Eargo, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Eargo third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. It is now my pleasure to introduce Vice President, Investor Relations, Nick Ledeco.

Good afternoon, everyone, and welcome to the ERGO Third Quarter 2020 Earnings Conference Call. The press release and slides to accompany this call are available on our Investor Relations website at ir.ergo.com. Please note we have also provided supplemental historical financial information at the end of this slide deck. As a reminder, both this live call and a digital replay will be available on our IR website. Joining me on today's call are Christian Gormson, President and Chief Executive Officer and Adam Loponis, Chief Financial Officer. Christian and Adam will provide prepared remarks, and then we will open the call to Q&A. Before we begin, I'd like to remind you that some of the matters discussed in this conference call will contain forward-looking statements regarding future events as outlined in our slides. We wish to caution you that such statements are based on management, current expectations and beliefs, and forward-looking in nature. and are subject to risks and uncertainties and actual events or results may differ materially. The factors that could cause actual results or events to differ materially include, but are not limited to, factors referenced in our press release today, as well as our filings with the FCC. With that said, I will now turn the call over to Christian.

Thank you, Nick, and good afternoon, everyone. We're incredibly pleased to speak with all of you today on our first earnings call as a public company. Today, I would like to send a special thank you to our founders, early investors, employees, our families, and most importantly, our now more than 49,000 users in the U.S. for believing in Eargo and joining us on our incredible journey. At Eargo, we're dedicated to improving the quality of life for everyone with hearing loss. I also want to thank our new investors for their support in the IPO. We're excited to partner with you on our journey. Since some of you are new to the Eargo story, I would like to start by giving you an overview of what Eargo is all about on slide five. We believe we're transforming the hearing aid industry. This is a large, well-established market with significant tailwind from an aging population and focus on quality of life. Hearing loss can make it more difficult to work or interact with family and friends, leading to feelings of isolation, depression, and increased stress. According to a study published in JAMA, hearing loss has also been linked to accelerated cognitive decline. Despite all of this, there remains a large unmet need driven by the stigma of hearing loss, high out-of-pocket costs, and the cumbersome and inconvenient nature of purchasing a device through an in-person hearing clinic. At Eargo, we address these unmet needs through a revolutionary product that is virtually invisible, but also comfortable and at a lower cost to the user. We provide our product and clinical support through a unique telecare model and a modern efficient awareness creation strategy. The result is a business that has delivered accelerating revenue growth to over 135% year over year and strong gross margins. Moving to slide six. Hearing aids have been around close to 100 years, and there are many great innovations and products out there, but they have significant limitations. The vast majority are behind or over-the-ear styles that cover most ranges of hearing loss and are comfortable, but they are visible and can be stigmatizing. They are also more discreet on less visible solutions, but many are challenged by discomfort or occlusion of the ear canal. The average cost of a pair of hearing aids through in-person clinics are on average $4,600, and the more cosmetic in-ear custom hearing aids can cost up to $10,000. Lastly, all hearing aids as defined by the FDA, including Eargo, must by law offer a trial period where the device can be returned. On slide seven, we believe the hearing industry has failed to deliver what consumers want in order to increase penetration. Products brought to market have not addressed the major shortfalls that have existed for years. Visibility, ease of use, comfort, convenience, and cost. Eargo addresses these shortfalls by offering a virtually invisible but also comfortable product that is not occlusive, easy to use, and can be purchased through our unique telecare model from the comfort and safety of home. This avoids the cumbersome experience of going to an in-person clinic multiple times and waiting weeks to months for your device. We can ship an Eargo device in days, and provide free telecare clinical support for as long as customers own the device at approximately half the cost of a traditional hearing aid. But it's more than that. We deliver a truly exceptional customer experience with highly trained staff focused on changing the way people think about solving for their hearing loss. We believe Eargo is the first and only technology that has been able to solve for fitting high-quality audiological capabilities into a device that is virtually invisible, non-occluding, and rechargeable. One of the core patented design features that allows for non-occluding comfort is the tip of the device, called FlexiPalms, which allow natural air and sound to pass around and through the device, just the way the natural ear was designed. The resulting audio quality is comparable to much larger, more expensive devices And Eargo comes with a convenient charging case, which is simple to use. In addition, we have built a highly trained consultative inside Salesforce, our personal hearing guides, and personalized unlimited clinical support by licensed hearing professionals. This virtual infrastructure eliminates the need to visit the brick and mortar clinic. By combining a revolutionary product with the telecare support, we have truly transformed the experience of hearing aid. Slide nine. With that, let me touch on some of the key drivers of our performance during the third quarter. By all financial and operational measures, the third quarter of 2020 was record-breaking. Most importantly, we continued to help more people hear better by offering both a revolutionary product and consumer experience. We delivered revenue growth of over 135%, growth system shifts growth of approximately 92%, and a return accrual rate of approximately 25%, down over 10 points year over year. We deliberately designed the year-go business model to generate growth at the lowest cost of acquisition possible. We have achieved that efficiency by diversifying our customer base beyond traditional out-of-pocket payment into the insurance market, accelerating repeat customer purchases, using sophisticated data analytics to constantly measure and refine our media deployment, and finally, leveraging our media investments to simultaneously reach multiple customer types. The best example of leveraging media investments is national TV advertising, which has been a particular successful media investment, generating broad awareness and complementing our digital efforts. We expanded TV advertising in the first quarter and accelerated the investment each quarter in 2020. National TV drives ergo awareness and volumes in two primary ways. First, it increases inbound calls, which our sales consultants typically convert at higher rates. Second, the awareness and credibility of national media complements our digital marketing efforts by making them more productive. A consumer may see our ad on TV, go online and review digital content, then request a consultation or simply purchase from our website. The result is accelerated volume growth, and significant leverage on our sales and marketing spend. We're very confident in the scalability of TV and have only just scratched the surface of awareness generation. As I mentioned earlier, we deliberately leverage these investments in TV and other awareness media to simultaneously reach multiple customer types, diversifying our business across cash paid customers, insurance customers, and repeat customers. Cash pay, where customers pay out-of-pocket, is the traditional way to get a hearing aid, but not the only way. Given our product, service, and cost advantages, we see tremendous opportunities in cash pay. Insurance coverage represents a growing segment of the U.S. hearing aid market. Eargo has identified and started to rapidly penetrate pockets of consumers with hearing aid insurance benefits, that cover most or all of the cost of an eargo. These consumers may see a national eargo ad that educates them on the possibility of a hearing aid benefit and call us or go to our website. Because we distribute direct to end user, we can offer national claims processing and make it easy. Just give us your insurance number and we do the rest. Overall, we estimate approximately 12 million consumers in the U.S., over 50, who have both hearing loss and access to hearing aid benefits under certain health insurance plans. Repeat customers represent an attractive long-term growth opportunity for your goal. Once you need a hearing aid, you need it for life, and customers often get a new device about every five years. On average, We estimate repeat customers represent approximately 50% of a typical US in-person hearing clinic's annual volume. At Eargo, our install base includes over 8,000 first or second generation devices that are now over two years old. While we're just getting started marketing to repeat customers, we believe our successful efforts to generate repeat customer sales in 2020 prove that ERGO can significantly shorten the upgrade cycle compared to the traditional industry cycle. Insurance and repeat customers generally convert at higher rates and return at lower rates, which has the multiplying benefit of driving up net revenue growth while driving down our overall cost of customer acquisition. We expect this positive mixed shift toward more insurance and repeat customers to be a key driver of growth and scalability going forward. Moving to product, Yergo Neo HiFi, which was launched in early 2020, continues to perform well, consistently receiving strong customer reviews. During the third quarter, Yergo Neo HiFi represented nearly 85% of our cross-system shift. The final driver of our 3Q performance is the accelerated consumer adoption of our telecare model. Let me briefly explain what Eargo delivers through its telecare model on slide 10. At Eargo, we believe that nothing is more important than the user experience, from awareness through consideration to purchase, support, and coming back as a returning customer. Audiology as a profession is critical to this and we do not want customers to lose out on anything by choosing Eargo. At the end of the third quarter, we had 34 licensed hearing professionals on staff full-time at Eargo that are very engaged with our customer base. In the first nine months of 2020, these licensed hearing professionals provided telecare to over 80% of our customers in the first month of ownership. Our professionals provide personalized, high-quality care by phone, video, or chat. This includes initial consultation, hearing screening, proper insertion, charging, and cleaning. Most importantly for Ergo Neo and Neo HiFi, customers can and or we can help customers adjust their audio profile settings in real time over the phone, to ensure your Eargos are solving for their individual hearing loss. Supporting this telecare model is our mobile app, which allows Eargo Neo and Neo Hi5 customers to adjust settings themselves or connect with our professionals when it's convenient for them. As we observe how consumers rate the Eargo experience, our support is consistently the highest rated element of the experience. together with accessing benefits for our insurance customers. We are confident that purchasing a hearing aid in this fashion is the future of solving hearing loss. Additionally, we think the unfortunate rise of COVID-19 has accelerated the long-term consumer shift away from traditional in-person clinic distribution and toward buying a hearing aid remotely. When we look at 3Q specifically, We are pleased to see this shift continue despite volumes at the brick and mortar in-person clinics returning to year-over-year growth. According to data collected by the Hearing Industries Association, private commercial sector hearing aid unit sales in the third quarter of 2020 increased by 0.5% year-over-year, following 58.6% year-over-year decline in the second quarter of 2020. In addition, many of our customers tell us how thankful they are to have a solution that does not fall off when they're wearing their mask or other personal protection equipment. This gives us a high degree of confidence that despite the beginnings of normalcy in traditional distribution, consumers have found a better way to get a hearing aid through Eargo. Let me now turn it over to Adam for his review of our financial results.