Q3 2021 SmileDirectClub Inc Earnings Call
Greetings and welcome to the Smile direct club third quarter 2021 earnings call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
I'll now turn the conference over to your host Tripp Sullivan of Investor Relations. Thank you you may begin.
Thank you operator, and good afternoon before we begin let me remind you that this conference call include forward looking statements.
For additional information on Smile direct club, please refer to the company's SEC filings, including the risk factors described there and you should not rely on our forward looking statements as predictions of future events.
All forward looking statements that we make on this call.
Just on assumptions and beliefs as of today.
We refer you to our Q3 2021 earnings presentation.
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. We will also have a discussion of certain non-GAAP financial measures, including adjusted EBITDA and free cash flow.
Information required by regulation G. The exchange Act with respect to such non-GAAP financial measures is included in the presentation slides for this call, which can be obtained on our website.
We also refer you to this presentation for a reconciliation of certain non-GAAP financial measures to the appropriate GAAP measures.
Joined on the call today by Chief Executive Officer, and Chairman David Katzman.
Chief Financial Officer, I will let me now turn the call over to David.
Thanks, Tripp and good afternoon, everyone. Thank you for joining us today.
Smile direct club was founded seven years ago with a mission to democratize access to a smile, each and every person loves and deserves.
Making it affordable and convenient for everyone.
Each decision we've made since then has been to support and expand the submission.
Which will enable us to achieve our long term growth potential.
That's the same approach, we're taking with every company that I have found an inlet.
I will get into why that matters in a moment, but I first want to highlight what these decisions that S. T. C have led to so far.
We've had 30 patents issued for innovations that enable the treatment of more complex cases automated manufacturing.
New types of a liners small scanning technologies.
Our proprietary telehealth platform oral care products and a variety of other areas to continue our disruption.
Most recent patent was granted for our Smile bus concept and there are many more pending and in the pipeline in the U S and abroad various technologies relating to data capture.
Three D image capture treatment planning intra oral scanning monitoring manufacturing and consumer products.
We've enabled treatment for over one and a half million customers with affordable and convenient teeth straightening.
We built the only vertically integrated med tech platform for straightening teeth at scale.
Enabling us to provide an unparalleled customer experience.
This includes a state of the art FDA certified and registered facility that is home to one of the largest fleets of three D printers, and one of the largest clear aligner manufacturers in the U S.
We created a dental partner network and have 735 global practices that are alive or pending training.
We created oral care products that are now available at over 12900 retail stores nationwide and serve as a highly efficient lead source and brand building opportunity.
Our ancillary product portfolio is available through every retail channel, putting drug stores grocery stores club stores mass retailers and through ecommerce.
We have entered 14 countries and counting.
That's a long list, but here's why those achievements and differential assets matter.
The global Orthodontics market is large and underserved in the total addressable market is expanding.
I mean, the U S and rest of World. There are approximately 500 million people for whom clear liners would be inappropriate means to treat malocclusion and.
And who can afford treatment using our smile pay program.
Within that there are approximately 15 million worldwide orthodontic case starts annually.
And the penetration of clear liners within that is still less than half.
It's a tremendous global opportunity.
It's been my direct experience in building businesses like ours that you'd need these unique assets and innovation to disrupt you.
You need the agility and flexibility to adjust to the needs of the customer and marketplace.
And you need to invest in multiple channels of customer acquisition.
You also need to never lose sight of the bigger prize, which is building a sustainable brand that is always top of mind with consumers as demonstrated through both aided and unaided awareness to efficiently and profitably capture their attention.
Yeah.
We have done all of this in the face of consistent diversity over the past six plus years.
It's only natural that those who have benefited from traditional teeth straightening with high prices and three time, Mark ups would try to prevent challengers and disruptors such a smile direct club from participating in this market opportunity.
For example, we've.
We've seen tele dentistry intentionally misrepresented as DIY or do it yourself.
Dental boards and trade associations have engaged in conduct to try to prevent tele dentistry.
Other market participants have engaged in marketing practices and have made statements that the FTC and the national advertising Division of the better business Bureau, they've had to investigate anchor tail.
We anticipated the pushback and we've responded.
The regulatory and legal wins to allow customer access to the convenience and affordability of tele dentistry had been numerous and in many cases propelled the rest of the industry forward.
We expect more of these wins to come.
We've also been able to convert enjoying many of the leading industry organizations such as the National Dental Association. The American Telemedicine Association American Association for dental boards women in DSO and many others.
Even the American Academy of clearer liners has turned from actively campaigning against us asking us to become a member of the organization.
As demonstrated by the recent retraction.
As I said earlier, we've been entirely incremental to the orthodontic space with our $1 5 million cases and counting.
These are customers that historically could not afford the five to $8000 price tag for airliners.
From day, one these customers have been a massive tailwind to our business in the Americas and rest of world.
And this is a customer base, we will continue to support and grow with over time.
That said as 2021 has progressed and as we discussed last quarter. Our core demographic has been challenged by the current macroeconomic environment.
As our Q3 results and revised outlook would indicate our core demographic continues to be impacted and we expect this to remain throughout Q4.
That said, we still believe this macro impact is transitory and we continue to make changes to minimize the near term impact.
Just one or multiple campaigns, we are launching this week as our deferred monthly payments till 2022 with smelting.
We tested this campaign during holiday time, 2019, and will now be rolling it out in November.
This campaign and alerts we plan to launch in Q4 will help ease the burden of record inflation on our customers.
Last quarter, we outlined some of the headwinds our core demographic is facing.
The data backed US up then and does so now with.
But third party economic research has shown is that a combination of factors are likely contributing to the headwinds constraining discretionary spending for our core demographic.
As a reminder, our core customer has a median household income of $68000.
The first impact is inflation.
The increased cost of non discretionary goods and services is likely eliminating the ability to spend on discretionary goods and services.
This inflationary headwind appears to have accelerated since the Q2 earnings release.
Inflation averaged six 1% in Q3 for the 50 to $69000 income demographic versus an increase of five 8% Q2.
This increase was larger relative to other higher income demographics, such as those served by our largest competitor.
Second as preferences, the reopening of the economy has been more focused on goods over services. So when choices are being made goods are being prioritized in the wall over services, especially with a $68000 income customer.
In that same vein our demographic is also finding it difficult to pay household expenses.
Q3, 44% of household survey by the census Bureau reported difficulty up from an already high 42% in Q2.
Third is underemployment, while employment trends have improved since the end of Q2. The recent series high cliffs in August could suggest disruption in household finances.
We know that when customers are considering straighten your teeth. It typically might do one or all of the following.
One they might search online to understand their options to they might ask Dennis and three they might ask a friend or family member, which option they would recommend.
Based on our research our product and customer experience is competitive with invisalign and 60% less expensive, but we have to continue to change perception across these three channels to continue to gain market share.
Changing perceptions habits and beliefs is critical to the next phase of our growth in these tougher macroeconomic times for our core demographics.
That's why our efforts in marketing with our Challenger campaign building out our partner network are key initiatives to the next wave of our growth.
Our marketing will be focused on helping to support our core demographic while at the same time continuing to move upstream with our income demographics through the challenger campaign.
We launched this campaign early in the third quarter to target Invisalign as end user users with our value proposition and ramped up the advice throughout the quarter.
The early results from the campaign have been encouraging and we expect to continue to do well into 2020 two.
This is not an all or nothing campaign.
Given that we have not previously focused on this end user base, which is the majority of the $15 million annual orthodontic case starts a fractional percentage could be very material to us.
We've also only begun to scratch the surface on the opportunity and our partner network. Our network now has approximately 735 signed practices in the United States that are active or pending training.
And we have begun an aggressive hiring program to grow our rate of new office sign ups.
We're also having success with referrals into our clinical partners for them to increase and introduced new patients to their practice.
There are finding our value proposition very compelling because we can increase practice revenue with minimal chair time by using our called Dentistry platform. So it's highly profitable and also provide the added benefit of new customer leads into the practice as well.
In addition to being a little ahead of the game on the macro impacts. We were also the first in our space to call out the impact of Apple's iOS 14, and privacy changes.
Digitally native brands such as ours.
In the past three months there have been no fewer than 20 companies, noting this change is a substantial headwind in Q2 and Q3.
Facebook and Snapchat earnings last month reinforces how material. This change has been to their business.
Similar to all of these companies the privacy changes required us to pivot quickly to different lead strategies.
Historically, the Facebook platform, where a large portion of our sales and marketing spend and were also highly effective in terms of conversion and our sales funnel.
We've not only been shifting marketing spend away from these platforms to more T V. But we've all also.
Also changed our lead strategy.
We are now focused on higher funnel leads to more efficiently and effectively drive long term growth.
I care in Australia, our TV wait, we will drive greater aided and unaided awareness.
This is also a longer term strategy focused on building our base of course consumers, including the higher income customer rather than paying for each sale we'd get.
Well, we drive stronger awareness of our brand we are less focused on optimizing to acquire the smaller percentage of consumers who are already aware of S. D C.
The last but likely the most consequential topic I want to cover is where our brand sits in the eyes of our consumer.
We recently commissioned a study from a third party market research firm with significant expertise in oral care and customer satisfaction with SDC other.
Other tele dentistry players in Invisalign.
This survey included over 1200 respondents and what we found was that S. D. C and Invisalign are frequently tied statistically in many categories, especially in the important categories such as quote has a network of dentists and orthodontists to provide the best possible care to its customers envelope.
Or is a brand that I can trust.
Overall, it seems that patients are claiming an identical experience between S. T seen invisalign, yeah, we charged 60% less in price in a more convenient.
Our NPS score was 55 and Invisalign was 54 compared to an average of 22 and a half for other tele dentistry players.
For other tests told dentistry platforms. The study also showed that signet significantly fewer customers would recommend those brands compared with S. D C customers.
There were also significantly less satisfied with the customer support received from them as compared with the S. T six customer satisfaction.
The Q3 results for the U S brand tracker consumer survey of the general population for airliners oral care and Whitewater's highlight our continued separation as a brand.
Unaided awareness for Smile direct club increase significantly from Q2 to Q3.
We moved from 8% to 11% and that's significantly higher than other tele dentistry.
By comparison Invisalign as unaided awareness is 39%.
Aided awareness for Smile direct club is also improving 54% in Q3 up from 52% in Q2.
This is also significantly higher than tall dentistry competitors, while invisalign awareness for the quarter.
66%.
I would also call out the sizable shift from Q2 to Q3, where consumers perceive STC and Invisalign would equally deliver on quote helps transform individuals' competence smiles they love unquote.
In Q2, Invisalign held an advantage.
69% of your Smile direct club as a legitimate orthodontic option for straightening teeth 74 per cent for Invisalign.
66% believe smile direct club as a brand they can trust closing in on Invisalign at 69%.
We've made a lot of progress in a short amount of time, but we have more work to do.
I'm, a fiercely competitive executive who has fought similar battles and other disruptive industries and I know how to win.
We've assembled the best team I've ever seen who will execute on our initiatives.
We remain laser focused on our mission.
And I'm fully bought into what we need to accomplish this success.
I'd like to thank our club members for their support as we continue to work to capture this massively underserved market.
And now I'll turn the call over to Kyle who will provide more detail on our Q3 financial results and our outlook call.
Thank you David L.
I will jump right to our results for the quarter.
Please be sure to review, our supplemental materials posted to our Investor website.
Which provide additional details on everything I will cover.
Revenue for the quarter was $138 million.
Which is a decline of 21% sequentially.
And a decline of 18% on a year over year basis.
This was driven primarily by 70000 initial aligner shipments at an ASP of 1900.
The latter of which is up 1% sequentially and up 6% year over year.
For the nine months ending in September revenue was $511 million.
Which is up 8% versus the prior year.
The Q3 decline is primarily due to the macro factors that David mentioned earlier.
These results were below what we had baked into our full year forecast shared last quarter as.
As the macro headwinds continued to accelerate.
Well have more to say on that front later regarding how much of this headwind we are factored into our new outlook for 2021.
We have outlined the economic data and our earning supplemental deck supporting the macroeconomic trends that we're seeing.
In particular <unk>.
<unk> has had even more of an impact on our customers' wallet than it did last quarter.
And that has shown up in the number of kits and scans your question.
We also continue to work through the changes in our lead strategy that require investment and more brand awareness at the top of the lead generation funnel.
We expect these efforts that David noted earlier over the long term will be more efficient and profitable compared with utilizing lower funnel tactics, such as re targeting and social media.
Recall that top of funnel me everything prior to requesting a killer scan.
And middle of final means from requesting a kit where scan to returning the kit, we're showing up for the scan.
As you can see from our investor deck rest of World Aligner shipments were down slightly from Q2.
We typically see some seasonality in Q3.
In EMEA due to vacations, but the relaunch in Spain, and Germany helped offset some of that shift.
Based on our early results. We believe these markets will be strong performers for us because there are two of the largest in EMEA, but given the prevalence of competition currently in those markets in particular, Germany.
It will take time to reach the level. We've previously achieved in the U K and Australia.
Providing some details on the other revenue items.
Implicit price concessions were 9% of gross aligner revenue.
Up from 7% in the second quarter.
We maintain separate reserves for IPC and cancellations.
We analyze and regularly rebalanced those reserve based on current trends.
The net effect in the current quarter versus the previous quarter with a higher RPC reserve amount that was offset by lower cancellation reserve.
Reserves and other adjustments, which includes impression kit revenue refunds and sales tax came in at 10% of gross aligner revenue, which is flat to Q2.
Financing revenue.
As interest associated with a smile pay program.
Keeping at approximately $11 million, which is slightly down relative to Q2.
Primarily due to the lower revenue.
Other revenue and adjustments, which includes net revenue related to retainers whitening and other ancillary products came in at $19 million and it's flat to Q2.
Now turning to smile.
In Q3, 2021 small type purchases came in at 59, 5% of initial aligner purchases.
This is down relative to Q2 due to the decreases in the U S and slightly below historical levels.
Since we view smile pay customers with more price sensitive consumers in postpaid customers.
We believe this decline in the U S smile pay rates as an additional indicator of financial strain on our core customer.
Overall small pay has continued to perform well in.
In our delinquency rates in Q3 and to date in Q4 were consistent with prior quarters.
While admittedly our core customer has had difficulty with the macro environment.
The fact that we keep a credit card on file and have a low monthly payment gives us the confidence that smile pay will continue to perform well.
Turning to the results on the cost side of the business.
Gross margin for the quarter was 71%.
Representing a 230 basis points sequential decline.
This performance is primarily attributed to the revenue decline with the continued streamlining of our manufacturing helping to offset the impact.
Our second generation automation machines are now producing approximately 89% of a liner.
Up from 84% at the end of Q2 2021.
And on pace with the target we set for 90% of a liner is by the end of the quarter.
This streamlining its helping a turnaround time productivity reduction in scrap and a more consistent and superior product for our club members.
The financial benefit of these investments can be seen when looking at the 90 basis point improvement versus Q3 2020.
Even though Q3 2020 had 25% higher shipment volumes.
Marketing and selling expenses came in at $96 million or 70% of net revenue in the quarter.
Compared to 55% of net revenue in Q2 2021.
The sequential increase as a percentage of revenue is primarily attributed to the decline in revenue.
But it is also the result of increased marketing spend to relaunch, Germany, and Spain as well as increased pressure, we're seeing with marketing efficiency from the challenges associated with Facebook targeting.
And the macroeconomic environment.
On small shops recall that they function, primarily as fulfillment centers instead of sources for demand generation.
We had 164 permanent locations as of quarter end.
And helped 201 pop up events over the course of the quarter.
For a total of 365 location sites.
That total is up from 288 at the end of Q2 and.
218 at the end of Q4.
These pop up events had been an efficient way to meet our demand and enable us to fully leverage our small shop resources in order to fulfill demand that is coming through aided awareness referrals and marketing.
They have also been critical in supporting our partner network.
Now have over 735 partner network locations globally that are active or pending training.
And an active pipeline of approximately 1600 locations.
As referenced earlier, our marketing and selling expenses in the quarter reflects significant investment in brand building to support our long term growth in international markets.
And this quarter's results bear out that emphasis.
Sales and marketing as a percentage of revenue was 94% and rest of world markets.
Compared to 64% in the U S and Canada.
The rest of world sales and marketing investment.
System with what we signaled last quarter.
With the need to invest up to 100% of revenue in those regions to launch the brand.
While up as a percentage of revenue in the U S and Canada.
Our absolute dollars were down 6 million sequentially.
Recall that with our changes to the lead strategy we.
We do not expect much of an increase to our overall spend in the U S and Canada.
But we do expect our emphasis on investing in television and the partner network will change the composition and timing of that spend.
We believe this high funnel lead capture strategy will be more effective and efficient longterm at building improved customer consideration through greater aided and unaided brand awareness.
Overtime. This approach will also result in our business being less sensitive to volatile performance of our direct response marketing with platforms such as Facebook.
Because we will have increased the pool of prospective club members.
We're a S D C.
As expected early indicators in the U S and Canada are showing increases in lead capture per visit your web site and we expect this trend to continue as we lean into this strategy through Q4 and into 2022.
General and administrative expenses were $86 million in Q3.
Compared to $85 million in Q2 2021.
After adjusting for the onetime impacts from Q2, Q3 expenses were flat quarter over quarter.
Other expenses include.
Interest expense of $1 8 million.
Of which $1 million was deferred loan costs associated with the convert we issued earlier in the year.
450, K was associated with long term lease accounting.
And 300, K was associated with capital leases.
Other expense was $4 $2 million related to $1 5 million of one time facility closure costs of our car targeting <unk>, Costa Rica office, and $2 7 million of unrealized currency re measurement loss.
All of the above produced adjusted EBITDA of negative $54 million in the quarter.
With an all in net loss of $90 million.
Breaking it out regionally adjusted EBITDA came in at negative $33 million for the U S and Canada.
Which aligns with the underperformance in this region due to the macro factors.
For rest of World adjusted EBITDA was negative $21 million.
Due to the over investments in sales and marketing to launch in key markets in these regions.
Moving to the balance sheet, we ended the third quarter with $308 million in cash and cash equivalents.
Cash from operations for the third quarter was negative $38 million.
Cash spent on investing for the third quarter was $25 million, mainly associated with capitalized labor and software.
Manufacturing building in automation and.
And shop lease hold improvements.
Free cash flow for the third quarter defined as cash from operations less cash from investing was negative $63 million.
Turning to our updated guidance for the year.
I would point to our earning supplemental deck for the key assumptions underlying our forecast.
There are a few points to note.
We believe the macro environment will continue to affect our customer throughout Q4.
Given this we expect full year revenue to be between 630 $650 million.
The improvements to our lead strategy to emphasize more efficient and profitable leads will take time to have the impact we expect.
And we will continue to update you each quarter as we start seeing the impact.
There are still a number of potential benefits that could occur during Q4.
And that we're driving toward and not factoring these contributions into our outlook at present.
This includes the normal seasonality improvement in Q4 versus Q3 around the holiday retail calendar.
Greater partner network adoption.
That's what our challenger campaign, and accelerated success in Germany, Spain and France.
We're also making operational changes.
And we expect the deferred payment program to have an impact in Q4.
We're also working on additional financing changes to help our small pay customers can make it more affordable.
State U as they're released throughout Q4 and Q1.
We've also adjusted our margin outlook gross margin as a percentage of total revenues of approximately 70% for Q4 2021.
Reflecting potential deleverage from revenues.
Sales and marketing as a percentage of total revenues in the range of 80% to 90% for Q4 2021.
Reflecting continued near term rate headwinds expected from our lead focused marketing strategy in the U S and Canada.
Accelerated marketing investments to support Relaunching ramp up and expansion in international markets, and lastly added selling investment to support planned growth in partner network.
G&A dollars are expected to be flat to Q3, but.
Experiencing rate pressure with continued topline headwinds.
While we were disappointed in our current results they.
They do not yet reflect the investments, we're making in the brand and success, we anticipated mining the long term opportunity available in the clear aligner space.
The rapidly evolving macro environment for our core demographic.
It's not something we could've anticipated.
We have responded quickly by pivoting, our lead strategy and moving upstream with higher income demographics.
With over 500 million people globally, who fall into our market opportunity and affordability being one of the biggest barriers to care.
We fully believe that our business, which has a product and service offering that is on par with invisalign at a much more competitive price is well positioned to grow across the world.
Liquidity on our balance sheet and the strengthening of our brand perception and brand credibility among consumers prefer.
A solid foundation to help us return to our long term growth targets and provide the best club member experience.
Thank you to everyone for joining today with that I'll turn the call back over to the operator for Q&A.
Thank you.
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In the interest of time, we ask that you. Please limit to one question and one follow up.
Our first question comes from the line of John Kreger with William Blair. Please proceed with your question.
Hi, Thanks, very much hey.
Hey, Kyle with the updated guidance for 'twenty. One just can you clarify does this sort of change the long term model that you've got.
And could you give us any kind of early thinking on 22.
And I guess the final one related to that how many years do you think it'll take to get to the.
Kind of long term model EBITA margin that you guys have articulated thanks.
Yeah. Thanks, John look I would say overall 2022, just given where we sit today and some of the macro impacts that we're seeing on the business.
It's really too early to predict and so for now I would say, let's focus more and in and around Q4, and how we're thinking about that.
I think from a long term perspective, nothing has changed right I mean, we believe the macro environment that we're in will continue to impact our customers throughout Q4, and that's what we've guided to but we fully believe that that's a transitory impact on our core demographic and at some point that will return back to normal as well and so with that there. There is no changes to the long term targets that we've outlined.
And I think when you look at the profitability again, as we get back to more normalized topline growth as the macro impact taxes from us I would expect similar trends to what we've outlined in the past.
Which is ramping to that 25% to 30% adjusted EBITDA margins over a five year period, and I think you've seen some of that come.
Come to light here in the P&L. So if you look at gross margin in particular if.
If you normalize for for volume.
And you look at sort of where we are today by adding back depreciation and amortization were right on top of that longer term, 85% target that we've outlined and so I think we've made really good progress against that.
If you look at the sales and marketing line clearly in the short term, there's some headwinds from a macro perspective, but if you look on the G&A side as well I think we've demonstrated a lot of leverage there historically with the ability to control that cost and get to profitability pretty quickly. So we still have high conviction in those longer term topline numbers as the macro environment returns and I think from a bottomline perspective the tie.
[noise] frame would be about the same over that five year period, as we get back to that growth.
That's helpful. Thanks, and maybe one just quick follow up.
Are you thinking with your international strategy sort of tapping the brakes here as you wait for a sign of a healthier core customer or should we think about the international strategy is even more aggressive in the next year or two.
Yeah.
I'd say its a very similar strategy to what we've outlined historically I think if you look at the business overall it was about 20% of revenue in the quarter I would expect it to be about the same as you look at Q4 in particular and as you look at next year and beyond just given the sheer market opportunity representing about 75% of our total business in rest of world market.
And you know the ramp up that we've seen in the markets that we've gone into our strategy. There remains the same we think it's the right time for us to continue to.
To penetrate and gain a foothold in newer markets, which is going to support overall longer term growth and we expect to see a good return on the cash as we invested in these newer markets. So we've got a France that where we're ramping up right now, we've relaunched Germany, and Spain, which are performing well and we're getting some traction there.
We've got a handful more countries that we're expecting to launch into next year as well.
Okay. Thank you.
Thank you IRA.
Our next question comes from the line of Robbie Marcus with Jpmorgan. Please proceed with your question.
Hey, this is actually a really on for Robbie thanks for taking the question.
On the fourth quarter guidance I was hoping you could just dive a little bit deeper into how some of these headwinds have trended so far into fourth quarter relative to what you saw exiting the third quarter and how much visibility and confidence do you have and where guidance is quite clear as a model. Thanks.
Yeah.
Yeah look I think when we.
If you take a step back and look at sort of where we exited Q2.
Pervasiveness of the macro factors and just the overall sustained impact on the business.
We're not entirely clear.
Given that we did give annual guidance over.
Over the course of the year at that time, rather than quarterly because of that but we certainly were not anticipating sort of a worsening on our core demographic from a macro perspective in Q3 or in Q4.
So that said well if you look at sort of the ranges that we've outlined here.
Given that we're about four weeks into the quarter right now we've looked at sort of the macro environment and assume that we see more of the same as you look between now and the end of the year and we tried to put ranges around that as well.
<unk> talked about on the call I also outlined in the deck as well there are several potential benefits that could occur during Q4.
That we're clearly driving towards but we're not factoring those contributions into the outlook at present and so generally we see some seasonality improvements in Q4 over Q3 around the holiday in particular, Black Friday, cyber Monday and the.
Calendar there.
We're making good progress with the partner network and we've got a good hiring plans there for the Q4.
We're not we're not assuming any additional sort of material ramps from that and same thing on the challenger campaign as well, we're not assuming that that really starts to take off within the quarter. So we think there are some upsides to what we've outlined to that but we haven't even included them in the 630 to 650 that we've outlined here and we're also making a lot of operational changes.
As David and I talked about in the script as well with a deferred payment program that we're launching right now, which we think will have a nice impact in that we saw a nice impact back in 2019, when we launched that as well.
Great. Thank you and just a quick follow up on the Challenger campaign them you know in the past, albeit obviously, you havent really view them as much as.
As a direct competitor, but you know that's obviously shifted a bit with the strategy that you're taking so can you talk to us a little bit more about why it's the right time to be going up against a line and are there any early metrics you can share on how successful they have been thanks.
Yeah, I can take that won't tell so ultimately down the road, it's all about a liner or.
As we start to measure where those aligner orders are coming from based on income demographics.
Currently today, there's very little overlap the millions of half customers that we've served really were incremental to the category.
So we started looking at this it's it's it's a natural kind of progression going from a disruptor to a challenger.
And we started looking at this earlier in the year.
We rolled out some TV spots in July and spend very little money against it we're now.
Now ramping it up as a <unk>.
Total spend against our marketing budget in the short term, we're looking at brand trust credibility with consumers and G. PS is one example of a G P I.
We're also measuring brand recall and awareness with our TV spots that are centered around the challenge of campaign. So there's companies like Phoenix that are giving us indicators as to how memorable spots or do customers understand them.
And then where we're now tracking as we mentioned in the script, we actually just did a.
Survey of 1200 customers that completed treatment.
The last three months.
And what it's telling US is that these consumers, where we're tracking very well to do invisalign, our NPS score is actually higher.
We were at 55 versus 54, the other tele dentistry players were half of that in 'twenty, two and a half.
And also you know.
How consumers view us as a trusted brand our network of doctors will we deliver the results that they want so all those things are tracking very favorably.
And that's not just the challenger campaign, that's a lot of the work we're doing in our treatment planning customer service.
And all those other things so as we as we start to track.
Where are these line of orders are coming from and you know success ultimately to US is that we're gonna start taking market share. It doesn't take a whole lot of market share. When you look at the 15 million case starts orthodontic case starts worldwide.
That align our plays and we really don't play in that sandbox. So are millions of half has been incremental and so if we can start to you know continue to focus on our core demographics, you've got some solutions in place for this macro effect with our small pay financing and then slowly start to chip away and let customers know that we have a safe and effect.
<unk> treatment, it's 60% less.
That's that's what a disruptor does.
Intermediary Theres no reason to pay that markup and we believe overall it is a superior platform, especially if you want to be treated in the comfort of your home. So we'll continue to report on metrics as we are because we start together.
That's helpful. Thank you.
Thank you.
Our next question comes from the line of Jon Block with Stifel. Please proceed with your question.
Hey, guys. Good afternoon, maybe two for me. The first one I think I saw long term EBITDA margin of 25% to 30% and then more to the slides I just want to make sure.
Is that intact, because when the street was around $850 million this year.
Applied over $2 billion in revenues in 2025, and we took your prior.
20% to 30% revenue growth and extrapolate it out so can you just help us with.
If the 25% to 30% EBITDA margin is intact, how are we thinking about revenue growth because if I sort of running that.
15% annually instead of your prior 25, Youre getting a 2025 revenue number that's cut in half and just curious how you were able to garner the same EBITDA margins in that Alaska, a tighter follow up.
Yeah look on the long term targets are in terms of what I said before being impact it really goes back to the macro environment that we're in right now passing first right and obviously that's difficult to predict when that's going to be but fundamentally nothing has changed in the business and we believe.
The market environment that we're in is transitory and so I think that's that does pass theres no changes to the targets that we've outlined being topline.
Plenty of 30% growth per year.
And no change to the unit economics that we've outlined for 25% to 30% adjusted EBITDA.
If anything I think we've gotten there from a gross margin perspective ahead of plan B.
Being sort of right on top of that right now with normalized volume.
That was more of a five year target anymore.
Good progress against that in a short period of time, so obviously, it's difficult to predict when this macro environment does pass in particular from an inflation perspective, but as that does pass we see no changes to the long term targets that we've outlined.
Thanks that was helpful. And then just a second question you know David you mentioned navigating the regulatory environment, that's been disruptors need to do but it was all due respect is that really the regulatory environment, it's preventing STC from competing in these states and I think that's almost what's a little bit more scary quite honestly I mean, you guys have been able to compete it doesn't seem to be regulatory gemcitabine LTV to CAC that for now it does.
At work and I don't think a lot of investors have conviction that it works and so can you help us out with that you know what what debates in that regard because iOS is just getting more difficult. So when we think about that LTV to CAC.
It's fallen short so far how do you rectify that is that the L. T V going higher is that the CAC going lower because right. Now you know just the the numerator denominator doesn't seem to be working itself out. Thanks.
Yeah, John well I think prior to Q2, which is only a short.
A quarter ago.
We were demonstrating that we have brought down coming out of or into Covid in Q2 of 2020.
And then the remainder of 2020, we talked about our sales and marketing being at 45%, which is part of the plan to get to 25% EBITDA margins and we were hitting those we were hitting those targets. We were EBITDA profitable a quarter ahead of the Q4 2020 goal we choose out in Q3.
Had a nice Q4 Q1 was a really nice quarter for us and we we actually.
Invested a little bit higher than the 45% in sales and marketing. So we're not in a tough situation right now between the iOS, 14th and the macro trends where customers just aren't responding to worried about putting fueled in their car and food on their table. All the all of the staple items have gone up in price and two a 60000 all your person.
It's much more material than it is to a $200000 I mean, we're not we're not in a in a recession. We're in an inflationary environment, which most people haven't seen so I'm not worried about the long term, especially as some of the things that we are doing and gaining traction on.
With our brand awareness aided and unaided and our referral we're hyper focused on the customer experience, we have a better product today with our Gen. Two we're also going to be announcing I'll give you a little preview.
This week, probably early next week I can't remember the timing.
But it has to do with our treatment planning to point out, which we've been working on for several years now we expect the same kind of big impact that we did when we announced gen two and the automation in our manufacturing this new treatment planning that we've been working on is all AI driven it it gives us capabilities to do a lot more with <unk>.
Aging molar movements without attachments, all kinds of stuff for teens as far as virtual geometry, and mixed dentition. So this is actually all of our Texan Costa Rica have been trained on it all new treatments coming out of there.
This weekend into next week will be on our new treatment planning to point owe more to come on that but those kinds of things are all designed to have a better customer experience to have more referrals and if you have more referrals you can look at it it will lower your CAC. So.
I think we've proved that we were there I think we'll get back there with with the with the strategies that we've implemented in our marketing to combat some of the Seo was 14 and some of the macro trends.
And so I'm I'm I'm confident that we'll get there.
Got it thanks guys.
Yeah.
Thank you. Our next question comes from the line of Chris Cooley with Stephens. Please proceed with your question.
Good afternoon, and thanks for taking the questions maybe let me just.
Bigger picture for me.
First thing I want to come back on the long term margin profile for my follow up but can.
Can you just maybe elaborate a little bit more when you think about the patient acquisition channels that you're in now.
Nationally here in the United States to your partner networks and straight.
Direct to consumer channels, just the relative rates of growth you're seeing in those respective channels and the stickiness.
Of those of those leads.
Just kind of curious if anything is changing there.
You see those consumers as they come through the various channels.
Back into the pipeline either from a growth rate or a conversion rate and I have a quick follow up.
Yeah.
Yeah, I think from a <unk>.
Conversion perspective, we're seeing trends as you would expect just given the macro impact and so.
You know that that is an impact that we've seen throughout the funnel around conversion over the past couple of quarters, but look I think it's important to kind of.
Take a step back and look at sort of the long term strategy that we've outlined outlined along that and it really goes back to the lead generation strategy right. So if you think about it it's a highly considered purchase as we've always talked about you know this has been a lifelong problem for people who want to straighten their teeth and it's just a matter of win right. Why now is the right time that I want to do it and so we believe that focusing.
On leads and then winning once they're in consideration through CRM or partner network or other tactics are is the most efficient and profitable long term approach.
And so when someone is in consideration and we talked about this in the script, we've talked about in the past a lot as well consumers are really looking at three things right. One they're gonna, they're gonna look online two they're gonna ask their dentists and three they're going to ask a friend or family member and so I think when you look from a lead perspective and driving those leads to convert for us It really goes back to winning across those three.
Channels I think online we've made really good improvements and big investments in brand credibility.
With the Challenger campaign, you can see that in some of the data points that we've provided on.
On the partner network side that really goes back to building credibility with dentists and making sure we win there and that's a good reaction and then all the investments that we've put into our friends and family and improving our customer experience. There. So I think that's how we're thinking about it from a lead gen and conversion perspective over time.
Thanks, I appreciate that and then not to be redundant, but when you think about the long term objectives, I realize you're not giving guidance.
Got it for 22, yet but is.
But if we just think about again, what you've laid out in the deck, a little bit slower uptake and similarly, you know higher spend outside of the U S.
Clearly continuing to invest in the U S and also from a marketing perspective, having to do.
No more T V versus a piece.
Facebook or other had based media.
At least in the shorter term had the company's costs.
Structurally increased realized so do you think you can leverage those over time.
But as we think about the current macro environment. Because this is a cost structure that we think you should should be maintained until you can see that lift in the top one.
Thanks.
Yeah, absolutely I think when you look at it you look at it from a cash perspective on the cost side. So we've got over $300 million in cash as of quarter end. We also have another 200 million a day are our liquidity on the balance sheet that we can either sell or or factor and so if you look at that in total over $500 million in total liquidity.
I think we've also demonstrated in the past as well that we have the levers to control our burn if you look at Q2 of 2020, we get to cash flow positive very very quickly.
But for now just given the liquidity that we have and where we sit within the market. Our belief is the right approach is to continue to to optimize and invest for future growth.
And so when we think about it from that perspective.
Certainly in the near term as a result of some of the macro factors that we're seeing we expect to see on the cost sides.
Performance that is ahead of the longer term targets that we've outlined and so if you look at that as what you thought it would be about a 70% gross margin approximately for Q4, we'd expect sales and marketing to be 80% to 90% of revenue in Q4 of this year and then just overall G&A dollars to be relatively flat.
But given the liquidity that we have in our overall position in the marketplace and continuing to invest for longer term growth. We believe that's the right decision.
Understood. Thank you.
Thank you.
Next question comes from the line of Michael <unk> with Bank of America Securities. Please proceed with your question.
Alright, thanks for taking the question guys.
I want to start on the economic macro discussion again, sorry to harp on that but I really want to revisit a given it seems to be still pivotal so flagging what happened in <unk> in your forward outlook. I mean, there is there is no doubt inflation continues to tick higher but we've been tracking consumer discretionary spending.
Especially in some of the lower income, even 50000 or below consumer.
Consumers in United States and the latest data is pretty resilient I mean, there is some fluctuation week to week.
But it hasnt seen anything like what you're indicating in terms of what happened in <unk> and the outlook for Q. So anything any additional color you can provide on why you think.
Services, and particularly the dental.
Business your business is being affected.
Such a magnitude I mean, if you look at inflation of five 8% to six 1%.
Uptick in differently paying bills. These are really minor changes, 1%, one 2% and yet we're seeing a 30% 40% swing in volumes. So why does why is the model so sensitive to relatively small sequential.
<unk>.
Yeah, I think you've got to look at it from our core demographic. So the core demographic. We have has a median household income of $68000.
And as we look at the data. This is coming right out of the Bureau of Labor Labor Statistics, and economic analysis, and if you do the math on 65000 68000 household income and do the math on the inflation.
At over 6% at several thousand dollars impacted their bottom line right and so given most of their spending.
Spending is gonna be on non discretionary goods, it's almost 80% 90% of spend is on non discretionary goods are 6% to 7% impact on that is four to $5000 right and so that's clearly more than the cost of our liners and has a direct impact on that customer. So you know inflation is real for this demographic in particular, it's not it's not as big.
A an impact for someone who makes $150000 of Bob but for our core demographic. That's about 65 to 70000 of household income.
Is a big impact and there's a variety of other factors in there as well I think if you look at spending preferences, there theres a lot more focus on goods over services.
From the economic data that we're looking at a if you look at our household surveyed the ability to pay bills continues to get tougher on a quarter over quarter basis quits were at an all time high if you look at quit sets of August it's the highest they've been since January of 2020, So I think from a macro perspective, when you look at all the data that.
Pulled together there are it really supports what we're what we're saying here.
And Collin I'll add too and I think we had a slide in the deck.
We had a graph in the deck about large purchases I mean this is a 2000 dollar purchase.
And the consumer confidence index in there for those large purchases just felt I mean, it's just a sharp fall starting in Q2.
Continued falling into Q3.
I think from a confidence standpoint, even if you're saying well, it's only 6% inflation. So there it's two to $3000 more for basic items, but it's also the confidence index Where's this going should.
Should I be doing this right now spending 2000 odd straight my teeth.
I'm not sure where prices are going to me. It's all over the news she can't turn on the news and not see the supply chain issues.
Gas prices are double to fill up your tank than it was a year ago.
So there's escalating prices everywhere and theres, a shortage of supply of goods.
Oh I see.
Listen we know what's real if you listen to Dent supplies earnings call last week, they talked about it as well the macro effect on them.
In Q3, and the potential Misunder 2021 guidance with respect to their bite acquisition.
So those guys spend quite a bit of time talking about on the earnings call.
I think they were a little surprised to see it but it it's real it's here.
And we're doing everything we can to combat it and I think.
That's part of the advantage that we have of being a vertically integrated company in all aspects.
Especially with financing we are the only company that controls our finance and so we know.
We have real good experience at it and some of the stuff, we're gonna be doing not only with the late billing that's out there.
On our website and in the market today things, though that we're gonna be announcing in December that we think will really help. This this core demographic customer overcome some of these concerns.
Yeah I appreciate that thanks, Scott I, just mean that the <unk>.
Six 1% and <unk> it was five 8% and <unk>. So I was just looking at on a sequential basis, but.
Real quick just a quick follow up for me can we drill in a little bit on U S versus O U S.
You talked about international expansion for a while and from what we can tell that's still.
Trending pretty well as we think about continued investment priorities for <unk> next year as you sort of.
Remain in this challenged environment.
How are you allocating U S versus O U S dollars given much bigger revenue base in the U S, but seemingly much better return on investment given the growth opportunity.
Yeah, I would expect revenue if you look at Q4 to be a similar split so still approximately 80 20.
From a margin perspective, obviously international has been a little bit lower with some additional shipping.
Shipping costs in country, and then also local cost for final Assembly. So I would expect a similar trend there are on average between.
U S and rest of world about 70% for Q4, but still a little bit lower than that for international.
You look at sales and marketing in total as I said before about 80% to 90% of revenue.
If you break that down between U S and rest of the World I would expect us to be 75% to 85% and rest of world to be 100, or 215% as we continue to invest in new markets like France and get that market off the ground. As an example, and then overall G&A dollars relatively flat on a quarter over quarter basis for both the U S and rest of world.
Great. Thanks.
Thank you. Our next question comes from the line of Nathan Rich with Goldman Sachs. Please proceed with your question.
Hi, Thanks for the question I just wanted to go back to the the shift in marketing strategy now it sounds like you know you talked about moving more to the top of the funnel weeds, but it sounds like given the macro environment. You know your customer could maybe benefit from more help at point of purchase and you know David you talked about the extended financing program, but.
Do you need to do more or make any changes to price to really kind of helped the core demographic in this macro environment.
Yeah, I don't think it's a matter of lowering the price on the single pay or <unk> 19, or $50 price point.
It's more about and what we're seeing like Karl mentioned.
Earlier was that we're at a low here on our smile pay percentage went down under 60% for the first time in a long time, because that's the customer that has affected us in this macro environment. So most of the stuff that we're talking about doing this month and into December is is around helping that customer make it even more affordable more create.
Financing.
I'm looking at the monthly payments $89, a month and how can we make that more affordable for them.
Without hurting our delinquency rates I think we've got some pretty creative ideas that you'll be hearing about.
That's going to help with that so.
As far as from a lead split listen all of US faced and we were one of the first ones to come out and talk about it in Q2, the iOS effect.
Being a digitally oriented.
Marketer.
The signal strength, which has gone I mean, you know most people opted out of opted into the privacy and so that really hurt the lower funnel conversion optimizing to sales re targeting because you really can't follow these people round the internet. So it's it's you know.
We're fortunate that we have a lead strategy a lot of a lot of e-commerce companies that rely on that conversion that sale conversion.
Kind of stuck because they weren't getting the signal strength.
So we can get that customer over a longer period of time, we have a great CRM platform, both SMS and email and so were going for quality of leads we're gonna educate these customers.
So we're going to use all the the other mechanisms that we have to convert them.
Got it and Kyle maybe a follow up for you the guidance implies a pretty meaningful step up in the marketing and selling expenses in the fourth quarter is that the new base that we should think about as into 'twenty two as we go forward.
Or are there some one time investments that you're making in <unk> that might not continue as we head into 2022. Thank you.
Yeah, I think as we look at 'twenty two it again, just given the macro perspective, it's a little bit early to start looking at it from that perspective, but look.
Look we're making investments on top of funnel as we've talked about to continue to build the lead tunnel.
We expect to continue to do that in Q1, which is a very good time for us.
And so for now I would think about that is as an overall runway, but we'll continue to update you in future quarters as we get.
Get more insight into the overall macro environment.
Thank you we've hit the top of the hour, ladies and gentlemen that concludes today's earnings call. Thank you for your attendance at all.