Q2 2023 Sonendo Inc Earnings Call
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Good afternoon, and welcome to <unk> second quarter earnings Conference call. At this time all participants are in listen only mode. We will be facilitating a question and answer session at the end of today's call.
As you reminded this call is being recorded for replay purposes.
Now, let's turn the call average Luisa Smith from the Gilmartin group for a few introductory comments. Please go ahead.
Thanks, operator, good afternoon, and thank you for participating in today's call.
Joining me from Sin endo or be Orenburg, Hahn, President and CEO and Michael what CFO .
Earlier today Fernando released financial results for the quarter ended June 30th 2023.
Copies of the press release is available on the company's website.
Before we begin I'd like to remind you that management will make statements. During this call include forward looking statements within the meaning of federal Securities laws, which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Any statements made on this call that relate to expectations or predictions of future events results or performance are forward looking statements.
All forward looking statements, including those relating to our operating trends and future financial performance.
The impact of COVID-19 on our business.
Fence management expectations for hiring growth in our organization market opportunity revenue guidance commercial expansion and product pipeline development codebase.
Upon our current estimates and various assumptions.
These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those implied by these forward looking statements.
Accordingly, you should not place undue reliance on these statements.
For a list and description of the risks and uncertainties associated with our business. Please refer to the risk factors section of our most recent annual report on Form 10-K filed March eight 2023, with the Securities and Exchange Commission and available on Edgar and in other public reports filed theory.
<unk> with the SEC.
This conference call contains time sensitive information and is accurate only as of the live broadcast on August nine 2023.
<unk> disclaims any intention or obligation, except as required by law to update or revise any financial projections or forward looking statements, whether because of new information future events or otherwise.
And with that I will now turn the call over to Bjorn.
Thanks, Louisa and good afternoon, everyone and thank you for joining us today.
This call I will start with some commentary about second quarter performance business highlights and forward looking strategy before turning the call over to Mike to provide additional detail regarding financial results, we will finish with Q&A.
During the second quarter, we continued to see increased adoption of our technology, while also navigating a challenging market environment.
Revenue for the quarter was $11 million in the range of our expectations.
While we acknowledge that revenue was at the low end or quarterly guidance. We remain confident in the strong foundation of the business. The uniqueness of the technology and that we will ultimately capture long term value.
I'd like to spend some time discussing the second quarter results, specifically highlight some of the challenges we've experienced at the top and bottom lines.
I'll then provide some detail regarding specific initiatives that we have already begun implementing for the remainder of the year, including top line growth drivers margin profile improvements and balance sheet preservation.
In the second quarter, the team delivered 5% year over year revenue growth.
Sales for the second quarter totaled $5 6 million, representing a 16% year over year increase.
We're very pleased for the year to date performance of procedure instruments, and the positive benefits, our new pricing program.
Clean full adoption also improved reaching over 60% penetration.
We are now projecting to be significantly ahead of our 2024 targeted timeline for full conversion.
Turning to console placements, we experienced a decline in the placements year over year.
<unk> sequential growth over Q1.
There are several reasons as to why this was the case many of which are dynamics, we have communicated over the past year in prior calls and at Investor conferences, but today I'd like to address the headwinds in capital sales and what we're doing to drive console placements going forward.
During the second quarter, we had several late stage opportunities where potential buyers chose to delay, making a purchasing decision.
They are not falling out of the sales pipeline and we believe they will adopt John wave later in the year.
Attribute much of this delay to macroeconomic uncertainty and related increasing interest rates.
As we have noted in previous calls our pipeline and interest in <unk> remains strong.
We are generating more new leads than in prior quarters and have more opportunities to continue to nurture within our pipeline than at the same point last year.
We're seeing constraints, primarily on timing of capital expenditures at dentist offices and other financial considerations.
The implication of these dynamics is an elongation or our sales cycle.
When we look at the first half of the year. The vast majority of the deals that we've signed continue to be with the endodontist with only a limited number of console sales attributed to dentist within the GP channel.
There is significant runway of untapped customers in the GP segment, particularly in higher volume dental practices.
No that previously that the GP rollout would be a measured strategy to ensure a high level of service solander has become known for and provide us with the opportunity to address this new channel.
And analysis of the funnel entering the second half shows a more equally weighted pipeline between GP and then to doctors.
The majority of Gp's do not know about to Delray procedure and the value proposition it brings to their practice.
As we educate them through our sales team we are encouraged by their enthusiasm.
An example of this is our recent attendance at the Florida Dental convention.
There was a lot of interest and discussion around how the technology works and how to integrate it into their practice.
This gave us great exposure and a similar experience to other GP focused trade of us.
Therefore, we believe demand generation, we've cultivated and the initial stages of our GP strategy will produce a higher proportion of sales within that segment in the future.
Associated with the earliest GP accounts, we've gained some important learnings for our long term strategy.
The sales team is seeing three distinct segments, where jumbo delivers significant value proposition to their practices.
The first segment consists of GPS.
We're already keeping procedures in house.
As a result of <unk>. They are now able to offer not only a better patient experience reduce chair time, but also increased practice productivity and potential referrals from satisfied dental patients.
The second segment are dose GPS the see the potential for leveraging <unk> to offer same day endodontics workflows that include both the endodontics and restore to procedure and therefore increase revenue per chair.
The third segment represents those GPS that had previously been referring outreach canals and who are now able to keep them in house to produce an additional revenue stream for the practice.
And all of these segments. Our system allows these doctors to confidently treat their patients.
One GP, who recently adopted <unk> share with our sales team.
And I quote.
This machine gave us the confidence to perform high quality rct's.
Molars, which we previously didn't do the disinfection of the root Canal system is their perfect every single time and quote.
We're still in the early stages of what we believe to be a significant growth opportunities with GPS and we remain confident that investing in the GP channel is the right strategy for the business at this stage.
Consequently, we reallocated resources to increase awareness and demand from new doctors, specifically within the GP segment.
Also moving investments into educational events and activities that have historically been important clothing initiatives.
We have several programs that allow doctors to get in office access to Java.
That allows them to evaluate how the system works for their business model and how it fits into their practice workflow.
Additionally, we're focusing investments to drive professional media specifically for this segment.
Building out the GP channel strategy should prove valuable as we move through Q3 into Q4, which has historically been our largest quarter due to the increased purchasing trends that accompany doctors benefiting from tax incentives.
Okay.
In conjunction with our GP channel initiatives is our approach to the DSO or dental service organization market.
This includes both specialists dsos and other GP dsos.
We're pleased to announce that we recently hired a corporate account leader that has direct responsibility for the development and implementation of our DSO strategy and.
And who comes with substantial experience within the DSO market.
There are thousands of dsos in the United States and Canada.
The new corporate accounts role is a reflection of our commitment to put more attention and focus on the critical market opportunity.
While were bullish about the opportunity to expand the GP channel and gain traction within the DSO market.
We have not relented on the focus on and adopt us.
And those remain an underpenetrated market with less than 20% of the over 5000, the endodontist in the United States and Canada utilizing the <unk> system.
It remains an important strategy for <unk> moving forward and one that we will continue to commit resources to.
Moving to the bottom line I'd like to focus some of our time to discuss margin expansion.
Second quarter gross margins were negatively impacted by the result of specific accounting adjustments, Mike will discuss the details of those charges.
During his remarks, but I'd like to address our action plan to return higher margins as we exit 2023 and prepare for accelerating improvements in 2024.
Regarding an improvement to margins on our procedure instruments first one of the charges. We took in Q2, we will accelerate our adoption of clean flow by exiting a supplier relationship and canceling a future order relating to the molar pie.
And this also relates to gross margins.
On August one.
We announced that the clean for Pi is not indicated for use on anterior teeth until now anterior teeth required the use of a separate pi the APM to be used for the gentlemen system, requiring multiple manufacturing line and sourcing of alternative materials.
These steps Mark important milestones within our planned margin expansion and goal of one pie for <unk> at the start of 2024.
Having one pie will greatly improve our ability to achieve economies of scale simplify the product portfolio achieve supply chain consolidation and ultimately results in higher contribution margins.
Turning to consoles as we discussed in our first quarter call we have <unk>.
Made the decision to bring G. Four console assembly in house.
Assembly line is fully operational and we've already placed a number of internally assembled units with customers.
In House Assembly, not only allows us to focus on optimizing the manufacturing process. It also ensures closer supervision of the entire supply chain and oversight or quality control for units in the field.
We anticipate that we will be able to accelerate cost reduction leverage internal resources, and therefore margin improvements by making this change.
And finally I'd like to touch on our ongoing strategies for balance sheet preservation and expense management in June and July we implemented an approximate 10% reduction force and cut future expenditures to reduce our cash burn.
We're continually reassessing, our spending requirements and we are prioritizing a tighter expense program in the near and longer term.
In summary, we are allocating resources to accelerate <unk> adoption and have multiple initiatives to improve gross margin and reduce cash burn.
I will now turn the call over to Michael What's So then those chief Financial Officer, and then return for some closing comments ahead of the questions and answer session.
Mike.
Thanks, Darrin as previously stated Fernando total revenue for the second quarter 2023 was $11 million compared to $10 5 million for the second quarter of 2022, an increase of 5%.
Q2 product segment growth was 4% versus the prior year with an increase in <unk> revenue, partially offset by a decline in console revenue.
<unk> revenue was $5 $6 million compared to $4 8 million in the second quarter of 2022, an increase of approximately 16%.
<unk> revenue growth was driven by new Pi pricing program, which resulted in an approximate 17% increase to average selling prices compared to the prior year period.
Procedure instruments sold in the quarter totaled over 73000.
As we had mentioned during our Q1 2023 earnings call Pi sales out were higher in Q1 due to customers buying ahead of the 2023 price increase.
We believe this negatively impacted Q2 volumes by approximately 5%.
Note that year to date revenue is up 24% over the same period for 2022, reflecting positive results in our pricing program and utilization.
In the second quarter General wave console revenue was $2 $2 million compared to $2 $7 million in the second quarter of 2022 with reasons for the decline addressed in Piceance commentary.
The average selling price for the general way of console was roughly $60000 sequentially lower with an unfavorable ASP mix attributed to special pricing on the legacy gentle way of Gen three console.
Total other product related revenue was $1 million in the quarter.
Total software revenue for the second quarter was $2 3 million compared to $2 $1 million in the second quarter of 2022, an increase of 8%.
<unk> continues to perform well and gained favorable traction and group practices.
Gross margin for the second quarter of 2023 was 10%.
This represents a decline versus Q2 2022 in Q1 2023.
As John previously mentioned within the quarter, we recorded two charges relating to inventory.
The first charge of $1 7 million relates to an excess quantity of our legacy Gen III consoles and reflects lower than anticipated demand of gen. Three driven by customers choosing the newer G for console.
We are committed to supporting our Gen. Three install base and plan to continue to offer Gen. Three as an option for customers, albeit at lower quantities than planned.
The second charge of $1 2 million relates to the retirement of legacy procedure instruments, the molar and APM and termination of a supplier relationship for those products.
Our plan to accelerate the transition to one <unk> with clean flow will lead to sustained margin improvement in the second half of 2023 into 2024.
These adjustments gross margin for the second quarter would have shown positive improvement year over year and sequentially from Q1 of this year.
Total operating expenses in the second quarter of 2023 were $18 million compared to $16 $8 million in the same period at the prior year <unk>.
Increases were driven primarily by higher general and administrative cost relating to stock based compensation recruiting and legal expenses and higher sales and marketing expenses related to increased revenues.
Is that partially by lower R&D spending.
Loss from operations was $17 million in the second quarter of 2023 compared to $14 3 million in the second quarter of 2022.
Net loss was $17 $7 million for the second quarter of 2023 compared to $15 1 million in the second quarter of 2022.
Our cash and cash equivalents and short term investments as of June 32023.
Approximately $65 9 million.
Long term borrowings remained at approximately $40 million.
As noted in our earnings release Q2 cash and cash equivalents includes the receipt during Q2 of the entire $4 4 million employee retention credit recognized in other income in 2022.
Okay.
As for our 2023 financial guidance, we now expect net revenue to be in the range of 44 million to $46 million.
This guidance reflects the dynamic that we have seen over the first half of the year with respect to lower than expected console pipeline closure rates and an elongation of the sales cycle of generally of consoles.
We're expecting third quarter revenue to range between $10 2 million and $10 6 million.
Now back to <unk> for closing comments.
Thank you, Mike I'd like to end by saying that we remain steadfast in our commitment to driving sustainable success of the general procedure and are encouraged by the growth opportunities that lie ahead.
I am proud of the progress <unk> made in revolutionizing and adopted care, we strongly believe in the business fundamentals and sound infrastructure and anticipate that the back half to FY 2023, we'll bring more predictability to the sales cycle, we're committed to value creation not only for our shareholders, but also.
For this industry as a whole and intend to continue prioritizing drivers long term growth.
At this point I'd like to open the call up for questions.
Thank you.
I would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to meet that question. Please press star followed by <unk>.
Again to ask a question. Please press star followed by one as a reminder, if you want use can you speak up please remember to pick up your handset before asking your question and please do you ensure that you have on muted locally.
Our first question today comes from the line of Jason Bednar from Piper Sandler. Please go ahead, Jason Your line is now open.
Thanks, Good afternoon guys.
I just want to pick up maybe where we just left off there in the prepared remarks, maybe on the purchase delays in the slowed adoption here in the current macro environment I think <unk> been referencing these now for the past year or so at least with respect to your business.
But I'm curious if you could elaborate on what the root cause of the elongation of the purchase decisions in the 10-Q were and maybe what you expect here over the next couple of quarters, just any extra color.
<unk> deteriorating versus where we sat two or three quarters ago are the effects of rising interest rates, just having a larger effect on your business really just trying to reconcile kind of what what youre seeing out there versus what seems like maybe more stable or even in some cases, improving tone from some other parts of the equipment market.
Well. Thank you Jason let me just start off by saying that we are not happy with our performance in Q2, we're making some changes to change our trajectory.
It's going to be critical for us to have a clear pathway to cash flow breakeven.
So youre going to see us being acutely focused on topline growth margins and cash preservation.
I think youre asking a very very good question, we have talked about the.
Purchased life, if you will so.
So let me try to give a little bit more color specifically around us.
I think the what.
What we're seeing like we said before is that macroeconomic conditions are making console sales slower to prospective customers.
I think for Us I think.
I don't think we realize.
To its fullest extent, how significant the macro economy is to the decision making process of the small business owners.
No I think the other thing that we've looked at is.
However, now penetrating into these this market.
Specifically as we move deeper into the Endodontics segment or the Endodontist segment, if you will.
I think we're approaching endodontist that are one they are comfortable with patient care, they're providing in two they're happy with their way of their business is currently being run.
As a result, we're approaching many doctors that don't necessarily see the need to change.
So we're not.
We're not seeing customers that say no they're just delaying their decision.
Till later in the year.
Now the other thing I would say is the customers. These customers have invested a lot of time with us they're deep into our sales funnel they've spent a lot of time.
Going through our sales process. So they are actively engaged.
And that's also.
One of the things that we've looked at to really get a sense of exactly what's going on.
So surveyed our customers to understand their thinking just to make sure that our understanding of the mechanics. If you will in the market is correct.
And so it just.
This confirms effectively our thinking here. So we have put together a very very specific.
Specific actions that we've put in place to really.
To really go after this and Thats something that we can.
Talk more about.
But I also just wanted to hit the last portion I think of your question, whether or not this is deteriorating or not with we're seeing.
In Q2, what we saw in Q2.
Is similar to what we saw in Q1, so we're not seeing a deterioration. We're just seeing that the macro is stable if you will and impacting our customer in a similar way to what we have seen in the past.
Okay, Alright very helpful.
Maybe and look at the gross margin or maybe.
Adjusted gross margin is probably the better reflection.
Definitely took a nice step forward here. So this is the.
I think now the third consecutive quarter of gross margin improvement after you've taken these actions it sounded like they probably accelerate the path to.
Improvement.
I guess with.
Some of these other actions that you have now on the Pi side.
Where do you think we are maybe for sitting a year from now with gross margins are we talking about still some step function improvements in gross margins.
Or just any other.
Thoughts on the trajectory we're on here because it seems like that is an improving part of the story here.
Not just for the rest of this year, but going forward into 2004 two.
Hey, Jason Hey, it's Mike I'll take the first part of that and then let Ben add color but.
As you indicate if you exclude the adjustments that we took in the quarter. Our performance was a step up sequentially and year over year and what we're.
What we're expecting for the rest of the year is that we would see gross margins in the mid 30%. So definitely an improvement over Q1 last year mid 30% for the remainder of the year and that is really due in large part to having.
Progression in our strategy to have one pie around clean flow.
And then also as we bring <unk> in house and leveraging.
Benefiting from scale of our production capacity.
I would also add that.
The adjustment that we took for Pis will help us to accelerate.
Our movement to clean flow into 2024, so we're expecting clean flow to be earlier than what we had previously communicated we previously communicated middle of 'twenty 'twenty four for conversion and now we're seeing that much earlier in the year.
Potentially at the beginning of the year with January .
Maybe if you could just let me add just a few comments there.
Mike is spot on here talking about clean full because that is ultimately our key margin driver.
Thats something thats very acutely focused on <unk> one.
One we are launching clean full for anterior teeth, obviously that will help transition.
Transition customers over to clean flow.
Two as Mike was alluding to we took this extra charge extricating ourselves from a supplier agreement, which means that we can start.
We'll effectively be converted to clean flow.
At the beginning of 2024 and the other thing is that we will.
Release of enhanced clean flow that will further simplify the clean flow technologies, just to make sure that customers have an incredible experience with clean floor.
And that ultimately just simplifies the entire operations for US we will have one.
Simplifies routes at the supplier side.
Mark manufacturing side, the training side sales side, and just really will be a key element as we continue to drive margins.
Okay, Great and then maybe one more from my side.
Just curious Mike our garden, just if youre comfortable offering a view now on cash burn expectations as we move forward.
Again over the next six to 12 months you are taking some actions here to protect the balance sheet, but that was very clear in the prepared remarks.
And again, sorry, if I missed it, but where where do you think cash burn goes here.
And moving forward.
So.
I indicated.
We're committed to reducing our cash burn we are expecting a sequential reduction in cash burn when you exclude the benefit that we received from the ERC. So the ERC in Q2 gave us a benefit of $4 four.
So if you exclude that we will see a sequential improvement in cash flow for Q3, and Q4 and the reduction in positions that we've taken in other expense reduction efforts will contribute to that and then also.
And the benefit of moving to <unk>, we were able to get more leverage out of our balance sheet and the inventory position.
I'd just add that we're going to continue to look at expenses.
As we go forward here and we're going to be just stay very very acutely focus too.
Sure. It is to continue to have a strong balance sheet looking at any and all different opportunities here too to preserve the balance sheet to us as we go forward.
Alright.
Alright, thanks, guys.
Thank you Jason.
Thank you.
The next question today comes from the line of Sarah <unk> from Goldman Sachs. Please go ahead, Sir your line is now open.
Alright. Thank you so much for taking my question today, I guess I wanted to start first on the procedure insurance volumes.
At the 17% price increase and even including the 5% pull forward into the first quarter. It still seems like we might have seen a sequential step down.
What is driving that is that pulled back because of the pricing are we seeing lower volumes per console would just love a little bit of color.
Sure, It's Mike I'll take the question and then again.
And if he has anything to add but when you look on a year to date basis, we see a year over year increase.
Digit increase in procedure instrument sales out and utilization.
I think what you may be alluding to is when you look at a per console basis in utilization per console, we did see a dip.
On that basis, roughly around 4% to 5% now that was within the range of our expectations. When we had done the pricing increase the analysis surrounding that we anticipated that some customers may make the choice to not use general wavelengths certain procedures.
But we're still very pleased with the overall utilization.
Increase that we've had on a year to date basis. When you look two quarters combined and then also just how the price increase is playing out.
Sir if I may just add we're obviously looking at utilization closely but are also looking at revenue per device.
We've done a very very significant.
Number of different pricing increases.
If you go back in a year of back two years, you will see a very very significant price increase.
So I think it is natural to have a slight reduction in utilization.
Mike is alluding to we had an increase in revenue overall on the procedure instrument side.
So an increase in revenue on a per box.
Okay really helpful. And then I guess I just wanted to touch on the GP channel expansion.
You said there is now a more equally weighted pipeline I just wanted to know on how is the conversion of console sales for those GPS compared to Anders.
Just any color around that decision.
So sorry, it's Mike when we look at the pipeline right.
Right now as we look at the phases of our pipeline as a beginning and an act and right now the GP is weighted more at the beginning and the under Daunt us that have been with US for some time are weighted towards the end so they're closer to the closing rate. So that's why we see more and the daunt us filling our existing install base.
Conversations around the GPS now just continuing to educate them on the benefits generally it can have to their practice.
Engaging DSO is to move them through and that's a very big part of where we're focused in the second half and we're allocating additional resources into that capacity.
Hopefully that helps.
Yeah.
Thank you.
As a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad.
The next question today comes from the line of Jon Block from Stifel. Please go ahead, John Your line is now open.
Hey, everyone. This is Joe Federico on for John .
I just wanted to start with the guidance revision it looks like with the new guidance. The implied second half sales came down by about $5 million just looking at our model we had previously modeled around.
Maybe a little bit above $6 million in second half console sales. So I just wanted to see if we could get some more color on what else is being taken into account.
With with the new guidance.
Yes, so Joe so when you look at the guidance what we built into there is around the low end is just what we've experienced in the first half of the year for console sales out and then also.
So console is of course, as we ought to console to the.
Install base.
Additional revenue suddenly put console is down Youre also going to CPI has come down with that but when we look at.
Just continuing the trends with limited GP conversions in the second half of the year, that's what we'd hit the low end when we look at the high end.
To come back up to where we had placements in 2022, and the GPS and our pipeline start to convert.
But the base still remain in knots of specialists. So it's all the.
Adjustments is relating to consoles, but of course that has a tail with the pis.
Hopefully that helps.
Okay, Yes that makes sense. Thank you.
And then just.
On the cost actions that you mentioned.
Earlier can you give us any more color on like where those cost actions are being taken there what we can look forward there.
So the reductions were largely centered around the general and administrative.
And research and development and some management positions as well with limited impact to the field sales team.
And our commercial efforts.
So on the P&L you would see that in SG&A for admin and then R&D.
The split would be more weighted towards the G&A aspect of it at this point.
Just maybe let me add some additional commentary for us, it's very important to drive console sales and top line growth.
And hence that's why we've been very careful obviously cutting too many expenses on the commercial side.
Okay, great. Thank you for the questions.
Thank you.
Thank you.
It reminds you that you would like to ask a question. Please press star followed by one on your telephone keypad.
There are currently no additional questions waiting at this time, so I'd like to pass it back to the management team for any closing remarks.
Thank you operator, just want to reiterate again, we appreciate everyone's time today. Thank you for your interest in <unk> have a great day.
This concludes today's conference call. Thank you for your participation you may now disconnect your lines.
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