Q4 2021 SmileDirectClub Inc Earnings Call
Greetings and welcome to the Smile direct club fourth quarter 2021 earnings call.
At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Now my pleasure to introduce your host Jonathan platelet director of Investor Relations. Thank you Jonathan you may begin.
Thank you operator, good morning before he begins let me remind you that this conference call includes forward looking statements for additional information on Smile direct club. Please refer to the company's SEC filings, including the risk factors described there and you should not rely on our forward looking statements as predictions of future events.
All forward looking statements that we make on this call are based on assumptions and beliefs as of today.
For each of our Q4 2021 earnings presentation for a description of certain forward looking statements. We undertake no obligation to update such information, except as required by applicable law.
In this conference call. We will also have a discussion of certain non-GAAP financial measures, including adjusted EBITDA and free cash flow.
Information required by regulation G of 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.
I refer you to this presentation for a reconciliation of certain non-GAAP financial measures be the appropriate GAAP measures.
I'm joined on the call today are Chief Executive Officer, and Chairman, David Katzman Interim Chief Financial Officer, Troy Crawford and global head of F. P N E and Investor Relations Jessie Weaver, Let me now turn the call over to David.
Thanks, Jonathan and good morning, everyone. Thank you for joining us today.
Last quarter, we talked a lot about the decisions we've made over the past seven years to fulfill our mission to democratize access to a smile, each and every person loves and deserves by making it affordable and convenient for everyone.
Some decisions have been easier in some tactics have been more impactful than the others, but they are all consistent with our mission.
One of the hardest decisions we've made over the past several weeks was the late January announcements to reevaluate our international footprint for near term profitability.
Right size, our operating structure and allocate capital to our core growth initiatives that can produce the highest return on investment.
These initiatives include expanding our professional channel the Smile direct club partner network.
Innovations in our aligner products to successfully obtain our share of high income households.
Throw in the oral care product business and returning to profitable expansion of our small shop footprint markets strong consumer demand.
We have to part ways with many of our team members in the Americas and rest of world that made contributions to our success and dial back some expectations in existing markets.
Ah stressing the importance of generating near term profitable growth.
Focused on markets and businesses that best support our mission and have existing.
Or a more direct line of sight to profitability Troy.
Troy will discuss what impact these decisions will have on our 2022 forecast the results in a moment.
And I will close my remarks later with what all this means for re engaging growth profitability and positive cash flow within the next five years.
First let's talk about one of the primary reasons that we have needed to evolve our tactics this past year.
There are economic realities influencing our core customers consumer spending.
Recall that this is a customer base with median household income of approximately $68000.
This customer just traditionally has been priced out of teeth straightening options.
But with our offering we've been able to expand the market to this demographic teeth straightening to more than one and a half a million customers worldwide.
It's late in the second quarter of last year, we have pointed to economic factors such as inflation affecting their ability to spend on discretionary items.
With inflation existing everywhere now I don't think we need to make our case as forcefully as we have in the past on that point.
I think there's broad consensus today that not only is our customer base challenge, but that the lower to middle income consumers as well.
We have included several updated charts in our earnings deck that provides a little more color on what we're seeing.
Such as inflationary pressures appear to be the most logical source of consumer friction this past quarter and consistent with what we've experienced for nearly three consecutive quarters.
Cost of non discretionary items has increased sequentially every month since early to mid 2021 .
In January 2022 the cost of non discretionary items was even higher with an eight 5% increase.
All this reinforces our decision to expand our reach upstream with higher income demographics that are less price sensitive and have more capacity to spend on discretionary goods and services.
But the child tax credits you've seen in January that could have impact on the past they'd spend this.
Last July approximately 36 to 38 million households have been pre receiving half of their credit on a monthly basis.
Given the income qualification requirements. We believe this payment stream of more than $400 per household has benefited households, with less than $150000 in adjusted gross income.
These headwinds are clear and ongoing challenges to the business.
We've overcome a lot of adversity. The last several years. Unlike other small non vertically integrated DTC competitors with full of their tends to move down.
In the past few months, rather dramatically curtailed online marketing presence over the last few months, our differentiated assets allow us to be nimble with our offering to our existing customers or expand upstream and develop additional customer acquisition channels.
These assets include 30 patents issued for innovation, the only vertically integrated med Tech platform her straightening teeth at scale and unparalleled.
A lot of customer experience a state of the art FDA cleared technology and registered facility.
Home to one of the largest fleets of three D printers.
And the largest clear aligner manufacturer in the U S.
We believe these assets along with our smile pay captive financing are incredibly difficult to replicate and necessary for long term success.
Well, we have the assets for success teeth straightening, there's a highly considered purchase and choosing a brand to trust. Your smile with is an important decision.
When making that brand decision, we know that customers rely on three important channels for their information.
They go online to check reviews, they talk to their friends and family for references and they listen to the opinions of the dental professional.
This is why we have spent the last seven years investing over $1 billion in marketing to build a brand that customers know and love and believe that's important that we continue to build our brand credibility across all three of these channels.
Last July we launched our challenger campaign to target Invisalign as end users with our value proposition and ramped up the AD buys throughout the quarter.
Our challenge or campaign ads are demonstrating excellent breakthrough in recall.
They have really cemented our position in a tourist race in the U S. It's worth noting that this is not an all or nothing campaign.
This campaign is just a piece of a much larger a concerted effort to expand our brands reached a high income consumers.
Based on our research our product and customer experience remains competitive with Invisalign and is 60% less expensive.
We have to continue to change perception across the channels as I noted earlier.
Gain meaningful share in this demographic.
Given that we have not previously focused on this end user base, which is the majority of the 21 million in annual Orthodontic case starts across the world.
Our actual percentage can be very material to us.
Further our brand reach with consumers credibility with professionals and capability and treating our customers. We accelerated many of the tactics we had underway during Q4.
By deepening our investment in the partner network to drive adoption and utilization in dental practices.
We appointed breath fever, as SVP and general manager of partner network.
But it will help further build and ignite growth through this channel he brings extensive knowledge and global commercial strategy.
Sales customer service and professional education from the dental and health care space.
We announced the partnership with celebrity cosmetic dentist Doctor Mirror, who will help advocate for our shared mission of increasing access to care as well as advocate for G. P joined the partner network.
Expanding our brand reach with the formation of the confidence Council, which include a partnerships with Jonathan Van Ness, Tuesday, or you're not in a real vandenberg two weeks new demographics by harnessing their influence to shine a light on the transformational power of a smile.
Introducing innovative oral care solutions through the launch of our new and innovative fastest whitening strips, which we had 4600 Walmart shelves by the end of February .
The strips or a new convenient and easy way to get fast waiting results without the mess traditional strips.
In addition, we continue to launch other whitening innovations, including the wireless port weighting system and Steinberg.
Finally in spite of the right sizing efforts I mentioned earlier, we continued to invest in R&D that supports our mission of providing a successful care.
We announced our Nextgen proprietary treatment planning software Smile O S.
The leading edge AI software delivers enhanced treatment outcomes more accurately predicts tooth movement and enables doctors to better visualize their patients' treatment.
Well, Oh EFS adds to the vertical integration of our business, creating a superior customer experience and most notably will help our network of doctors treat a broader range of patients.
Last week, we announced a partnership with care stream helps utilize their cutting edge intra oral scanners throughout our small shops and partner network locations.
An exciting partnership allows our partner network locations to leverage the openness of care streams platform for greater flexibility in how they can utilize a scanner for expanded functionality and addition to clear aligner treatment planning.
As you can see we continue to bring innovations to the market that we believe will further solidify our foundation for the next phase of our growth.
And our earning supplemental deck, you'll see that we've described our long term outlook on pages 31 to 32.
Outlook encompass is 2022 through 2020 six.
With our guidance for 2022 already in the release and Troy walking you through that more materially I want to focus on the next five years.
Before I begin I want to highlight that quicker gains in the higher income demographics and faster adoption of our partner network expansion could produce growth rates and require investments above the numbers that I'm about to present.
Beyond 2022 we expect revenue to grow at a mid teens compounded annual growth rate based on aligner shipments returning to 2019 levels by 2026.
Annual price increases the 4% to 5%.
And continued strong growth in oral care products.
Gross margin is anticipated to expand by 50 to 100 basis points each year based on increased aligner volumes, leveraging our fixed costs with higher Gen two utilization.
Offset by the lower gross margin profile of the oral care products.
Selling and marketing is expected to show a 300 to 350 basis points of margin improvement each year as we gained leverage on marketing spend from annual Weiner pricing increases modest gains in marketing efficiency and higher shop utilization.
G&A is expected to show a 200 to 225 basis points of margin improvement each year as the total dollar spend grows at close to inflation.
Increased leverage from continued revenue growth.
Capex spend to remain in the range of 7% to 10% of revenue.
I'm doing the math here that would imply that we would expect to return to EBITDA profitability by 2023 and to positive cash flow by 2024 or 2025.
The global Orthodontics market is large and underserved in the total addressable market continues to expand.
Between the U S and rest of World. There were approximately 500 million people for whom clear liners would be an appropriate means to treat mild to moderate crowding in spacing.
And who can afford treatment using our smile pay program.
Within that there are approximately 21 million worldwide orthodontic case starts annually and the penetration of clear liners within that is still less than half.
A tremendous global opportunity that we can't lose sight of during these challenging times with our core customer.
We have multiple avenues to achieve outsized growth over and above what I've. Just walked through these include organic volume growth and profitable small shop footprint expansion retail partnerships and adjacent product expansion professional channel network growth and successful targeting of higher income consumers.
As we said before we only begun to scratch the surface on most of these opportunities.
You can expect to hear more from us on all of these avenues for growth in the months ahead.
And now I'll turn the call over to Troy, who will provide more detail on our Q4 financial results, our liquidity and 2022 outlook Troy.
Thank you David I'll jump right into 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 fourth quarter was $126 million, which is a decline of 8% sequentially and decline of 32% on a year over year basis.
This was driven primarily by 66000 initial lennar shipments at an ASP of 18 99.
The latter of which is up 4% year over year.
For the full year 2021 revenue was $638 million, which is down 3% versus the prior year.
The Q4 decline is primarily due to the macro factors that David mentioned earlier in our revenue results were within our revenue guidance range provided in our Q3 earnings call.
I'll have more to say on these headwinds when I discuss our outlook for 2022.
Providing some details on the other revenue items implicit price concessions were 12% of gross aligner revenue up from 9% in the third quarter as we have.
Mentioned in prior quarters, we maintain separate reserves for IPC and cancellations.
We analyze and regularly rebalance those reserves based on current information.
Our I T C rate this quarter was due to this rebalancing on overall lower revenue for the quarter.
While IPC reserves were up for the quarter the credit of our AR remains strong with delinquency rates in line with prior quarters.
Full year implicit price concessions as a percentage of gross aligner revenue was 9%, which is consistent with historical rates.
Reserves and other adjustments, which includes impression kit revenue refunds and sales tax came in at 10% of gross line of revenue, which is flat to Q3.
Financing revenue, which is interest associated with our small pay program came in at approximately $10 million, which is slightly down relative to Q3 due to the lower accounts receivable balance.
Other revenue and adjustments, which includes net revenue related to retainers whitening and other ancillary products came in at 18 million, which is down slightly to Q3.
Now turning to smile pay.
In Q4 Smile pay purchases came in at 58, 5% of initial land purchases. This is down 1% relative to Q3 due to decreases in the U S and slightly below historical levels.
Since we do small pay customers is more price sensitive consumers than full pay customers. We believe this is client in the U S. Small pay rate is an additional indicator of macro factors, putting financial strain on our core customer.
Overall small pay has continued to perform well and our delinquency rates in Q4 were consistent with prior quarters.
While admittedly our core customers had difficulty with the macro environment. The fact that we kept that we keep a credit card on file and have a low monthly payment gives us the confidence that small pay will continue to perform well.
Turning to the results on the cost out of the business gross margin for the quarter was 65% representing about a 650 basis point sequential decline.
This sequential decline is primarily attributable to the revenue decline, causing that deleveraging of our fixed components of our manufacturing costs, along with a couple of items that we don't expect to repeat including startup costs associated with our smile O S implementation and lower retail margins due to higher expansion costs in our international retail business as well as higher reach.
Inventory reserves.
Collectively these nonrecurring items had about a 400 basis point impact on our gross margin this quarter and adjusting for these items would produce about a 69% gross margin in the quarter.
Yeah.
Our second generation automation machines are now producing approximately 91% of the liners up from 89% at the end of Q3, 2021 and.
And hit our internal target of at least 90%.
This streamlining is helping with our turnaround time productivity reduction in scrap any more consistent and superior product for our club members.
Marketing and selling expenses came in at $99 million or 79% of net revenue in the quarter compared to 70% of net revenue in Q3 21.
The sequential increase as a percent of revenue is primarily attributed to the decline in revenue, but it's also the result of increased marketing spend to increase international brand building as well as increased pressure, we're seeing with marketing efficiency from the challenges associated with Facebook targeting.
And the macroeconomic environment.
I'll outline later in my comments, how the cost actions. We took in January will reduce the marketing and selling expenses in 2022 related to exiting some of our international markets.
On small shops, we had 188 permanent locations as of quarter end and held 180 pop up events over the course of the quarter for a total of 368 location sites.
That total is consistent with the 365 at the end of Q3 and up significantly from 218 year over year from 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 meet the demand that is coming through aided awareness referrals and marketing.
We continue to evaluate profitable expansion of small shops and other scanning distribution models, we believe incremental demand exists to cover the additional cost of these locations.
They are also being critical in supporting our partner network.
We now have over 657 partner network locations globally that are active or pending training and an active pipeline of approximately 200 locations.
The reduction from 753 locations in Q3 is primarily due to the exit from the German market and deactivation of Dsos and private practices with low productivity.
With the addition of Brett deeper leading the team they have been extremely focused on tightening the model to maximize engagement and productivity within active practices.
So while the total number of partners has decreased productivity has increased significantly and the remaining practices with an increase in the total number of case submissions on a smaller base.
As referenced earlier, our marketing and selling expenses in the quarter reflects significant investment in brand building to support our long term growth.
This quarter's results bear out that emphasis sale.
Sales and marketing as a percent of revenue was 110% in rest of world markets compared to 71% in the U S and Canada.
We expect our emphasis and marketing spending to continue through investments in T V greater reach through Influencers and expansion of the partner network.
We believe this high funnel recapture strategy will be more effective and efficient longterm at building proved customer consideration through greater aided and unaided brand awareness.
This approach will also result in our business being less sensitive to the volatile performance of our direct response marketing with platforms such as Facebook.
Because we will have increased the pool of prospective club members aware of S. D. C that we can nurture through our CRM system and sales processes.
As expected early indicators in the U S and Canada, showing important sequential increases in lead capture per visit to our website and we expect this trend to continue as we lean into this strategy into 2022.
We are continuing to diversify our media strategies and investments to ensure long term efficiency in the face of headwinds from our <unk> 14.5 privacy updates and subsequent signal loss.
General and administrative expenses were 74 million in Q4 compared to $86 million in Q3 of 'twenty one.
The lower G&A costs was primarily due to lower stock based compensation costs, and a $9 million reversal of incentive compensation cost based on full year results.
Q4 also included a one time legal settlement costs of approximately $4 million.
Other expenses include interest expense of $1 9 million of which $1 1 million was deferred loan costs associated with the convert we issued earlier in the year 330000 was associated with long term lease accounting and 500000 was associated with capital leases.
Additionally, other expense was approximately 2 million related to one time closure costs of some international facilities.
All of the above produced adjusted EBITDA of negative $62 million in the quarter with an all in net loss of 95 million.
Breaking it out regionally adjusted EBITDA came in at negative $34 million for USA, and Canada, which aligns with the underperformance of this region due to the macro factors currently impacting our core customer for rest of world adjusted EBITDA was negative $28 million.
Yeah.
Moving to the balance sheet, we ended the fourth quarter with 225 million in cash and cash equivalents.
Cash from operations for the fourth quarter was negative 44 million cash.
Cash spent on investing for the fourth quarter was 36 million, mainly associated with capitalized labor and software as well as manufacturing automation and facilities free.
Free cash flow for the fourth quarter defined as cash from operations less cash from investing was negative $80 million.
We ended the year with 225 million in cash on the balance sheet and unlocked $120 million in cost savings coming into 2022, and believe we have enough liquidity to execute our plans we have.
We noted that we have access to additional liquidity through our ability to unlock the embedded value in our asset base to support any accelerated investments in initiatives, such as partner network and small shop expansion.
We often receive unsolicited offers to add additional liquidity on favorable terms and we are always evaluating our liquidity needs and capital structure.
As mentioned previously in January we took actions to reorganize our company and meaningfully reduce costs.
Overall, these targeted cost reductions to optimize our operations to refocus our business on achieving near term profitability, while minimizing any impact on revenue.
These actions are expected to reduce costs by approximately $120 million.
While the exact breakdown of the components of the cost savings could change during the year. The following should help you understand where the savings will occur.
Approximately five to 10 million in savings will be realized from cost of goods sold efficiency gains through right sizing, our staffing model and productivity improvements from automation.
Reductions due to scaling back our international operations, primarily in targeted markets will reduce marketing and selling expenses by approximately 30 million and general and administrative costs by approximately $20 million.
We will also say between $25 million and 30 million in operating expense from the remaining markets in corporate support to reduce team members and project related expenses.
Lastly, we will be reducing capital expenditures about $35 million to $40 million based on reduced spend for redundancy expansion and disciplined prioritization of capital projects.
Turning to our guidance for 2022, 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 customers through 2022.
Our guidance also does not include any outsize contributions to revenue or acceleration of investments related to expansion of our partner network, where small shop footprints.
We anticipate 2022 revenue in the range of 600 million to $650 million.
The lower end contemplates a continued worsening of the environment for our core customer.
The higher end assumes the macro headwinds impacting customers ease in the second half of 2020 two.
Gross margin is anticipated to be between 72, and a half and 75% largely driven by leveraging our fixed cost with increased aligner volumes, partially offset by higher volumes from oral care products that carry a lower gross margin.
Adjusted EBITDA loss between $75 million, and 25 million driven by flow through on revenue.
Capital expenditures for the year between 60 million and $70 million.
And finally, one time reorganization costs from our January announcement between 20 million and 25 million.
We are pleased to deliver Q4 results in line with our targets provided in our third quarter call combining the financial strength of our operations with our continued improvements in brand perception and brand credibility. Among consumers provides a solid foundation to help us achieve our 2022 and 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.
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Now our first question is from Matt <unk> with credit Suisse.
Please proceed with your question.
Hey, good morning, Thanks, so much for taking the question.
One question just on.
Some of the assumptions you've made around just sort of the pace of of inflationary pressure, which is something he talked an awful lot about the back half of the year and its effect on your demographic.
Your thoughts and then assumptions on how that plays into your guidance for this year and expectations going forward.
Yeah, I can take that one so we were one of the first companies to start talking about inflation back into summer.
And into Q3, you know back then it was around a five 5% in Q3, an increase of I believe six 5% and was just reported in January approaching 9% little shy of 9%.
So looking nobody has control or knows what's going to happen into 2022, our guidance is that we anticipate.
This type of inflation high single digits low double digits is going to continue.
And that's the range of it if it worsens, we could be at the 600 million low end of the range.
To ease based on some of the things that the government's going to do.
We believe that we can hit the higher end of the range. So but everything is accounted for as far as anticipating that this will continue and some of the tactics that we're doing.
Fight that are not necessarily built into the model will continue to do.
Yeah Joe.
<unk> come up with with what tactics and solutions to combat that one of those is going into the higher household income group, which is affected.
By this inflation.
And then expansion into our partner network, which we believe is incremental and not quite as affected as well.
Okay.
Well. Thank you for that and then just maybe a follow up on your you talked a fair amount about the restructuring and the.
Uh huh.
Cost savings and flexibility that's going to drive into your model.
Can you talk about maybe the trajectory of our of your marketing spend.
Span and brand investment and how some of the savings are are you know factored into that or what the trajectory of that looks like.
Yeah. So so from a marketing standpoint first of all that's that's a core competency of the group.
Playing all channels from digital to offline T V.
Mail all of them and.
So we have the ability to move in and out of different different channels, such as Facebook has been affected by the privacy and I O S.
In our long term model, what we're showing is we're really getting leverage.
Awesome.
The price increases that we've just announced we have not done a price increase.
We had done five price increases since we started the business over five year period, we pause when COVID-19 hit.
And we kind of were watching what was taking place.
And now that we're coming out of this pandemic into a more normal state we are in and with the inflation. That's that's hitting most companies are taking some form of price increase so we're gonna be announcing a four.
4% to 5% price increase in the next month and.
And get back on a regular cadence of price increases over the next five years, so that helps with the CAC and the leverage that we can get on our marketing spend we do anticipate some efficiencies over the next five years, it's pretty modest but the leverage that will get it will be off a R. E. S. P that'll.
Continue to go up 45% over the next five years.
Okay. So it sounds like no.
The spend on marketing investment and brand is something that you'd say is continues at a steady trajectory.
Operating leverage in and and pricing are the things that drive it drive your improving margins.
At a high level yeah yeah.
Yes.
Yeah, that's fair I mean, there will be some efficiencies.
Efficiencies as you know as we put more dollars and we've already put $1 billion of marketing up in the marketplace. We have 54% aided awareness our NPS scores are in the mid 50.
<unk> 50 range now so that that has got to equate into more referrals, which will help lower the cap. The other thing that we are launching.
We haven't really talked about it it's a small tack it but I think it's it's it's one that we kind of overlooked.
Really a strategy around more viral marketing with our customer base and we have over there.
And a half enthusiastic members.
Who are very passionate about S D C.
And we're gonna be harnessing their energy and our new viral marketing efforts this year.
What more posts are asking our customers to post more on Instagram and Tic Toc and currently when when the customer has a great experience with us. They we ask them to go to Google or Trust pilot post reviews, well, we've got a couple of hundred thousand four to five star reviews that Google getting another one is not going to make it.
So we're shifting our tactics to asking and providing a way for our customer base to do more viral marketing posting which we think will also reduce our CAC.
Can get more referral business.
Yeah, and just just to add to that thank you.
Just to add to that for our savings initiatives, the $120 million about $30 million of that will come from the <unk>.
We made an international which will also help drive a little bit of leverage from a marketing and selling standpoint.
Excellent. Thank you.
Thank you. Our next question comes from Nathan Rich with Goldman Sachs. Please proceed with your question.
Hi, good morning, Thanks for the questions maybe just following up on the the comments David that you made on pricing both what's embedded in guidance for 2022 as well as the.
Longer term outlook I guess, you know first you know how sensitive do you think demand is two price increases in this environment and then I think if you do take can afford a 5% price increases a year. That's typically above the level that we've seen you know with from Invisalign in the Doctor Channel I guess, so how do you think about it.
Maintaining the price differential relative to the GP channel to kind of maintain that value proposition that you have.
Yeah. Good question Nathan so.
We have taken five price increases you know we started this business at 995 dollar ESP, we knew that was not sustainable, but we just wanted to take price out of the equation and see how the customers would transact.
Once we saw the demand we started raising their prices every year for five consecutive years, we're still the low price leader right. I mean, there's a couple of smaller competitors, who follow our lead if we go up they go up because the unit economics are not nearly what ours are.
Theres no reason, especially today with the advancements we've made in our product and our treatment planning or manufacturing which is.
Outstanding by the way.
All the work that we've done with her smile was complaining or gen. Two automation.
Laser cut lines that fit the comfort point.
Point is is that we're 60% last embraces and current peer lighters therapy in the marketplace.
So for us to go up over 45%. If you if you look at the model in the Investor deck, where it gets us to 2026, it's still pretty insignificant, it's still a 50% or better saved.
Savings than what's out there with with other clear liners and so to protect our consumer.
Who relies on smile pay we don't anticipate going up on the monthly payment will go up on the single pay so if we're at 1950 now if you take a 5% increase you do the math. We're at 2052 went up $100 $100 is meaningful and 350000 units that's $35 million annually right to the bottom line.
But smile pay which is 60% of our business, we're going to maintain that $89 a month, because that's the sweet spot with tested different price points and so from an affordability standpoint, as long as that consumer spending $89 a month to straighten your teeth.
You have to do and what we plan on doing is extending the term.
So instead of 24 months, maybe 26 months, we took another price increase maybe 28 months, so from an affordability standpoint and by the way we've seen in the past when we've taken these price increases it has not affected our conversion.
So.
We feel very good about the ability to take this 45% increase and by the way you know invisalign is not selling to the consumer and they're not offering financing to the consumer so they're showing to the doctor who either absorbs the price increase or for Lisa or raises their prices to the consumer.
So for us, it's a little different matter and I think by having this captive financing, having the smell of pay and the flexibility of the terms that we can use we can we can never take any of that too.
Great. That's helpful and maybe just a quick follow up on the.
Revenue outlook for the year, you know, maybe how or how are you thinking about kind of the pacing of growth over the year now I guess kind of going back to how we were thinking about revenue growth then in 2021 and looking sequentially. It seems like if we kind of apply that for 2022 you'd be looking at kind of high single digit sequential growth quarter to quarter.
Or is that sort of what you're expecting or maybe growth maybe more weighted towards the back half just given some of the near term pressure on the consumer does anything you could do to help us with cadence that would be great.
Yeah, I can take that so we definitely believe.
I believe that the back half of the year will be a little stronger than the than the front half just because of the macro economic conditions. We're in currently we do expect Q1 seasonally to be a little bit better than our than Q4.
And probably if you look at the full year, we would see a 45% to 50%.
Of the 600, and 650 million being in the front half with 50% to 55% being in the back half of the year, that's kind of the way we're looking at it.
Great. That's helpful. Thank you.
Yeah.
Thank you. Our next question comes from Chris Cooley with Stephens. Please proceed with your question.
Hi, This is Ben on for Chris Thanks for taking the question.
Just wanted to dive in first to the new demographics. They were looking to reach could you help us better understand the timing and magnitude of marketing.
Marketing spend over the next few years and how long do you think it will take to develop these new markets. Thank you.
Yeah. Good question Ben So.
Nothing is in the model today for capturing more of that market. You know, we do we do get 125000.
Household income and higher but we under index and so are our NIM.
Actually we want to get back to index and then over indexing.
We said that that market right now.
21 million case starts if we just get a fraction of that we think it's very meaningful it can really get us to.
To another level above and beyond even.
Higher end of the range of 650 billion I'm, giving guidance to we we we have plans with it it's one of our big initiatives. We're working on it it's going to take some time I think you'll start to see some of this rollout in Q3, it's a very comprehensive plan. It's not just about price, which is what we kind of dabbled in in 2021 making sure customers on it.
Stood that.
We don't have this three time markup that we are 60% less embraces and traditional liners.
But because of the advancements that we've made in our product offering and some of it some of the new.
Patients that are going to be coming out we think we can put together a real comprehensive solution for the higher household income involves all of our products.
All the services that we can offer and make it very appealing to the consumer so cant say a whole lot to today, but you'll see us.
The launch of that later in the back half of the year and then we'll continue to measure and test and expand upon.
Okay, great. Thank you that's very helpful. And then real quick just jumping back to the price increases.
Forecasted increase in pricing come with historical level of price concessions and reserves are how can how can we think about that moving forward. Thank you.
Yeah, we expect our consumer has been pretty consistent I would say over the last year and so from an overall credit perspective, I would say I would think very consistent.
Numbers year over year from an IPC and cancellation reserve perspective.
Thank you. Our next question comes from Jon Block with Stifel. Please proceed with your question.
Thanks, guys good morning.
Maybe just to start giving you any more on the partner network. You know it's been out there for a while for some time and I know you talked about those that are signed up and cleaned it up for the international markets.
Exited but any metrics you know on practices that have been signed up for more than six months or 12 months or traction that you're seeing from guys that have a little bit more longevity. If you would on the platform because it just seems like this is a key initiative for you guys from a cat perspective on how to get.
Volume at better economics, so are there any more color to provide there.
Yeah, no that's it.
That's a good point Jonathan so.
We've been definitely tinkering with it.
Sure.
We're ready to start growing that that initiative, we hired Brett Devers as we've talked about he's an industry veteran in the dental space.
He's he's already morph the model to be more of a hunter farmer model, where we are and we've been hiring up some of our farmers with sugar.
Customer service, calling on accounts once they are hunter signs up.
You know our practice so.
And you're right on the CAC side. It's it's you know based on the fees, we're paying and all the services, it's about a 50% savings so it's definitely.
Something that Oh.
It will help overall with our marketing spend and it's incremental I mean. These are these are most of these are customers coming from the practice. He says that their patients are introducing smile direct club.
Brand to them.
And so you'll start to see some some real progress our partner network.
The 600 5600 to 650 million guidance. Once again does not include as we really start to grow that out because it hasn't happened yet but were less than 1000 offices today. The pipeline is a little over a thousand but we're gonna start as we get some of these metrics down and we will report on these metrics I know you guys want it when a here similar to what.
Our wholesaler like Invisalign or other clear aligner therapy companies do you know number of offices submissions.
And you know growth in offices growth in submissions. So one of the things that we're really working hard on is getting those submissions up and I think with this with this farmer model that we're doing in some of these other testing.
Test and learn kinds of initiatives that we're doing we're seeing these submissions go up we feel the number of active partner network locations came down not.
Substantially but about 100 offices our submissions in total went up so I think in the next couple of quarters.
As we start to grow this will start to report on some of those things. So that you can model it out.
Okay. Thanks.
Thanks, that's helpful and maybe just to shift gears I know Nathan earlier asked about the cadence of 'twenty, two but maybe just overall 22 I mean, when I look at the <unk> 21, it seems like the exit.
Revenue run rate adjusted for the international markets that you exited was likely shy of 500 million you've got the $6 25 billion midpoint, it's still tough out there inflation surging youre, saying Theres no partner network in that number. So can you just talk about how.
How you get there it just seems like a very very healthy ramp and what gives you conviction in.
Those numbers are that sort of a midpoint of 625.
Yeah.
Yeah, I can take that so I mean, if you don't have to go back very far. However, you do point out the Q4 'twenty one number about 126 million from a revenue standpoint, and 66000 liners ship, but you don't have to go back very far to see you know, we exited Q4 of 2020 on $185 million and in sales and 100.
Aligner shipments Q1 of 'twenty, one we did over 100000, there as well. So we think that you know really all we need is a little bit of an improvement in the economy, we should be able to see some growth. There we have obviously other.
Triggers that we can pull as well to drive some additional growth, but really the macroeconomic environment is really what is what has hurt us. So far so just a little bit of an improvement there we should see our numbers improve.
From what we exited 21 with them.
So overall, we feel pretty good about where those numbers are considering the 625 is.
The mid point, which is if you take international out there is about the same numbers are really flat.
Two to 'twenty, one and we do believe we can get some growth with just a little bit of improvement from the macroeconomic environment.
Thanks for your time guys.
Okay.
Thank you. Our next question comes from Alex Nowak with Craig Hallum. Please proceed with your question.
Hey, guys. Good morning, this is Sean on for Alex.
Just have one company a split between high spend.
We believe the company was originally.
Yes.
Yeah, Yeah, we I can't hear him than anybody else.
Sorry can you hear me now.
Yes, sorry about that yeah, I just had a few company a split between high spend and low spend and do you believe the company was originally wrong to reduce spend back in 2019, and 2020 and up in other words.
What is the brand awareness of smile direct not quite at the level you expected.
Yeah.
I'm not sure I totally understand the question usually high spend most of them so that they're coming into the IPO and into Q4 2019, we were definitely in hyper growth mode. If you remember.
Back in the infrastructure of the business did not keep up with the growth went from 100 and these are rough numbers $140 million.
17, 450 million 18 750 million.
19, and our shipments were going out late we didn't have our gen. Two automation, we didn't have our new treatment planning software. We didn't have a lot of the infrastructure that we have today. So we decided to slow down growth theres, nobody chasing us we own the market.
And on the telehealth side and so.
Is that to me that was the right thing to do I mean, we're a company that's very customer centric focus we want to have this great experience for our customers and so we're back we're back at that point right now.
You know a five star experience for our customers.
Part of the issue that we have today is with the iOS 14 and in a lot of the channels that we were using the signal loss. So you know.
Tax starts to go up so you have to find other channels. The good news is that we like I said, we play in all the different.
Channels so shifting.
This quarter, we're looking more podcasts direct mail other vehicles, where we don't have that privacy issue and so we'll be testing and learning in other channels. The price increase does help allow us to.
The 5% handily allows us or on our CAC side as a percentage of sales.
To continue spending.
At these levels.
Mid teen CAGR, we feel very good about until the opportunity.
Exists that we can do more.
We're very agile group and and you know people mistake that.
Flip Flopper Wishy washy, we're not okay.
We can be agile and if so if the market throws a punch.
We can counter and go the other way and that's something I would think of as investors you would you would like versus getting stock in this big shift it can't turn.
The headwinds of inflation came on very fast I was 14, nobody thought it would have the impact that it did you know Facebook and others. So.
I think we're pretty nimble and I think I think we're pivoting and we have really good initiatives on the on the higher household income the partner network, our small shop expansion, which we haven't talked a lot about on this call.
Pre COVID-19 , we were over 300 shops, and we definitely like a lot of things were doing back then we were over expanding and we started to see some cannibalization.
Colby gave us the ability to reset we've shut down all the shops. We now have about 100 shops that have reopened and what we have seen especially as COVID-19 subsides as subsiding and more people want to start the journey through the shop.
And so we're slowly going to test into more shops, which are incremental not only gets the person to start with smile direct club, who otherwise wouldn't want to do a kid in the market, but also that experience going through the shop is a higher conversion than a kit customers.
So even if we're able to just ship kits the scans in a DMA if it's enough of them.
It's incremental and it's more profitable for us to have that shop. There. So that's something we're going slowly, but we see light at the end of the tunnel there to get to a larger shop footprint, which once again, it's not in the numbers so that that would be incremental if we can.
If we can get another I'm just going through a number of 50 or 100 shops out there.
<unk> does have a higher conversion and two our same dollar spend in marketing a lot more people to start with Smile direct club.
Thank you. Our next question is from Robbie Marcus with Jpmorgan. Please proceed with your question.
Oh, great. Thanks for taking the question.
Maybe first just to follow up on that David.
You know there were some changes with the way online advertising works with iOS Facebook.
And the Smile shop presence is lower than you.
You know, let's call it a year or two years ago, how do you think about.
The ability to increase your selling and marketing productivity, it's you're decreasing the percentage of sales going forward.
Yeah.
So yeah, I think there's a lot of the same stuff that I've been talking about so.
To increase the productivity of if we got to find newer channels TD has worked well for us, but it's a longer term play it's more of a lean driver awareness place. So we've seen it in the numbers getting up to 54%.
The awareness will be growing every quarter long term that'll pay off so when someone's because.
Streaming is a considered purchase.
Christmas over two years on their income profile it maybe more.
So that it will pay off its not as immediate as a Facebook span, where you needed to get a quick through and.
So you get a sale.
So I think.
Better customer experience will help better NPS scores better referrals more referrals drives down the cactus this whole new thing that I'm talking about with with viral marketing.
It's real and other companies have been embracing it, especially you're hearing.
A lot of times, you hear things first here.
You're going to hear a lot more about viral marketing because a lot of DTC and companies that deal with consumer facing the same issues with with their marketing spend on digital.
And so that's something that you know as I look back on it it was like Wow, we have we have these really passionate.
Fans.
And half of them, who we need to harness that energy and we have really.
Good I think a good strategy of using.
The shop experience coming out of the shop after that moment when they open their SA O box once box when they get that and how excited they are to start their journey, there's lots of points that.
We're going to try to use so if we can get even you know, 5%, 10% or more.
More and viral marketing, which would cause referral business that that will also get to make our marketing dollars more product.
So I hope that helps.
Yeah.
Okay, and maybe as a follow up how should we think about the company's view on international expansion at this point. It is taken out of the long term client permanently or is it still a viable option depending on on the market, but you know thinking back that was.
One of the biggest drivers of long term growth regionally. So just thinking about how it plays in right now thanks.
Yeah. Good question, we've been getting asked that quite a bit since we shut down some countries six countries now.
So it's paused I would say it's not forever.
We were seeing gains, but it was slow a lot of these countries had advertising restrictions they had telehealth restrictions, Germany. It just come down with the Supreme Court mandate that telehealth until a dentistry companies could advertise directly to consumer Spain was another market that we exited they had really tough laws on advertiser.
<unk> medical.
Medical devices.
Couldn't have certain shops teeth, and there are no before and after so a lot of the restrictive countries, which I think over time, because theyre being lobbied now some of that will ease.
It will help too.
Help us to get back in there but.
You know the current model that we have this mid teen CAGR does not include any expansion other than the countries that we're in today.
We'll be looking but the reason we exited them, even though we were seeing improvements as the marketing costs.
Were so substantial and the return on investment was so long that we said you know the position we're in today.
And cash is king.
We want to make sure that anything we're investing in has near site with <unk>.
Turned out investments such as apartments.
Such as a higher household income we're going to see very quickly. If we can make that work, we're not going to over invest within.
Two to three year kind of horizon.
Our ROI on our cash and that's what was happening in some of these countries. It was just too long term.
We did a lot of work.
<unk> work, what we call on the regulatory side.
On the financing side.
India, China, a lot of other countries. So the work's been done a lot of them. We have the licensing for so it's kind of shelves pause and at some point.
Whether it's more with the house's money and we built up a cash war chest, we see easing of restrictions a good market.
Launched fairly recently.
Didn't have as much rigor.
The regulatory environment.
We're getting was easier and there was a kit business. All these countries. We couldn't go to market both ways. So, it's Spain kits, where not a lot.
So it was a very expensive proposition to have these shops.
France is a market that we opened up.
You know pretty recently and saw a really good success more like what we saw in the UK when we opened in Australia.
Less regulation kit business shops, we don't have to have a G. P N.
Germany was another market that you have to have a dentist and your smile shop, So theres lots of regulatory issues that cause. These things these countries to be unprofitable with a long term horizon and that just didn't make sense for us at this point in time.
Yeah, just to add to that I'd say just beyond international you know the things that we haven't really included in our model. If you think about we talked to 20% to 30% growth in the past we're mid teens now, but we have so many opportunities around partner network.
Entering into that higher income consumer market, which we really haven't tapped into at all and that's that 21 million case starts. So just a small entrants into that category well will be an important improvement for us as well as like I said small shops partner network, there's a lot of opportunities for us for growth beyond just that international piece.
As well.
Great. Thanks, a lot.
Yeah.
Thank you. Our next question is from Michael Ruskin with Bank of America. Please proceed with your question.
Hey, Thank you. This is Peter on for Mike Just one quick one for me just thinking about a little bit more backend. There I know you just touched on it but maybe can you quantify or give us a sense of what's embedded in that base case through 'twenty six.
For your rest of World revenues I guess, maybe in other words what percent of your mix would you expect those to compose by 26. Thank you.
Yeah, I can take that the what we're looking at from a <unk>.
U S versus rest of world was very consistent between the two of those I would say so.
It's been about an 80 20 split.
Again, we did about $15 million last year in the countries that we exited.
We expect to gain some of that back from an international perspective, but overall I would say long term, we haven't built in a lot of those growth initiatives that we just talked about so this is really kind of that organic growth with the existing customer and we would expect those growth rates to be similar between international and the U S.
Very good thank you.
Yeah.
Thank you. Our next question comes from Brandon Couillard with Jefferies. Please proceed with your question.
Hey, Thanks, good morning.
Just back on the partner network.
How many active or pending locations would you expect to have by the end of the year or what TPI should we look at.
<unk> your progress in that.
Alrighty channel over the year.
Yes, I think so we're not we're not giving those numbers out today is.
Another question on this on this topic, but we will be happy to do that as they become more meaningful.
That'll happen this year in the next couple of quarters.
Things like submissions.
Number of locations that are that are opening and trained and open. So that's what we call active they are in the pipeline.
It come live there's about a three week training that goes on within those offices to get them up to speed and there's ongoing we have what we call. Those farmers that are constantly calling on these offices to make sure we're front and center, but is this whole thing comes together, it's going to be.
It's an engine that we're pretty good at doing you know when the small shops, you saw that that's starting to work.
We were opening 30 small shops a month.
You know at some point it will start.
You know expanding more rapidly the partner network and as it becomes more meaningful part of our revenue will start to share that just like we do with the rest of the world. So we will start talking about X percent of our business or minor sales are coming from the partner network Here's how many offices. We're in here somebody submissions on average we're getting very.
Very similar to the wholesale model that you see.
Another clear aligner companies, calling on the professional channel so.
We expect similar metrics to keep your eyes.
Okay, and then just one clarification pointed out that the guide doesn't include any potential accelerated expansion of the partner network with smile shops from a revenue or expense point of view, but just curious like what would what would trigger that what would be the goal.
The change that would.
The draw.
Drive that spending or is it the macro things that traction with the network funnel.
Just curious what that would be.
Yeah Yeah.
Macro.
It is a cloud over everything, but I think a little less so in the partner network and the high household income, but specifically on the partner network, you know whats going to ignite that growth engine as some of the things that we're working on like this new this new go to market approach with the farmers and the hunters a couple of other things we're doing we announced a cursory partnership you start.
Placing these care streams inside of our partner networks.
About two thirds of the dental offices out there still use an impression kit two thirds.
Dennis just to one invest in them because they have another option, but it's it's a real good productivity option and it's great for us because it takes a lot less time, but the hygiene patient to get scan and get loaded into our system by the hygienic. So.
Little niches like that that once we see sustained traction we can get our submissions to a certain level and our models that makes sense. Then we'll start to accelerate growth. We are growing I mean, we are opening new practices. We've got 12 of them in the pipeline. We are we are continuing but I'm not what you're asking for a little more aggressive growth.
We want to see.
A few more things come to fruition on the submission side.
I think you'll start to see some more growth in that same thing with the small shops. So we have next month.
I think it's 10, new small shops, which we have not opened new small shops really since COVID-19 .
I shouldn't say that we opened our base case back up we havent incrementally opened new ones.
And these are.
Not only just new DMA, but also existing dnas that may have one or two shops, where we used to have six so we're testing into that right now we always get an initial pop in the first two three weeks, we got to wait about four to six weeks to see the instrumentality analytics team in F. 18 is measuring all of this and as we see incremental.
Profitable revenue above and beyond just having kits in that market or kids in one shop, and we will we will start to accelerate that as well.
And get more shops open, which will will add to the guidance that we gave and you'll see that and you'll hear that in the coming quarters that we've gone from 100 shops to 120 shops to 140 shops et cetera.
Thanks for the time.
Yep.
Thank you our last question comes from Laura Champine with loop capital. Please proceed with your question.
Good morning, Thanks for taking my question. So if I look at your long term outlook. This mid teens growth trajectory given that that it is.
The macro that's hurting sales trends now I'm I'm curious what kind of macro expectations you have in that long term view, what do you think of it as as what level of GDP growth or how do you frame out the macro backdrop to that to that mid teens growth rate.
Yeah, I can take that.
Oh, Yeah go ahead trail probably has some color go ahead.
Okay. Yeah. So just from a model perspective, we just really see more of a normalization. If you look at the 8% increase in our in costs for non discretionary.
In Q4, we just see more of a normalization of that so I would say that coming back a little bit would be what we would expect through the back half of this year and then much more normalization.
Three through 26, obviously the inflation you can't continue at this rate going forward. So we definitely expect some normalization.
Yeah that was gonna add it and we put this in the investor deck in her guidance liner.
Aligner shipments in 2026, you talked about five years out or.
Are the same as 2019, I think it's a pretty conservative now.
You know a lot of the 15% increase CAGR is made up of a bunch of things, where it's a price increase whether it's oral care expansion retainers, which is a bigger part of our business today. The subscription models that we have for containers.
So from an aligner perspective.
It's pretty conservative.
So you.
Getting to the 400000 plus shipments in 2026.
Very doable, we believe.
In this environment and like Toy said, it's five years from now we don't expect there'd be.
<unk> 10 per cent of inflation.
There will be a correction at some point.
Which could accelerate the growth to it and all the things we're talking about.
What's gonna not in that five year model the partner network higher household income shop expansion.
All those things will add to the model N will update for guidance.
So at the end of the year. This is going to go through.
Got it thank you.
Okay.
This concludes our question and answer session. Thank you for your participation you may now disconnect.
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