacturing facilities and our second generation of automation machines are producing approximately 70 per cent of the liners.
We expect that percentage to grow to approximately 90 per cent by the end of the second quarter.
And while still early these new capabilities have already begun to reduce our scrap and provide a more consistent and superior product.
This rollout has been a key component of our adjusted EBIT of positive results over the last three 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 97 million of 49 per cent of revenue in the quarter.
Compared to 72% of net revenue in Q1 2020.
Our efficient deployment of acquisition spend.
[noise] advancement and aided awareness and referral rates.
Access the highly efficient lead sources and the networks of small shops.
Positioned us the continue to perform well against our long term targets in quarters to come.
On small shops, we had 126 permanent locations as of quarter end.
The 156 pop up events over the course of the quarter for.
For a total of 282 location sites.
These pop up events are of critical component to supporting our demand function in 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 the aided awareness referrals and marketing.
As referenced earlier, our marketing and selling expenses in the quarter reflect significant investments in brand building to support our long term growth in international markets. The.
You'll recall that revenue from rest of world came out of approximately $16 seven per cent of total revenue for Q1.
This was supported by increasing acquisition spend of new markets and puts us over the top end of our long term target range.
As I mentioned earlier, we believe this is the right time to invest overseas, where we see 75 per cent of the total market opportunity and where the competitive landscape is highly fragmented.
That said, our long term target on sales and marketing remains intact and we've made great progress here.
Recall that in the same quarter, a year ago sales and marketing was 72 per cent of net revenue.
So we've made great progress over the past year and we expect this trend to continue.
General and administrative expenses were $81 million in Q1 compared to $78 million in Q4 2020.
G&A expenses were up 3 million sequentially, primarily driven by one time higher stock based compensation.
Adjusting for this G&A expenses were down $6 million on a quarter over quarter basis.
Excluding D&A stock based compensation and onetime items, G&A expenses remain down $11 million or 15% versus Q1 of 2020.
We plan to continue to stay vigilant with cost control throughout the remainder of the year and beyond and you can expect to see continued leverage from this line item.
Other expenses include interest expense of $17 5 million.
Mostly associated with borrowings on our indebtedness from our previous credit facility.
Which was paid off at the end of the quarter with proceeds from our new convertible debt.
We also had a onetime $47 $6 million loss on extinguishment of debt relating to the repayment of this prior credit facility.
This expansion includes the make whole amount paid in connection with the termination of the agreement.
The remaining unamortized costs and the unaccredited value of warrants issued in connection with the prior credit facility.
Additionally, we have store closure expense of $1 1 million associated with optimizing our store footprint and other expense of point of $90 million, primarily related to unrealized foreign exchange losses.
All of the above produces adjusted EBITDA positive for $9 million in the quarter with an all in net loss of $96 million.
This net loss includes the 48 million of loss associated with the retirement of the prior debt facility as noted a minute ago and as compared to a loss of $107 million in Q1 of 2020.
Breaking it out regionally adjusted EBIT came in at $11 6 million for the U S and Canada or 7% of net revenue.
The negative $6 7 million for the rest of the world, where we continue to overinvest in sales and marketing as mentioned earlier.
Moving to the balance sheet, we ended the first quarter with $434 5 million of cash and cash equivalents.
Cash from operations for the first quarter was negative $28 3 million.
Cash spent on investing for the first quarter was $23 million mainly.
Mainly associated with leasehold improvements capitalized labor and software and building our manufacturing automation.
Free cash flow for the first quarter to find the cash from operations of cash from investing was negative $51 million.
In closing as David mentioned, our performance in the first quarter reflects disciplined progress against their long term revenue and margin targets in support of our controlled growth plan I.
I would like to reiterate a few key points, which are consistent with prior quarters.
For all and as David alluded earlier, we continue to execute against the long term targets outlined at our controlled growth plan.
Q2, without the cyber attack, which caused delays and disruptions in certain systems of manufacturing operations, we expected revenue to be in line with our long term targets on a sequential basis.
The 5% to 7% over Q1 2021.
So while we are adjusting our revenue expectations for Q2 based on our best estimates of the possible impact.
Our long term revenue growth targets remain unchanged.
We do expect to feel the impact of the backlog for at least another month and potentially longer.
Well, we expect the full impact to be realized from the second quarter.
All of it it's still early to have a complete certainty as to how the impact of leads will ultimately convert.
As of today for Q2, we expect revenue to be approximately $195 million to $200 million.
We expect adjusted EBITDA to be approximately breakeven as we recover from the cyber attack.
We continue to lean in the marketing spend in international markets.
On cost of goods sold we're making good progress on manufacturing automation with our second Gen machines, producing approximately 70 per cent of our liners.
We plan to increase that percentage of significantly over the course of the year and we expect to be at approximately 90% by the end of Q2.
As we've often stated we believe streamlining our cost profile for operational efficiencies will not only improve our margin profile, but more importantly will provide a consistently superior customer experience that meets their expectations and uphold our brand promise.
On sales and marketing, you'll recall that for small shops function primarily of fulfillment centers.
A lot of sources of demand generation.
As of quarter end, we had 126 permanent shops open and held over 156 pop up events over the course of the quarter for a total of 282 location sites.
We continue to see our shops are performing well with higher utilization, which is a key part of meeting our long term financial targets.
Additionally, we have seen great success with our strategy of pop up locations, which allows us to fulfill demand without the addition of fixed locations and the associated costs.
On liquidity, we are well positioned with approximately $430 million of cash in our balance sheet. This gives us ample liquidity to support our growth initiatives, while also investing in research and development.
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.
Our mantra remains to drive controlled and profitable growth.
The changes we have made on customer service and continue to make are working.
This is evidenced by the strengthening of our brand perception of credibility, which is now within a few percentage points for some bids won as David mentioned earlier.
We remain the low cost provider with 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 in the professional channel international growth and of penetrating new demographics to drive control growth.
While also executing against the profitability goals.
Lastly, we continue to see favorable industry dynamics with broader acceptance of the telehealth and specifically tell of dentistry.
The minimal penetration against the total addressable market.
And clear liners, gaining share in the overall industry.
All of these position us well for long term success.
We look forward to continuing to update you on progress in the days and weeks to come.
Thanks for you to everyone for joining today with that I'll turn the call back over to the operator for Q&A.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask the question. Please press star one on your telephone keypad. The confirmation tone will indicate your line of my question for you you May press star two if you'd like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star.
Please limit to one question and one follow up question.
Our first question is from Jon Block with Stifel. Please proceed with your question.
Thanks, guys good afternoon.
Kind of I guess the first question for you is just when we think about the 5% to 7% sequential revenue growth.
Intact as you said should we apply that to you know called the depressed <unk> 'twenty, one base or was it a little bit of higher in the near term and in case you recapture of some of the noise from the cyber security issues I'm just trying to figure out if it's more you know higher than the five to seven over the next couple of quarters.
For us again, because of the depressed base or do we run the five to seven off of this <unk> number and then I've just got a follow up.
Yeah sounds good thanks, John So yeah, David I'll, I'll kick that off and the jump in as well. So look our long term hasnt changed a 5% to 7% sequential growth is still the long term target and that's driven by a 20 of 30% of annualized growth rate on a year over year basis, I think to the answer that John you really got to look at leads.
And so what happens is lead to who didn't convert within Q2, they're not necessarily lost forever right. We have millions of leads in our pool, who have not converted from prior periods and this group debt ultimately didn't convert in the second quarter is going to go into that pool. So we're going to continue to retarget them and try to get them to convert over time, but it's very difficult.
<unk> to predict when and if they will because what happens is if we don't give the treatment plan on day, one, which we typically do the.
Likelihood the ultimately convert drops off significantly and as time goes on.
You know that that pool gets gets incredibly lower than if we were to get them of planning on day. One so it's difficult to know if they do convert the dish.
And to that there's also a flywheel effect that happens from referrals rights of orders that would come in within the second quarter would have would have impacted the third quarter and also of the fourth quarter and just as a reminder, referrals are typically about 20% of our overall orders within a typical quarter, so a pretty meaningful.
Portion as well you know and in lieu of that we would have to spend into that from a marketing perspective to recapture some of those referrals as well and that's not something that we're we're planning on doing so you know I think if you look at our history look at Q4 as an example of our volume growth in Q4 was over 9% right at our target is 5% to seven.
Percent Inc.
Q1, our volume growth was for and a half so pretty you're pretty close to that five to seven per cent that we want to be with him and so we certainly have the potential to be above that five to seven but it's very difficult to predict if and when that would happen. So you know as I think about the rest of the year beyond Q2, and looking at Q3 and Q4 for now I would expect the the.
To be 5% to 7% of off of that Q2 a day.
It's about how we're planning our spending our marketing dollars because we're not going to continue to spend above and beyond where we want it to be in terms of marketing dollars, but we do have the ability to be slightly higher of some of these leads do come in you know as as demonstrated in prior quarters, but most importantly, we're not going to jeopardize the customer experience, which we've worked so hard on over the past several quarters to chase.
And that's something that we're going to keep a very close eye on.
Okay great.
For color there. Thank you and the second one sort of two part one very helpful information on the break out between the U S and internationally EBITDA of I guess, you know caller, David when would you expect the turned the corner internationally on EBITDA and David If you don't mind I know I'm going to get this question of Tomorrow. So you gave a lot of helpful statistics on the consumer experience and what's improving but yet the mer for ways for the year.
P. S scores I don't think of our improving or actually the the worsening I think referral of move backwards from 'twenty to 2020 one per cent and I think the the NPS score has actually been down every quarter since the IPO of so can you just sort of you know Rex.
Reconcile if you watch some of the improvements that you specifically cited versus an N. B, yes, maybe it's a lagging indicator of that that'd be very helpful. Thanks, guys.
Yeah I'll take the latter part of that question first column and you can answer the other part so yeah M. P. S is a lagging indicator and we measure it two different places John we measure it from 21 days in perhaps the to get the airliners.
Change out their trays of at least once so it's 21 days and we measure it and then we measure it at the end of treatment for the six months later all.
All of the metrics that we talked about today on the call.
Some of our sentiment, which is at an all time high negative sentiment, which is down 45% instead of an all time low some of these other statistics on credibility that we talked about were within a few percentage points of the line and trusted brand.
Orthodontist and doctors and I Trust in the network all of these things like huge improvement over last year, which we were up 20 to 25 percentage points in one year's time that was a big concerted effort over the last year since we announced the Q4 after two for 2019 the strategy around providing the best possible experience.
For our customers totally paying off the the referral rates are a lot of a lot of that's a function of how much of how much we spend of marketing, but 'twenty. One of 23 per cent. We don't see of no noticeable difference there the NPS scores as of as a as a early indicator on the 21 day is up significantly we're not reporting on the number right now, but we do it as a blended overall.
All of that 43, 42%, but if things hold at the end of treatment.
And all of these other consumer sentiment higher numbers hold youre going to start to see that overall NPS scores start to shoot up and still very high for health care. If you look at categories.
We're not satisfied we want to see that get into the sixty's, but we are very pleased with all the benefits and which ultimately is going to do is going it is going to lower CAC right. If our N. P. S starts to go up and that referral rates starts to go up and.
And we stay on track here as a credible source for the straightening teeth were going to start to see our cat go down and in our EBITDA and all of the things that we're talking about here come to fruition.
Yeah.
The second part of their John Yeah. So just on the second part there in terms of international EBITDA. The over it. It's obviously very difficult to predict in total and that's just because of it certainly is a function of growth right. So look as we think about international growth I would expect growth from an international market to continue to grow faster as.
As a percentage than the U S and Canada.
Just given the overall the market outside of U S and Canada is about 75 per cent of the total market opportunity it.
It represents about 40 to 50 per cent of case starts globally, but it's only it's only about 17% of our business as we mentioned that as of the first quarter. So you know given that growth overall within that five to seven per cent target is completely fungible. We think it's the right time now to continue to focus and grow our international footprint, which in the long term is really gonna overall support.
The longer term targets that we've outlined it and with that we continue to overinvest to build aided awareness and to build the brand and in these new markets with which long term is really going to drive that growth. So as we go into these markets. We generally operate them for approximate one approximately 24 months, where they run out of loss in turn profitable after the.
So if you look at our most mature markets like the U K, which we launched around this time a couple of years back for those markets are starting to turn profitable offset by newer markets, where we're investing heavily in bringing didn't just launching and so.
That's how I would think about sort of international EBITDA contribution for the foreseeable future.
Perfect. Thanks, guys.
Yep.
Thank you. Our next question is from Dylan Carden with William Blair. Please proceed with your question.
Thank you very much.
Just curious if you can speak to whether or not you're actually referring patients to the doctor channel.
And then maybe if you can just speak to growth in that channel I know, it's Nathan the maybe sort of on the same chair of sequential basis, and then kind of zooming out more broadly.
Where I can imagine that the sort of smile shop production.
Is the drag on the business, maybe where you're kind of capturing some of that business across the rest of the model. Thanks.
Thanks.
Yeah, So I'll take some of that kind of and you can finish off on the small shop network. So.
There's multiple legs to the stool here on our what we call our partner network, There's office direct.
The office direct is the partner that takes on an and offers smile direct club to their patients within their office, so its a new offering.
At the same price point 1950, they of the smile pay it basically do a scan they do our exam of of the Pea.
So all of our hygiene and then once that the.
We closed the sale of that patient goes into our telehealth platform and our telehealth state licensed orthodontists and dentists take care of that customer patients always free to go back to the dentist or the the dentist that they started with but part of what we're offering to the Denison that off the strike model is the savings of chair time, because two of our telehealth platform we can.
The ship all of their liners of once we have 20 for southern access to our dental team and we can take care of that customer.
Of the thing that we are doing to help out. These these G piece of North always is that we are taking our customers that come to our site and then we're scheduling them into those partner network. So that's increased traffic for them was a new hygiene patients new patients that are looking for dental homes. There's all kinds of studies that we're putting together as to how the convert those patients since of new patients for themselves.
<unk>, which as you know a lot of these practices grow organically low single digits.
The.
Through marriages or our children, but they're not out there marketing of blitzing for for new patient acquisition. So the smile direct club of offers that to them and they're very excited about debt. We also in the third leg of that because we actually are opening from small shops, where we operate the the operatory right inside that partner networks office with our smile guidance.
And what that's why they're excited about that as hey, they have they have some added space. They may of 7567, Operatory and that all full so well, we'll take a couple of the base and then once again as these customers come in to get scanned. We then send them over for of cleaning or introduce them to the the dental home as a new patients. So very excited about all of it.
It is new but we think it's gonna be a meaningful part of our revenue coming into the back half of the year here and as of 2022 of our team is doing an excellent job of building up the outside sales team and the inside sales team. The leads are coming in.
The two as far as I know, we haven't had a hard no yet we've got large dsos and get into the individual GP practices of smaller dsos, but I think the G. P looks at it as a way to participate in the teeth straightening without a lot of the chair time, the chair of time for what they do best.
And let us take care of of you know.
Treating those customers who are the telehealth platform.
Great Yeah, and then just on on shops as well just to your last question. So you know overall I would say it's been a net positive for and you can see that in the certainly within the P&L metrics that we've outlined but if you look at the sheer numbers.
Including pop up events, we had 282 location sites within the quarter. That's up from 218 are within a within Q4. So we are continuing to see nice growth. There the growth that we're seeing is largely coming from pop up events right and what those events do are enable us to pull out demand.
From locations that we don't have a permanent location and so if you think about it from a demand perspective, we're completely agnostic obviously in terms of how consumers start their journey, which is why the omnichannel presence of so important so we offer of impression kits shops be of permanent or pop ups and also of the partner network as well and if you look at how business is coming.
To us from from those different paths, we had 58 per cent of the business in Q1 that was coming from kits. That's down from approximately 60 per cent in Q3 and Q4. If you look at more recent months like March it was closer to 54 per cent. So we are seeing shops continue to trend back. The 50 50, and we certainly still expect over time that shops.
Will be of more dominant player. If you are comparing that to the overall.
Impression kits versus shops, but we also expect the partner network as well to continue the continued to ramp up over time. So I think the most important takeaway is really just the omnichannel approach that we've taken the flexibility of that model.
The one pull out the man, but to do it in a in a cost for a cost effective way that's in line with the longer term targets that we've outlined.
Understood. Thank you very much if I could just sneak one maybe smaller one in.
The straighter smile for life kind of a compelling idea here just sort of from both sides of the P&L, how youre thinking about cost of debt you know, there's sort of higher accruals and then what that might be able to do for demand.
Customer satisfaction that'd be helpful. Thanks.
Yeah, so from a customer side and kind of you can speak to the numbers are and what's being recorded but from a customers. You know we just launched this lifetime of small guaranty and we're pretty much doing it any way from a customer satisfaction standpoint, if the customer got out of sync and wasn't wearing the retainers.
As often as they should of and the they called US three or four months. After treatment. We were going ahead and offering what we call of touch up which has come back and get scan or we'll send you out of kit and we see a little bit of shifting or maybe their GAAP started open up and we would we would set them up with the new treatment usually they are two to three months in duration very short.
The sent out new of liners.
And we said Hey, we're going to we're going to do this for our members anyways and what typically happens the reason that that they get out of compliance or they don't worry of the retainers either gone order of retainer.
Zone, where the retainers, while they sleep at night and so to get their compliance what we're saying is as long as you buy two retainers of year from US every six months. The they're made so if the worm every night, they're going to wear out of about six months.
And so as long as you know the $99, it's not a huge expense, but for $99 you're going to maintain that smile and if for any reason your T shift they're not happy with them, we're going to give you at least one free touch up.
So therefore, you don't have to worry about well, let me say a big chunk of our customers of the exact number but it's in the probably 30 to 40 per cent range of our customers had worn some type of appliance the straighten your teeth prior to coming to us whether they were teenagers wearing braces, they forgot to where the retainers a lot of them of our adult patients that after treatment.
The ore the orthodontist or Dennis didn't push hard enough the need for where are we.
<unk> and then you know very quickly the all of the center T shift. So I think our customers. We have we have good attachment rates on our retainers and I think of it can even make it more so and we'd love for them all to stay in compliance sort of the retainers every six months and of for any reason, they're unhappy we're gonna go ahead and take care of it for life.
Yeah, and then just on the on the P&L side, you know as of <unk>.
Today, we're still pretty early in the rollout of this but not expecting any material impact from the P&L perspective, you know the the overall as David pointed out our purchasing two retainers per year approximately is going to offset the cost of goods sold. The if you know sort of every member of ultimately where to get that touch of per year, which we don't think will happen. So yes.
B of small incremental positive, but as of now we're certainly not modeling in anything material from an upside perspective as we sit here today, yes, I think what it will do certainly has helped on the front end with with conversion and the fact that we're standing by and guarantee.
The smile for life also with our club member satisfaction as well.
Hum.
By giving this offering but also improving the rate of which people are compliant Ah do their check ins.
And stay in touch with their doctor throughout treatment as well, which we think will help with overall net promoter score and club member satisfaction.
Sure.
Thanks, a lot I appreciate it.
Yeah.
Thank you. Our next question is from Glen Santangelo with Guggenheim. Please proceed with your question.
Oh, yeah. Thanks for taking my questions all day, but I just had two quick questions for you.
I'm kind of curious on the cyber security issues of dig in a little bit more I mean, I guess in your own much more of an expert today than you were a couple of months ago and I'm I'm kind of curious looking back do you think the company could of did anything differently. For example, the wish you invested more heavily in security and how.
And how does the investors get comfortable that something like this won't happen again and that it was just the one time sort of issue where were STC of bad luck.
Yeah. It's a good question you know look we were always aware of it we have we of our insurance policy for it and we've been building out our what we call. Our engineering security team. We spent millions of dollars on it you know we're a HIPAA company were in health care. So we have to take this very seriously.
I don't know if anybody can do anything as you know the big news over the last couple of days has been what's happened here out on the east coast with the fuel pipeline for you've heard about that recently the thing that happens.
Two days ago. So every company is susceptible we are we of our team members and our I T team of work for major Fortune 500 companies that's happened to multiple times not just once.
We take these things very seriously I think our team did a really good job isolating it when it first happened.
It was one of the larger a ransomware networks outside of the United States that the hit these public companies.
They shut it down pretty quickly and then they came to us for so guys good for us.
To secure the network for secured data, we're going to have to shut everything down.
We have hundreds of hundreds of servers and clean them out of here and then we'll we'll rebuild those servers. We gave obviously the green light.
We every single sort of was shut down at touch manufacturing impression kit intake.
Order shipments out of it did not affect our website.
So that was weird because that wasn't tie back into our internal networks. So we were able to keep the website going customers can still come on line, but what if there was the delayed for several weeks treatment planning.
The impression intake, let customers know what they have to do another impression with the impression kits were accepted those kinds of things manufacturing nothing went out the door pretty much shut down our manufacturing, Tennessee for a of a week.
I think the overall.
The download and we we presented the download to our audit Committee and we're taking this very seriously and anticipating other it could happen even though they spent a lot of time and they've got nothing they've got no ransom.
They didn't lock up our systems, but what we are going to do next time as you know you can't prevent every single Incent there'll be something else for they'll come up down the road, possibly we're obviously learning from what has happened is the rebuild of the systems that's the.
We're we're building now and going to automate it took a long time too long too.
To rebuild those systems from scratch once they went down and to reboot them. They were it was all the manual and so we're automating that process for scripting. So if something like this happen again, we shouldn't we shut down all of our systems, we get the threat out of our system and then within a matter of of day instead of a week or longer we can get those systems up and running for.
For automation.
Rather than a manual rebuilt so that that was probably the biggest learning that we got from this we've hired outside consultants.
<unk> was the big partner in this from from.
From what they're telling us that we did the really unbelievable job some of these.
The companies are down for weeks and so we were very pleased with the reports that we got from our outside consultants on this.
Okay. That's that's helpful and maybe just ask the follow up David you know given the investments that you've made in manufacturing automation and operations and you gave some statistics on in your prepared remarks, and and also some statistics around the the improvement and the member experience. What are you looking for before maybe moving from this.
<unk> growth strategy to one where you really try to maximize you know top line growth because it seems like a lot of the pieces are kind of coming together, but I you know earlier in your prepared remarks, you talked about that 20% to 30% five year of sort of controlled growth strategy at some point, we inflect in the more aggressive direction.
Or no.
Yeah, I mean, right now I would say the answer is we're we're sticking we feel really good about running this business at this control of the growth. We saw what it was like we were growing 50% to 70% from Q4.
And so you know there's so many more components Glenn to the extent just the automation of manufacturing, which is really going well you know are the the number of finishes or down the comfort since that is embedded in this new.
The design is really helping but theres a simple like like I talked about on the on the on the earnings call that in my prepared remarks that we've heard elven Stokes who.
There's the whole contact center side of this too and making sure that you're you're.
No there where customers want to engage with you 24, seven getting back to customers on time.
Have any information that's needed we're doing a whole transition with sales force right now in the back end, we're fairly young company, we grow very fast.
And so we're building all of this stuff now what I can tell you you know at some point.
As all of these things start coming to fruition, you know better treatment planning software that we're working on in Costa Rica, all of the backend for customer care and the contact center. All of these lots of innovation with a huge R&D and innovation team. That's working on stuff right. Now is all of this comes together and typically the good news is as you start to implement the stuff like Gen. Two not only is there a.
They are a great customer benefit from the services they get but then there's also a P&L benefit because its cost less.
The processes are more automated customer experiences better so at some point as we as we bring it all together we don't compromise the customer experience. We may give guidance that we're gonna start to inch that up I don't see it in the foreseeable future, but its certainly possible as long as we can get the kind of service that we want to give our customers because that net debt rift.
For all right. The M. P S score of Super important in the.
The consideration of our P&L model and our CAC.
And so if the compromise that we're gonna be back to where we were in Q4 of 2019.
Okay. Thank you Kelly.
Do you want to add anything to that.
No I think you said it very well, it's all of its all about.
And we have we have our internal metrics as the.
And what might those metrics look like and we've said this in the past where if our net promoter score was closer to a 65.
And that's something that we'll evaluate and say do we have the you know the legs of the stool to ultimately grow faster than what we've outlined but.
Certainly not within the foreseeable future, but not off the table forever.
Yeah. Okay. Thank you approaching 1 billion also a portion of the billion dollar revenue company very shortly or.
Growing 20 of 30% kind of a very complex business.
I'm proud of that I think we're doing a good job.
Like we said, it's not like there's someone chasing some of it over our shoulder here that we've got we're not.
The race against so you know there's lots of customers out there that one of our services I want to give it to them in the best possible like that we can and if that means going little bit slower them of a little slower.
Thanks for that.
Thank you.
Thank you. Our next question is from Kevin Caliendo with UBS. Please proceed with your question.
Thanks, Thanks for taking my call.
So I wanted to.
Ask you about the E. S. P is $18 60 was much higher than we had originally modeled I was wondering what drove that in this quarter. If there was anything in particular of the call out and it is this a new run rate, we should be thinking about any color around the S piece would be really helpful.
Yeah, I can take that one Kevin so yeah.
Yes, great quarter for Asp's overall, Oh, it's really of the impact of a few different things for one it was the first full quarter of the pricing change that we rolled out within Q4, so we rolled out within Q4, but it wasn't across all markets and it wasn't.
At for within the U S market in particular, so that was a big driver within there we've had of continual focus really starting with the in Q3 of last year. The continued limiting discounts and I'm sure if you.
You are going through the process, you'll see it through our CRM streams, where we're making a very active effort to continue the limit discounting in and we saw that continue to have an impact on asps as well within the quarter and then just lastly R. R. O U S pricing. So I think about sort of outside of U S and Canada in certain markets, we are priced higher than the the U S.
S market in particular, and we also saw a small benefit from currency conversion associated with that back in the U S dollars from O U S dollars, so really the three of those together.
In terms of of just overall mix and where I would expect it to be I would expect it to be fairly flat for that $80 60, as we think about the.
The near term quarters here.
Okay. That's that's helpful and.
Just looking at the at the U S market I mean, obviously, the second quarter Youre going to have an incredibly easy comp everywhere.
If we were to if we were to look back for say 2019, and then sort of look at your case volume in the U S.
Where do we sit and where would you when would you expect there to be sort of meaningful case growth.
Relative to 2019, I mean, I understand your business went through a huge yeah, Tim all during the COVID-19 and everything but if.
We use that baseline how should we think about about that kind of that kind of growth.
Yeah, I would think about it very consistent with what we've been saying and outlining since Q4 in 2019. So it's it's all about the control of them profitable growth strategy and it focuses on the the club member experience at the center of that and so that that strategy is really more about of sequential target and again that that target is more on revenue from of five.
To seven per cent perspective, it's not necessarily on volume, but with flat pricing, obviously that gets back to the.
You know, Paul you're being within that 5% to 7%. So that's how I would think about it sequentially quarter over quarter, we expect to be within that 5% to seven per cent target less so on how that compares to 2019 or even.
You know the early parts of of 2020, where we were spending over 70% of revenue on sales and marketing.
Just spent 49% are so.
So much more cost effective but also significantly ramping up in newer markets, which is driving that above the the longer term target of 40% to 45%. So.
It's really about executing within that strategy of controlled profitable growth.
Alright, that's helpful. I guess I just one quick follow up I mean, if I think about the growth.
U S. P. S. At 18, 60, roughly that's going to be relatively flat for the year over 'twenty 'twenty, that's sort of half the five to seven is three 5% sort of.
Growth.
So I'm just trying to in the international you see what I'm trying to get at I mean really one of the big overhangs of spend in the U S market and trying to figure out how the U S market is growing.
And.
I wish you could just provide us a little bit more detail around around the expectations for the U S growth, even if you break that out sequentially or not you know how much of that would be U S versus international.
Yeah, I think more and more importantly, the the growth is all fungible right. So to us whether it's coming from the U S or or sort of rest of world markets, where we're targeting a five to seven per cent and we have the the levers to be able to drive within there based on the overall efficiency of sales and marketing and where we're seeing that.
With the coming from I would say all else being equal you know in the near term, we would prefer more of that growth to come from the rest of the world because of the nuances of those markets. So if you look at the U S. We've got a great head start here in the U S. We have over invested the gain market share. Yes, we've talked about just a few short years.
We are the low cost provider and we've got the best unit economics with that and as we look at the competitive landscape. We don't feel like any one of chasing us within that total dentistry space and so we think now is the right time as we look at the international markets, which are highly fragmented.
We see a lot of of a lot of the similar dynamics, but we don't have the brand awareness that we have here in the U S and so we're spending heavily to the game that footprint, which we think long term.
It's really going to support that growth and so we're going to continue to invest in that I would expect the international markets to grow faster.
In the U S markets as you look at sort of the 5% to 7% sequential targets, but if for some reason, it's taking longer and conversion curves you don't take longer for people or club members to ultimately convert.
Then we do have that lever to look back at the core U S market and spend more here as well so.
I would think about it is fungible with the preference for for rest of world assuming they convert like we expected.
That's great. Thanks, so much that's really helpful.
Thank you. Our next question is from Robbie Marcus with Jpmorgan. Please proceed with your question.
Yeah. Thanks for taking the question two for me maybe first Kyle you know back to the first question on the five 7% sequential growth and does that.
Is that now off the lower second quarter. So I just want to make sure of versus you know the prior guidance of five 7% sequentially and and now off of the lower base in second quarter, it's essentially taking.
2021 revenues down by some like what 10 $15 million versus prior expectations. So just want to make sure.
That's the right way to think about it and the resulting second half our growth.
Yeah. So you know I think I'll, just sort of reiterate what I had said before.
In my sort of summer exception of of closing that out you know what.
Sure.
Think about spending marketing dollars in the back half of the year.
We're spending those dollars to execute against the 5% to 7% sequential growth. So that's off of the the $1 95 to 200 debt. We expect the close out Q2 with but there is potential upside to that and you saw that as an example in Q4, we were 9% sequential on a quarter over quarter basis as as leads came in better than we expect it to and so.
There is the potential where the leads that did not convert within the second quarter could mature.
Look at Q3, and as you look at Q4, and we have the ability to be slightly slightly ahead of that so obviously very very difficult to predict if and when that will happen just based on the nature of those conversion curves, but that that ability is there.
If if they come in.
Within that time period, as I said, just sort of closing that out the most important thing we won't do is jeopardized sort of what we're seeing what the club member experience and that includes our internal metrics on things like how long, it's taking us to ship of liners, but also a consumer sentiment metrics as well and something that we track very closely on line. So we'll keep a close eye on those in the event that the believes.
Are coming getting sort of better than expected.
But in lieu of bad I would expect us to be at that 5% to 7% based on where we close out Q2.
Got it David day.
Anyway, sorry go ahead, I was gonna say, David in the anything you'd add to that.
Yeah, I was on mute sorry no.
I think we said earlier, there's also of that call. It the 15 million that we've identified the was affected.
Based on this long cycle because of the cyber attack those are sources of referrals as well and even those that didn't cancel.
Not that happy with US right now because it took a little bit longer than what we had told customers remember when they leave that.
That scan shop.
Shop, we're telling them within 72 hours, you're going to of your treatment plan, we're going to get your liners order.
And then the phone starts ringing you know it's been five days. It's been seven day has been 10 day, so forget about the ones that cancelled and didn't convert you still have some customers out there that maybe.
They give us some lower marks for the short period of time, when we're back on track right now completely as far as Timeframes for the treatment planning were sort of behind on impression kits.
But manufacturing is up to snuff. So I think theres net effect of Robbie if you say well gosh, you should be able to make that up with the the way to make it up if youre not going to make it up as part of your your mixes referrals and that right and the overall sales and marketing part of that mixes referrals and you got to spend more in marketing.
And right now I don't think of I don't know if you want to do that I think we want to keep marketing spend where it is and see what happens I think it may not be second quarter is probably not going be the maybe we pick it up in the third and fourth well well give you guidance at the end of the quarters here of the others.
Customers are coming along.
Got it and then maybe just a follow up on the the last question I saw in the Q that you filed today that 83, 3% of revenues came from North America.
You know it does look like that that's the lagging a bit more than than we were thinking here. So you know maybe just.
To follow up and see you know any trends you can talk about in North America coming out of first quarter into the second quarter here and how we should think about the progression of North America versus the the better incremental growth you're seeing outside the U S would be really helpful. Thanks.
Yeah.
Yeah, so that percentage.
Talked about it on the the yearend call last quarter was about 13% for the full year of 2020, we did see a sequential growth obviously that that includes a total revenue within there. So that's normally a line of revenue, but it's also financing revenue and it's other revenue associated with retainers and.
Retail products as well so that percentage is is pretty flat on a quarter over quarter basis, as you think about that 83% approximately.
But again I think it goes back to what.
What I had mentioned to the Kevin is that you know as we think about.
The overall spend and where we're expecting that growth to come from you know we look at it first and foremost as executing against that 5% to 7% a second to that one of our view of growth is generally fungible and with a preference we prefer to come from international markets, but the conversion curve. There just given the the nature of sort of of our aided awareness of <unk>.
Rand awareness is still maturing and so it's a little bit more difficult to predict how those orders ultimately convert in these newer markets and so we have the lever with the core U S business and the growth engine there are to be able to spend into that on a quarter to quarter basis, if needed to hit that sort of 5% to 7%, but generally I would expect a R.
The rest of the world markets to grow faster than the U S market as we continue to overinvest, there to gain market share and in the foreseeable quarters here.
Great. Thanks, a lot.
Okay.
Thank you. Our next question is from Erin Wright with credit Credit Suisse. Please proceed with your question.
Great. Thanks.
On the international side I, just thinking about your omni channel approach and the various channel strategies that you have I guess can you can.
Can you speak to what strategies do you plan to deploy our current near the point in international markets, What works well what doesn't work well relative to the U S markets of whether it's doctor directed partnerships are traditional D. T. The approach I think you had originally said that you would enter these markets with an impression kit take the strategy and then move on from there, but where do you stand on.
On that front in various market.
Yeah, So I can take them on the household.
The much they're mirroring the U S. There are certain countries that we don't have impression kits, just where the classify them as medical devices very few for the most part we opened up small shops, we are doing what we call clinical these partners, where we're open up the small shops inside dental offices will.
Oh I run it with our small guides.
And then try to bring on those dental partners is what we call office direct whether then also offering smile direct club. So this new model that we've taken on here what we call partner networks is definitely are in play in all countries. The U K, Germany, where the source.
And the partners today, Spain.
All of our countries, where we're going with that model. We think it's it's a it's another on ramp the customer wants for those that want to see of Dennis and instead of them in.
In the dental share so it's pretty much the same.
Probably a little less heavy on small shops and more on what we call clinical leases, we can get them open up quicker.
The rent factors of little bit less than going into a full retail environments. So.
We still consider those as we look at new markets.
Okay, and then can you speak to the team demographic and what the initiatives are there and how much volume is attributable to take team today, I mean, how big could that realistically be for Ya items.
Yeah. So today, it's still about 10 per cent of our business in total.
If you look at the market. It's about 75 per cent of total case starts so clearly of a massive opportunity that were.
Really in the early stages of of going after their I think if you look at.
The team product that we launched last summer continues to evolve and it's part of our longer term growth strategy that we've outlined and that's a core component.
Component of that growth strategy, you know I think when we launched that product that it really if you think about it from the parent perspective, we needed the brand credibility.
That we have today and continue to improve to be able to address a large portion of that market and I think we have that today and so that was a good time to launch it.
As you think about some of the more complex cases with teens, that's something that we continue to evolve. So mixed dentition is of Great example.
Of of a product that is currently in development with our treatment planning and we're expecting to launch in the future of at some point, but today. If you look at more mature teams. We can already address a large percentage of of those cases today.
With with the existing treatment planning our platforms that we have and it's a core component to our longer term growth strategy as I said, but it's in the very early stages of continuing to to ramp that platform in that product.
David anything you'd add to that.
No. It's a huge opportunity for us of our three big initiatives I think that's the one that's going to take the longest.
The partner network, we're already seeing gains in that international obviously with 13 countries open up in a couple of more coming on soon.
We're going to get there, it's a huge market for us and I think we're doing all the right things right now with improved treatment planning like you said the credibility that our doctors have with the customer Great report, it's actually in the in the Investor deck, you can see some excerpts from it and one of the slides take a look at that.
Hum.
It's something that we haven't we initially the not go after but we have the the product offering we have the credibility and we're gonna we're gonna start improving.
Our teen offering for sure.
Okay, great. Thank you.
Thank you.
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