SmileDirectClub, Inc.

Smile Direct Club first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Alison Sternberg. Ms. Sternberg, you may begin.

Thank you, operator. Good afternoon. Before we begin, let me remind you that this conference call includes forward-looking statements. For additional information on Smile Direct Club, please refer to the company's SEC filings, including the risk factors described therein. 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. I refer you to our Q1 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. We also refer you to this presentation for a reconciliation of certain non-GAAP financial measures to the appropriate GAAP measures. I am joined on the call today by Chairman and Chief Executive Officer David Katzmann and Chief Financial Officer Kyle Wales. Let me now turn the call over to David.

Thanks, Alison, and good afternoon, everyone. Thank you for joining us today. I'm pleased to report that Q1 results came in ahead of expectations. and similar to recent quarters are consistent with the cadence of our controlled growth plan. As a reminder, our controlled growth plan was enacted after Q4 of 2019 and positions the integrity of our club member experience as the centerpiece of the plan. Over the past five quarters, we have continued to lay the infrastructure to execute against this long-term strategy, which positions us to generate average revenue growth 20 to 30% per year for the next five years, and adjusted EBITDA margins of 25 to 30% by the end of that time period. Before digging into the quarter, I do want to take a moment to remind everyone why it is we do what we do. Above all else, our mission is to democratize access to a smile each and every person loves by making it affordable and convenient for everyone. We deliver on this mission by providing a doctor-directed digital end-to-end experience in teledentistry. with 24-7 access to orthodontic care and the backing of our lifetime smile guarantee. We have always first and foremost been a telehealth business, and we are excited to see the growing level of understanding and acceptance of telehealth, especially for dentistry. We believe there will only be increased consumer and clinical adoption of the telehealth model from here, and we continue to invest in our proprietary platform and features to innovate against unmet consumer needs and pain points. For today's call, I'd like to first call out the high-level results from the quarter, followed by an overview of some recent key developments, before turning to how we're continuing to execute against our long-term revenue growth and margin targets. I will then turn it over to Kyle to walk through our growth initiatives, Q1 financial results, and outlook in more detail. Specifically in Q1, we achieved an all-time high, $199.5 million in total revenue, up 8% sequentially Q1 over Q4. We shipped roughly 106,000 unique aligner orders up 4.5% sequentially. Our ASP came in at $1,860, which is up 2% on a sequential basis. We saw continued strong performance in our SmilePay program and generated positive 4.9 million of adjusted EBITDA for the quarter. This is slightly ahead of our expectations, but down 2 million over Q4 of 2020 and reflects two dynamics. First, an increased deployment of marketing spend given attractive seasonal ad rates in Q1 that allow us to build our lead funnel early in the year. And second, continued investment outside of the U.S. and Canada as we scale our business globally. You'll recall that we see 75% of the total market opportunity outside of the U.S. and Canada, and we continue to meaningfully invest in building our brand in those markets. This is reflected in our adjusted EBITDA by region, which came in at 11.6 million for USA and Canada, or 7% of revenue, but negative 6.7 million for the rest of the world as we have expanded into 13 countries. Since Q1, we have also had other important developments. Specifically, we launched in Latin America for the first time with our entrance into Mexico. While still early, we are seeing good booking volumes since the opening of our first two small shops in Mexico City in early April. We grew our professional network of dental partners to over 1,500 locations. We also have a strong pipeline of potential partners, both domestically and abroad, and we're starting to see healthy appointment volumes across our network of clinical partners. We saw continued momentum across our ancillary product portfolio, including our successful launch at the Walmart Canada and Shoppers Drug Mart late in Q1. Canadian shoppers may now purchase Smile Direct Club's award-winning oral care products at more than 400 Walmart locations and over 1,000 Shoppers Drug Mart locations. Across U.S. and Canada, our oral care product footprint now stands at over 12,500 retail stores. We debuted our Lifetime Smile Guarantee, an industry-first offering that guarantees our customers a straighter smile for life. Customers who complete clear aligner therapy through our platform and order two retainers per year will qualify for the program, which ensures customers can obtain one free touch-up treatment, if needed, on an annual basis to maintain the members' desired results. Our Lifetime Smile Guarantee ensures our club members can keep their new smile for life and reap the additional benefits from a lifelong straighter smile. We appointed Ted Ward to our board of directors. Ted is a highly respected marketing executive with over three decades of experience, most recently as chief marketing officer with insurance giant Geico, and brings invaluable expertise in guiding a challenger brand to unseat the incumbent market leader. Ted joins us at a pivotal time as we continue to educate consumers on the clinically safe and effective treatments Smile the Red Club offers. For too long, straightening teeth by orthodontists with invisible liners or braces has meant paying a huge markup. Orthodontists have traditionally purchased invisible liners from a wholesaler or manufacturer, marked up the cost by three times, and then sold them to consumers for $5,000 to $8,000. Our proprietary technology and platform offer consumers the ability to get a clinically safe and effective treatment, but without the three-time markup. Before I try to provide some insight into our expectations for Q2, I'd like to take a moment to address the systems outage that was caused by a cybersecurity incident on April 14th, as mentioned in our recent 8K filing. On the day of the attack, we immediately mobilized our internal engineering security team and promptly implemented a series of containment and remediation measures to address the attack, including temporarily isolating and shutting down affected systems and related manufacturing operations. We have also engaged a leading forensic information technology firm to assist with our investigation into the incident. As a result of these efforts, we were able to successfully block the attack, no ransom was paid, and SDC systems and operations are back online and performing normally. I am very proud of the team for their efforts in identifying, containing, and remediating this attack as quickly as possible. As a result of the cyber attack, it is very difficult to predict how our conversion curves will mature in the near future. However, I would like to try to provide some high-level insight into the second quarter. In Q2, without the cyber attack, we expect the revenue to be in line with our long-term targets on a sequential basis, meaning up 5% to 7% over Q1 2021. We also expected adjusted EBITDA to come in slightly ahead of Q1 levels as we continue to invest marketing dollars to build brand equity outside of the US and Canada. In light of the cyber attack and the associated business disruption, we are adjusting our revenue expectations for Q2 based on our best estimates of the possible impact. As of today, we expect Q2 revenue to be approximately 195 to 200 million and adjusted EBITDA to be approximately breakeven as we recover from the cyber attack and continue to lean into marketing spend and international markets. As you can see, we are estimating approximately a $10 to $15 million sales impact in the quarter from this labor attack and the associated downtime we had in treatment planning and manufacturing. We maintain insurance coverage for certain expenses and potential liabilities that may be associated with the attack, and we plan to pursue coverage for all applicable expenses and liabilities. Before I turn it over to Kyle, I want to take a moment to discuss the customer experience and how we are evaluating our progress on that front. As we've said it before, our controlled growth plan is rooted in the delivery of a world-class club member experience. Our long-term revenue targets reflect what we believe to be the right cadence of growth to capture market share, while delighting our customers at every touchpoint. Our persistent focus on this is paying off, and we have seen continued growth and aided awareness amongst consumers, which currently sits at approximately 50%. Additionally, as we've continued to roll out our Gen 2 automated lines, we are also seeing our Google review ratings register at 96% positive, which is an all-time high. We've also worked to enact a higher touch approach to customer service in our customer contact center, including the recent appointment of Alvin Stokes, who's our chief customer contact officer. Alvin joins us with a distinguished career hallmark by developing and executing top-flight customer experience strategies and personalization platforms across multiple industries. Alvin will be responsible for leading our efforts to deliver a world-class experience for our customers globally, with oversight of a large multi-site team encompassing inside sales, customer care, dental experts, club member experience, and our center of excellence in both the U.S. and Costa Rica, as well as several outsourced locations in Malaysia, Greece, and the Philippines. While there is still plenty of work ahead of us, we are already seeing the benefits of these efforts. Our analysis of trends in consumer sentiment across multiple channels, including reviews and news coverage, blogs, Twitter, and other online forums, show significant positive trends, and online consumer sentiment is at an all-time high. Additionally, we have seen an almost 45 percent reduction in negative mentions year over year. Referral rates also remain healthy at roughly 21 percent. Lastly, all these efforts are impacting consumer perception around credibility. one of the core pillars of our brand alongside cost, comfort, certainty, and convenience. In our most recent independent U.S. brand tracker consumer survey, which polls the general population, 62% of consumers believe our network of dentists and orthodontists provides the best possible care to customers, up 20% since year-end 2019. Additionally, 62% of respondents surveyed noted that they view SDC as a trusted brand, up over 25%, over Q2 of 2020. This strengthening of brand awareness, consideration, and credibility demonstrates Smile Direct Club's transition from disruptor to orthodontic challenger as we make significant gains in this area, closing the gap to only a few percentage points versus Invisalign. This is a great improvement in a short period of time and largely attributable to our heightened focus on our club members and our industry-first doctor-directed telehealth platform. We are pleased with our progress on this front over the past few quarters and continue to focus on building awareness of our brand, product, and the benefits of remote dentistry. In summary, the most recent quarter represents continued advancement towards our long-term targets. On growth, we are making good progress against our initiatives and excluding the impact of the cyber attack in Q2, we're executing against our long-term revenue growth targets. On cost, we saw continued gross margin expansion in the quarter enabled by our manufacturing initiatives This, in combination with our sales and marketing efficiency and our continued cost discipline across the business, puts us well on our way to achieving our long-term targets. Since the enactment of our controlled growth plan in Q4 of 2019, we have completely reset the cost profile of the business. This is further demonstrated by the U.S. adjusted EBITDA margins in the quarter. One year ago, we lost $67 million of adjusted EBITDA in the first quarter. This past quarter, we made $4.9 million of adjusted EBITDA, which includes a loss of $6.7 million from our investments into expansion of our international markets. This is quite an accomplishment by our team members in a short period of time. Lastly, we continue to see favorable industry dynamics with broader acceptance of telehealth and specifically teledentistry, minimal penetration against our total adjustable market, and clear aligners gaining share in the overall industry. All these are trends we expect to continue and position us well for long-term success. I would also like to, again, highlight the fantastic cross-functional efforts of our team in identifying, containing, and remediating the cyber attack. These efforts ensure that even despite the business disruption, no data was lost or breached. Additionally, we maintain insurance coverage for certain expenses, and we do plan to pursue coverage of all applicable expenses and liabilities. None of this would be possible without the support of our team members, our club members, and investors. We thank all of you for your support as we work to capture this massively underserved market. we remain laser focused on our mission to democratize access to a smile each and every person loves by making it affordable and convenient for everyone. And now I'll turn the call over to Kyle, who will provide a detailed overview of our growth initiatives, Q1 results, and our financial outlook.

Kyle. Thank you, David. Our results in the first quarter mark continued progress against our plan of controlled growth with profitability. In every quarter since the enactment of this plan, we have seen positive momentum against all of the key growth drivers and cost levers that we have outlined. And our first quarter was no exception. We were managing the business to this plan, which has the customer experience as its centerpiece, and which positions us to generate the following. Average revenue growth of 20 to 30% per year for the next five years, adjusted EBITDA margins of 25 to 30% as we scale during that time period. This is driven by an 85% gross margin 40 to 45% sales and marketing margin, and a 15% G&A margin. Now, turning to progress against their growth drivers. In addition to our core business, we saw continued momentum in the quarter, and since then, across the three growth drivers we have previously discussed. As a reminder, they are expanding our customer acquisition channels, expanding our presence in the team demographic, and continuing our international expansion. On the first initiative, expansion of our acquisition channels, we continue to make good progress here. We have always been and remain agnostic as to how consumers start their journey to purchase aligners. We started with doctor prescribed impression kits, then smile shops, and now through our professional channel partnerships, corporate insurance partnerships, mass retail locations, and pop-up events, we have expanded our reach to new segments of consumers. This supports our mission of democratizing access to care which is foundational to what we do. On our corporate and insurance partnerships, we continue to build out a robust pipeline of potential new partnerships while also deepening our relationships with existing partners, including Allianz, Anthem BCBS, Empire BCBS, United, Aetna, and others. We are very focused on how our club members and potential club members experience the benefits of these partnerships and expect to announce more on this in the near future. On the retail side, our Earlcare products, which are now available at over 12,500 retail stores nationwide, including Walmart, CVS, Walgreens, and Sam's Club, continue to perform well and serve as a highly efficient lead source in brand building opportunity. As David mentioned earlier, we have also recently added to our retail partnerships with the roller of our product portfolio in Walmart and Shoppers Dry Mart locations across Canada. By the end of this year, our ancillary product portfolio will be available through every retail channel, including drugstores, grocery stores, club stores, mass retailers, and through e-commerce. Additionally, we continue to drive record growth in categories historically dominated by one market player, including the U.S. whitening and U.S. power floss categories, where we are the number one growth contributor in the category, reversing years of declines. On the professional channel, we continue to extend our partnership network and anticipate a strong cadence of additions over the ensuing weeks and months. We have started to schedule pop-up events to drive club members to our clinical partners, and our network has now extended across more than 1,500 practices in the United States. Over the last six months, we have seen healthy patient scheduling volumes with our clinical partners, and we have a deep sales pipeline, both domestically and internationally. As we have highlighted before, this acquisition channel is complementary to our existing offerings, and represents a new on-ramp for consumers who want to start their journey in a dentist chair. This also allows dentists across the country the ability to offer SDC clear aligner therapy to their patients. On recent earnings calls, we have detailed the various go-to-market strategies we are employing as we operationalize this channel. While each one accommodates a different use case, all are highly efficient margin and creative sources of lead flow for both SDC and our partners. Equally as important, this effort has again reinforced the flexibility and adaptability of our platform in accommodating a new segment of consumers. Recall that only 30% of GPs offer clear aligner therapy today, and most of the ones who do offer aligners are low-volume providers, so we see ourselves at the very outset of an incredible opportunity, both domestically and abroad. As these partnerships mature and grow, we will continue to share updates in future quarters, and although it is early in our rollout, we are encouraged by the results thus far and the feedback we've received from our clinical partners. This initiative is fueled by continuing to build our brand credibility with parents and product development, both of which are critical components to capturing this market. On this point, our brand credibility is improving, as evidenced by the stats that David mentioned earlier. Similar to the professional channel, we believe we are well-positioned to drive greater levels of adoption as we evolve and customize our offering to the unique needs of teens. On the international front, the same problems that exist in North America around access, convenience, and cost also exist globally. We launched into our first country outside of North America in the second quarter of 2019, and the rest of world countries already represent 16.7% of our revenue in Q1. That said, the international market represents approximately 75% of our global opportunity. So we are clearly still in the early stages of penetration. Our recent launch into Mexico further expands our footprint, and we are now in 13 overseas markets with plans to launch into additional locations in Europe, Latin America, and Asia Pacific throughout the year. We believe now is the time to invest heavily into brand building across these important regions in order to maximize our long-term share gains. You will see this reflected in our sales and marketing line item for the quarter, although our long-term sales and marketing targets remain intact. As you can see, We continue to make great progress on our growth initiatives, and we will continue to update you in future quarters as we execute against them. Turning to progress on the cost side of the business. You'll recall that we've been focused across three key areas to right-size our cost structure, and we have made consistent progress against those initiatives. These efforts drove continued outperformance on adjusted EBITDA and Q1, and we expect them to continue to support our long-term margin targets going forward. These efforts include the following. continued advancement in automating our manufacturing and treatment planning operations to allow us to reduce our scrap and keep pace with consumer demand. Our second generation automation production platform launched late in 2020, and it's currently producing approximately 70% of our liners. We expect this percentage to ramp to approximately 90% by the end of Q2. Consistent with expectations, we are seeing very positive trends in our turnaround time, higher productivity per team member, reduction in scrap, and most importantly, a more consistent and superior product for our club members. Second, continued discipline around the deployment of marketing and selling dollars, including a focus on leveraging our referrals, aided awareness, and highly efficient acquisition strategies, while also making strategic investments to drive brand awareness and consumer adoption in international markets. And lastly, continued G&A cost discipline across the business. G&A expenses were up $2.9 million sequentially, due to one-time higher stock-based compensation. Adjusting for this, G&A expenses were down $6 million on a quarter-over-quarter basis, resulting from our enterprise-wide cost control initiatives. Excluding depreciation and amortization, stock-based compensation, and one-time items, G&A expenses remained down $11 million, or 15% versus Q1 of 2020. We plan to remain vigilant on this front throughout 2021 and beyond, as we continue to drive towards our long-term target of 15% of revenue in G&A spending. As we have stated before, we believe streamlining our cost profile for operational efficiencies will not only improve our margin profile, but more importantly, provide a consistently superior customer experience that meets our expectations and upholds our brand promise. Now turning to our results for the quarter. Revenue for the quarter was $199.5 million, which is an 8% sequential improvement over Q4. and above the high end of the range in our long-term targets. It is also the first quarter of year-over-year revenue growth since the start of the pandemic and a record revenue quarter for the company overall. This was driven primarily by 106,000 aligner shipments at an ASP of $1,860. On a sequential basis, this was a 4.5% improvement in shipments. Providing some details on other revenue items, implicit price concessions were 7% of gross aligner revenue and we are expecting this to trend back to historical levers in Q2 at approximately 9% of revenue. Although our total reserves related to revenue were consistent with prior periods, we maintained separate reserves for IPC and cancellations. We analyzed and rebalanced those reserves on a regular basis. The net effect in the current quarter was a lower IPC reserve amount offset by higher cancellations reserves. Reserves and other adjustments, which includes impression kit revenue, refunds, and sales tax, came in at 9% of gross aligner revenue, and we are expecting similar performance in Q2. Financing revenue, which is interest associated with our SmilePay program, came in at approximately $11 million. This is flat to Q4, and we expect similar performance in Q2. Other revenue and adjustments, which includes net revenue related to retainers, whitening, and other ancillary products, came in at a record $21 million, driven primarily by the continued expansion of our oral care products and we expect similar performance in Q2. Now turning to SmilePay. In Q1 2021, SmilePay purchases came in at 61% of initial aligner purchases. This is slightly higher than Q4 and slightly below historical levels. However, overall, SmilePay has continued to perform well and our delinquency rates in the quarter and since Q1 were flat the prior quarters. Because we keep a credit card on file and have a low monthly payment, we expect SmilePay to continue to perform well. Credit card authorizations continue to perform well, and we remain focused on improving operations and collection strategies. Now turning to expenses and margins. Gross margin for the quarter was 76%, representing a 225 basis point sequential improvement and a 640 basis point improvement versus Q1 2020. This was supported by the increase in aligners produced using a second generation automated manufacturing. We expect gross margin to continue to strengthen as volumes grow, and we remain confident in our long-term gross margin target of 85% that we had previously provided. Additionally, we continue to focus on streamlining our manufacturing facilities, and our second-generation automation machines are producing approximately 70% of the liners. We expect that percentage to grow to approximately 90% by the end of the second quarter, and while still early, these new capabilities have already begun to reduce our scrap and provide a more consistent and superior product. This rollout has been a key component of our adjusted EBITDA positive results over the last three quarters and will continue to be a vital component of our traction towards our long-term adjusted EBITDA margin target. Marketing and selling expenses came in at $97 million, or 49% of revenue in the quarter, compared to 72% of net revenue in Q1 2020. Our efficient deployment of acquisition spend continued advancement in aided awareness and referral rates, access to highly efficient lead sources, and our networks of SmileShops have positioned us to continue to perform well against their long-term targets in quarters to come. On SmileShops, we had 126 permanent locations as of quarter end and held 156 pop-up events over the course of the quarter for a total of 282 location sites. These pop-up events are a critical component to supporting our demand function in the same capacity as a permanent small shop, and enable us to fully leverage our small shop resources to fulfill demand that is coming through aided awareness, referrals, and marketing. As referenced earlier, our marketing and selling expenses in the quarter reflect significant investments in brand building to support our long-term growth in international markets. You will recall that revenue from rest of the world came in at approximately 15.7% of total revenue for Q1. This was supported by increasing acquisition spend in new markets and puts us over the top end of our long-term target range. As I mentioned earlier, we believe this is the right time to invest overseas, where we see 75% of the total market opportunity and where the competitive landscape is highly fragmented. That said, our long-term target on sales and marketing remains intact, and we've made great progress here. You'll recall that in the same quarter a year ago, sales and marketing was 72% of net revenue. so we have made great progress over the past year, and we expect this trend to continue. General and administrative expenses were $81 million in Q1, compared to $78 million in Q4 2020. G&A expenses were up $3 million sequentially, primarily driven by one-time higher stock-based compensation. Adjusting for this, G&A expenses were down $6 million on a quarter-over-quarter basis, excluding D&A, stock-based compensation, and one-time items, G&A expenses remain down $11 million, or 15%, versus Q1 of 2020. We plan to continue to stay vigilant with cost control throughout the remainder of the year and beyond, and you can expect to see continued leverage from this line item. Other expenses include interest expense of $17.5 million, mostly associated with borrowings on indebtedness from our previous credit facility, which was paid off at the end of the quarter with proceeds from a new convertible debt. We also had a one-time $47.6 million loss on extinguishment of debt relating to the repayment of this prior credit facility. This expense includes the make-whole amount paid in connection with the termination of the agreement, the remaining unamortized costs, and the unaccreted value of warrants issued in connection with the prior credit facility. Additionally, we have store closure expense of $1.1 million associated with optimizing our store footprint and other expense of $0.9 million primarily related to unrealized foreign exchange loss. All of the above produces adjusted EBITDA of positive 4.9 million in the quarter, with an all-in net loss of 96 million. This net loss includes the 48 million of loss associated with the retirement of the prior debt facility, as noted a minute ago, and is compared to a loss of 107 million in Q1 of 2020. Breaking it out regionally, adjusted EBITDA came in at 11.6 million for the U.S. and Canada, or 7% of net revenue, and negative $6.7 million for the rest of the world, where we continue to overinvest in sales and marketing as mentioned earlier. Moving to the balance sheet, we ended the first quarter with $434.5 million in cash and cash equivalents. Cash from operations for the first quarter was negative $28.3 million. Cash spent on investing for the first quarter was $23 million, mainly associated with leasehold improvements, capitalized labor, and software, and building our manufacturing automation. Free cash flow for the first quarter to find the cash from operations as cash from investing was negative 51 million. In closing, as David mentioned, our performance in the first quarter reflects disciplined progress against their long-term revenue and margin targets in support of our controlled growth plan. I would like to reiterate a few key points, which are consistent with prior quarters. Overall, and as David alluded earlier, we continue to execute against the long-term targets outlined in our controlled growth plan. In Q2, without the cyber attack, which caused delays and disruptions with certain systems and manufacturing operations, we expected revenue to be in line with our long-term targets on a sequential basis, meaning up 5% to 7% over Q1 2021. So while we are adjusting our revenue expectations for Q2 based on our best estimates of the possible impact, our long-term revenue growth targets remain unchanged. We do expect to feel the impact of the backlog for at least another month and potentially longer, but we expect the full impact to be realized in the second quarter. While it is still early to have a complete certainty as to how the impact it leads will ultimately convert, as of today for Q2, we expect revenue to be approximately $195 to $200 million. We expect adjusted EBITDA to be approximately break-even as we recover from the cyber attack and continue to lean in to marketing spend in international markets. On cost of goods sold, we're making good progress on manufacturing automation with our second-gen machines producing approximately 70% of our aligners. We plan to increase that percentage significantly over the course of the year, and we expect to be at approximately 90% by the end of Q2. As we have often stated, we believe streamlining our cost profile through operational efficiencies will not only improve our margin profile, but more importantly, will provide a consistently superior customer experience that meets our expectations and upholds our brand promise. On sales and marketing, you'll recall that our small shops function primarily as fulfillment centers, not as sources of demand generation. As of quarter end, we had 126 permanent shops open and held over 156 pop-up events over the course of the quarter, for a total of 282 location sites. We continue to see our shops performing well with higher utilization, which is a key part of meeting our long-term financial targets. Additionally, we have seen great success with our strategy of pop-up locations, which allows us to fulfill demand without the addition of fixed locations and the associated costs. On liquidity, we are well positioned with approximately $430 million of cash in our balance sheet. This gives us ample liquidity to support our growth initiatives while also investing in research and development. Lastly, I would like to again reiterate what I have said in prior quarters. and reemphasize that our long-term objectives have not changed. We remain laser-focused on providing the best club member experience, and our mantra remains to drive controlled and profitable growth. The changes we have made on customer service and continue to make are working. This is evidenced by the strengthening of our brand perception and credibility, which is now within a few percentage points versus Invisalign, as David mentioned earlier. We remain a low-cost provider with brand presence, no pricing pressure, and no real competitor that provides an end-to-end vertically integrated platform for the consumer. As we have said in previous quarters, and as recently demonstrated, we will continue to make strategic investments in the professional channel, international growth, and in penetrating new demographics to drive control growth, while also executing against their profitability goals. Lastly, we continue to see favorable industry dynamics with broader acceptance of telehealth and specifically teledentistry, minimal penetration against their total addressable market, and clear aligners gaining share in the overall industry. All of these position us well for long-term success. We look forward to continuing to update you on progress in the days and weeks to come. Thank you to everyone for joining today. With that, I'll turn the call back over to the operator for Q&A.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please limit to one question and one follow-up question. Our first question is from John Block with Stifel. Please proceed with your question.

John Block Thanks, guys. Good afternoon. Kyle, I guess the first question is for you. When we think about the 5 to 7 percent sequential revenue growth intact, as you said, should we apply that to, you know, call it the depressed 2Q21 base, or is it a little bit higher in the near term in case you recapture some of the noise from the cybersecurity issues? I'm just trying to figure out if it's more, you know, higher than the 5 to 7 over the next couple quarters, again, because of the depressed base, or do we run the 5 to 7 off of this 2Q number? And then I've just got to follow up.

Yeah, sounds good. Thanks, John. So, David, I'll kick that off and then jump in as well.

So, look, our long-term hasn't changed. Five to seven percent sequential growth is still the long-term target, and that's driven by a 20 to 30 percent annualized growth rate on a year-over-year basis. I think to answer that, John, you really got to look at leads. And so what happens is leads who didn't convert within Q2, they're not necessarily lost forever, right? We have millions of leads in our pool who have not converted from prior periods. And this group that ultimately didn't convert in the second quarter is going to go into that pool. So we're going to continue to retarget them and try to get them to convert over time. But it's very difficult to predict when and if they will, because what happens is if we don't give a treatment plan on day one, which we typically do, the likelihood to ultimately convert drops off significantly. And as time goes on, that pool gets incredibly lower than if we were to give them a plan on day one. So it's difficult to know if they do convert. In addition to that, there's also a flywheel effect that happens from referrals. So orders that would come in within the second quarter would have impacted the third quarter and also the fourth quarter. And just as a reminder, referrals are typically about 20% of our overall orders within a typical quarter, so a pretty meaningful portion as well. In lieu of that, we would have to spend into that from a marketing perspective to recapture some of those referrals as well. And that's not something that we're planning on doing. So I think if you look at history, look at Q4 as an example, our volume growth in Q4 was over 9%. Our target is 5% to 7%. In Q1, our volume growth was 4.5%, so pretty close to that 5% to 7% that we want to be within. And so we certainly have the potential to be above that 5% to 7%. but it's very difficult to predict if and when that would happen. So as I think about the rest of the year beyond Q2 and looking at Q3 and Q4, for now, I would expect the growth to be 5% to 7% off of that Q2, just based on how we're planning our spending, our marketing dollars, because we're not going to continue to spend above and beyond where we want it to be in terms of marketing dollars. But we do have the ability to be slightly higher if some of these leads do come in, as demonstrated in prior quarters. But most importantly... we're not going to jeopardize the customer experience, which we've worked so hard on over the past several quarters, to chase growth, and that's something that we're going to keep a very close eye on.

Okay, great. A lot of apple color there. Thank you. And the second one is sort of two-part. One, very helpful information on the breakout between U.S. and international EBITDA. I guess, Kyle or David, when would you expect to turn the corner internationally on EBITDA? And, David, if you don't mind, I know I'm going to get this question tomorrow. So you gave a lot of helpful statistics on the consumer experience and what's improving. But yet the referral rates for the NPS scores I don't think are improving or actually they're worsening. I think referral moved backwards from 23 to 21%. I think the NPS score has actually been down every quarter since the IPO. So can you just sort of reconcile, if you would, some of the improvements that you specifically cited versus an NPS, maybe it's a lagging indicator. That would be very helpful. Thanks, guys.

Yeah, I'll take the latter part of that question first, Colin. You can answer the other part. So, yeah, NPS is a lagging indicator. And we measure it two different places, John. We measure it 21 days in, after they get their aligners and they've changed out their trays at least once. So it's 21 days and we measure it, and then we measure it at the end of treatment, four to six months later. All the metrics that we talked about today on the call, consumer sediment, which is at an all time high, negative sediment, which is down 45%, it's at an all time low. Some of these other statistics on credibility that we talked about were within a few percentage points of the line. on trusted brand, on orthodontists and doctors that I trust in the network. All these things are huge improvement over last year, which we were up 20 to 25 percentage points in one year's time. That was a big concerted effort over the last year since we announced that after Q4 2019, the strategy around providing the best possible experience for our customers totally paying off. The referral rates are a lot of that's a function of how much we spend on marketing, but 21% or 23%, we don't see a noticeable difference there. The NPS scores as an early indicator on the 21 day is up significantly. We're not reporting on that number right now. We do it as a blended overall, that 43%, 42%. But if things hold at the end of treatment and all these other consumer sentiment higher numbers hold, you're going to start to see that overall NPS score start to shoot up. It's still very high for healthcare if you look at categories. We're not satisfied. We want to see that get into the 60s. But we are very pleased with all the benefits, which ultimately is going to lower CAC, right? If our NPS starts to go up and that referral rate starts to go up and we stay on track here as a credible source for straightening teeth, we're going to start to see our CAC go down and our EBITDA and all the things that we're talking about here come to fruition.

Yeah. And just on the second part there, John. Yep. So just on the second part there in terms of international EBITDA, you know, it's obviously very difficult to predict in total, and that's just because it certainly is a function of growth, right? So look, as we think about international growth, I would expect growth from an international market to continue to grow faster as a percentage than the U.S. and Canada, just given overall the market outside of U.S. and Canada is about 75% of the total market opportunity. It represents about 40% to 50% of case starts globally, but it's only about 17% of our business, as we mentioned, as of the first quarter. So given that growth overall within that 5% to 7% target is completely fungible, we think it's the right time now to continue to focus and grow our international footprint, which in the long term is really going to overall support the longer-term targets that we've outlined. And with that, if we continue to overinvest to build data awareness and to build a brand in these new markets, which long term is really going to drive that growth. So as we go into these markets, we generally operate them for approximately 24 months where they run out of laws and turn profitable after that. So if you look at our most mature markets like the UK, which we launched around this time a couple years back, those markets are starting to turn profitable, offset by newer markets where we're investing heavily in brand and just launching in. That's how I would think about sort of international EBITDA contribution for the foreseeable future.

Perfect. Thanks, guys.

Thank you.

Our next question is from Dylan Cardin with William Blair. Please proceed with your question.

Thank you very much. Just curious if you can speak to whether or not you're actually referring patients to the doctor channel, and then maybe if you can just speak to growth in that channel. I know it's nascent, but maybe sort of on a same-chair, sequential basis. And then kind of zooming out more broadly, just where I can imagine that the sort of Smile Shop reduction is a drag on the business, maybe where you're kind of capturing some of that business across the rest of the model. Thanks.

Yeah, I'll take some of that, Kyle, and then you can finish off on the Smile Shop network. So there's a Multiple legs to the stool here on what we call our partner network. There's Office Direct. The Office Direct is the partner that takes on and offers Smile Direct Club to their patients within their office. So it's a new offering. It's at the same price point, $19.50. They have the Smile Pay. They basically do a scan. They do an exam of the patient's oral hygiene. And then once we close that sale, that patient goes into our telehealth platform and our telehealth state licensed orthodontist and dentist take care of that customer. The patient's always free to go back to the dentist or the dentist that they started with. But part of what we're offering to that dentist in that office direct model is the savings of chair time. Because through our telehealth platform, we ship all their aligners at once. We have 24-7 access to our dental team, and we can take care of that customer. The other thing that we are doing to help out these GPs and orthos is that we are taking our customers that come to our site, and then we're scheduling them into those partner networks. So that's increased traffic for them. Those are new hygiene patients, new patients that are looking for dental homes. There's all kinds of studies that we're putting together as to how they convert those patients into new patients for themselves, which, as you know, a lot of these practices grow organically, low single digits, through marriages or children, but they're not out there marketing and blitzing for new patient acquisitions. So Smile Direct Club offers that to them, and they're very excited about that. We also, a third leg of that, is we actually are opening some smile shops where we operate the operatories right inside that partner network's office with our SMILE guides. And what Weiderich said about that is, A, they have some added space. They may have seven, five, six, seven operatories, not all full. So we'll take a couple of the bays. And then once again, as these customers come in to get scanned, we then send them over for a cleaning or introduce them to the dental home as a new patient. Very excited about all of it. It is new, but we think it's going to be a meaningful part of our revenue coming into the back half of the year here into 2022. Our team's doing an excellent job of building up the outside sales team, the inside sales team. The leads are coming in. As far as I know, we haven't had a hard no yet. We've got large DSOs. We've got individual GP practices, smaller DSOs. But I think a GP looks at it as a way to participate in T-Straining without a lot of chair time. Leave the chair time for what they do best. and let us take care of, you know, treating those customers through our telehealth platform.

Great. Yeah, and then just on shops as well, just to your last question. So, you know, overall I would say it's been a net positive, and you can see that in the – certainly within the P&L metrics that we've outlined. But if you look at just your numbers, including pop-up events, we had 282 location sites within the quarter. that's up from 218 within Q4. So we are continuing to see nice growth there. The growth that we're seeing is largely coming from pop-up events, right? And what those events do are enable us to pull out demand from locations that we don't have a permanent location in. And so if you think about it from a demand perspective, we're completely agnostic, obviously, in terms of how consumers start their journey, which is why the omni-channel presence is so important. So we offer impression kits you know, shops, be it permanent or pop-ups, and also the partner network as well. And if you look at how business is coming to us from, you know, those different paths, we had 58% of the business in Q1 that was coming from kits. That's down from, you know, approximately 60% in Q3 and Q4. If you look at more recent months like March, that was closer to 54%. So we are seeing shops continue to trend back to 50-50, and we certainly still expect over time that shops will be a more dominant player if you're comparing that to overall impression kits versus shops. But we also expect the partner network as well to continue to ramp up over time. So, yeah, I think the most important takeaway is really just the omni-channel approach that we take and the flexibility of that model to, one, pull out demand, but, two, do it in a cost-effective way that's in line with the longer-term targets that we've outlined.

Understood. Thank you very much. If I could just sneak one, maybe a smaller one in. The straighter Smile for Life, kind of a compelling idea here, just sort of from both sides of the P&L, how are you thinking about cost of that, you know, if there's sort of higher accruals, and then what that might be able to do for demand, you know, customer satisfaction would be helpful. Thanks.

Yeah, so from a customer side, and Kyle, you can speak to the numbers on what's being recorded, but from a customer's, you know, we just launched this Lifetime Smile Guarantee program, And we were pretty much doing it anyways from a customer satisfaction standpoint. If a customer got out of sync and wasn't wearing the retainers as often as they should have and they called us three or four months after treatment, we were going ahead and offering what we call a touch-up, which is come back in, get scanned, or we'll send you out a kit, and we see a little bit of shifting or maybe their gaps started to open up, and we would set them up with a new treatment, usually they're two to three months in duration, very short, send out new aligners. And so we said, hey, we're going to do this for our members anyways. And what typically happens, the reason that they get out of compliance is they don't wear the retainers. They either don't order a retainer or they don't wear the retainers while they sleep at night. And so to get that compliance, what we're saying is as long as you buy two retainers a year from us every six months, they're made so if you wear them every night, they're going to wear out in about six months. And so as long as you – and they're $99. It's not a huge expense. But for $99, you're going to maintain that smile. And if for any reason your teeth shift, you're not happy with them, we're going to give you at least one free touch-up annually. So therefore, you don't have to worry about it. Let me tell you, a big chunk of our customers, I don't know the exact number, but it's probably 30% to 40% range of our customers had worn some type of appliance to straighten their teeth prior to coming to us, whether they were teenagers wearing braces, they forgot to wear their retainers. A lot of them are adult patients. that after treatment, the orthodontist or dentist didn't push hard enough the need for wearing a retainer. And then, you know, very quickly, all of a sudden, they shift. So I think our customers, we have good attachment rates on our retainers, and I think this is going to even make it more so. And we'd love for them all to stay in compliance, order the retainers every six months. And if for any reason they're unhappy, we're going to go ahead and take care of it for life.

Yeah, and then just on the P&L side, as of today, and we're still pretty early in the rollout of this, not expecting any material impact from a P&L perspective. The overall, as David pointed out, purchasing two retainers per year approximately is going to offset cost of goods sold if sort of every member ultimately were to get that touch-up per year, which we don't think will happen. So there should be a small incremental positive, but as of now, we're certainly not modeling in anything from an upside perspective as we sit here today. I think what it will do certainly is help on the front end with conversion and the fact that we're standing by and guaranteeing the smile for life, also with club member satisfaction as well by giving this offering, but also improving the rate at which people are compliant, do their check-ins, and stay in touch with their doctor throughout treatment as well, which we think will help with overall net promoter score and club member satisfaction.

Sure.

Thanks a lot. Appreciate it.

Thank you. Our next question is from Glenn Santangelo with Guggenheim. Please proceed with your question.

Yeah, thanks for taking my questions. David, I just had two quick questions for you. I'm kind of curious on the cybersecurity issue to dig in a little bit more. I mean, I guess you're much more of an expert today than you were a couple months ago. And I'm kind of curious, looking back, do you think the company could have did anything differently For example, do you wish you invested more heavily in IT security? And, you know, how do investors get comfortable that something like this won't happen again and that it was just a one-time sort of issue where STC had bad luck?

Yeah, it's a good question. You know, look, we're always aware of it. We have our insurance policy for it, and we've been building out what we call our engineering security team. We spent millions of dollars on it. You know, we're a HIPAA company. We're in healthcare, so we have to take this very seriously. I don't know if anybody can do anything. The big news over the last couple days has been what's happened here out on the East Coast with the fuel pipeline. I'm sure you've heard about that recently. I think it happened two days ago. So every company is susceptible. We have team members in our IT team who work for major Fortune 500 companies that's happened to multiple times, not just once. We take these things very seriously. I think our team did a really good job isolating it when it first happened. This is one of the larger ransomware networks outside of the United States that hit these public companies. They shut it down pretty quickly, and they came to us and said, guys, for us to secure the network, to secure data, we're going to have to shut everything down. And we have hundreds and hundreds of servers, and clean them out of here, and then we'll rebuild those servers. We gave them, obviously, the green light. Every single server was shut down at touch manufacturing, impression kit intake, order shipments out. It did not affect our websites. So that was, because that wasn't tied back into our internal networks. So we were able to keep the website going. Customers could still come online. But what it did was it delayed for several weeks treatment planning, you know, impression intake to let customers know whether they have to do another impression, whether impression kits were accepted. Those kinds of things, manufacturing, nothing went out the door. Pretty much shut down our manufacturing tenancy for over a week. I think the overall, you know, I've gotten the download and we've We presented the download to our audit committee and we're taking this very seriously and anticipating another attack could happen even though they spent a lot of time and they got nothing. They got no ransom. They didn't lock up our systems. But what we are gonna do next time is you can't prevent every single incident. There'll be something else that'll come up down the road possibly. We're obviously learning from what just happened is the rebuild of the systems. That's what we're building now and gonna automate. It took a long time, too long, to rebuild those systems from scratch once they were down and to reboot them. It was all manual. And so we're automating that process through scripting. So if something like this happened again, we shut down all our systems, we get the threat out of our system, and then within a matter of a day instead of a week or longer, we can get those systems up and running through automation rather than a manual rebuild. So that was probably the biggest learning that we got from this. We've hired outside consultants. Cisco was a big partner in this. From what they're telling us, that we did a really unbelievable job. Some of these companies are down for weeks. And so we're very pleased with the reports that we got from our outside consultants on this.

Okay, that's helpful. And maybe I just ask you to follow up, David. Given the investments that you made in manufacturing, automation, and operations, and you gave some statistics on in your prepared remarks, and also some statistics around the improvement in the member experience. What are you looking for before maybe moving from this controlled growth strategy to one where you really try to maximize, you know, top-line growth? Because it seems like a lot of the pieces are kind of coming together. But, you know, earlier in your prepared remarks, you talked about that 20% to 30% five-year sort of controlled growth strategy. At some point, will we inflect in a more aggressive direction or no? No.

Yeah, I mean, right now, I would say the answer is we're sticking, you know, we feel really good about running this business at this control of growth. We saw what it was like when we were growing 50% to 70% in Q4. And so, you know, there's so many more components, Glenn, to this than just the automation of manufacturing, which is really going well. You know, the number of fit issues are down. The comfort sense that is embedded in this new design is really helping. But there's this, like I talked about on the earnings call, in my prepared remarks, that we've hired Alvin Stokes, who, you know, there's the whole contact center side of this, too, and making sure that you're, you know, there where customers want to engage with you 24-7, getting back to customers on time, having the information that's needed. We're doing a whole transition with Salesforce right now on the back end. You know, we're a fairly young company. We grew very fast. And so we're building all this stuff. Now, what I tell you, you know, at some point, as all these things start coming to fruition, you know, better treatment planning software that we're working on in Costa Rica, all the back end for customer care and the contact center, all these, you know, lots of innovation with a huge R&D and innovation team that's working on stuff right now. As all this comes together, and typically the good news is, as you start to implement this stuff like Gen 2, now is there a great customer benefit from the service that they get, but then there's also a P and L benefit because it's cost less, you know, the processes are more automated customer experiences better. So at some point, as we, as, as we can bring it all together, we don't compromise the customer experience. We may give guidance that we're going to start to inch that up. I don't see it in the foreseeable future, but it's, it's certainly possible as long as we can get the kind of service that we want to give our customers. Cause that, that, that referral rate, that NPS score is super important in the, consideration of our P&L model and our CAC. And so if we compromise that, we're gonna get back to where we were in Q4 of 2019.

Okay, thank you. Kyle, you wanna add anything to that?

No, I think you said it very well. It's all about experience. And we have our internal metrics as to what might those metrics look like. And we've said this in the past, where if our net promoter score was closer to a 65, and that's something that we'll evaluate and say, do we have the legs of the stool to ultimately grow faster than what we've outlined? But, you know, certainly not within the foreseeable future, but not off the table forever.

Yeah, and, you know, approaching a billion, and also, you know, approaching a billion-dollar revenue company very shortly here, growing 20% to 30% on a very complex business. You know, I'm proud of that. I think we're doing a good job. And like we said, it's not like there's someone chasing us. There's someone right over our shoulder here that we're in a race against. So there's lots of customers out there that want our services. I want to give it to them in the best possible light that we can. And if that means going a little bit slower, then we'll go a little slower. Thanks, Glenn.

Thank you.

Thank you.

Our next question is from Kevin Caliendo with UBS. Please proceed with your questions.

Thanks for taking my call. So I want to ask about the ASPs. 1860 was much higher than we had originally modeled. I was wondering what drove that in this quarter, if there was anything in particular to call out, and is this a new run rate we should be thinking about? Any color around ASPs would be really helpful.

Yeah, I can take that one, Kevin. Yeah, great quarter for ASPs overall. It was really the impact of a few different things. So one, it was the first full quarter of the pricing change that we rolled out within Q4. So we rolled that within Q4, but it wasn't across all markets and it wasn't at full within the US market in particular. So that was a big driver within there. We've had a continual focus, really starting within Q3 of last year to continue limiting discounts. And I'm sure a few are going through the process you'll see it through our CRM streams we're making a very active effort to continue to limit discounting and we saw that continue to have an impact on ASP as well within the quarter and then just lastly our OUS pricing so think about sort of outside of US and Canada in certain markets we are priced higher than the US market in particular and we also saw small benefit from currency conversion associated with that back in the US dollars from OUS dollars so Really the three of those together, you know, in terms of just overall mix and where I would expect it to be, I would expect it to be fairly flat to that 1860 as we think about the near-term quarters here.

Okay, that's helpful. And just looking at the U.S. market, I mean, obviously the second quarter you're going to have an incredibly easy comp everywhere. But if we were to look back to, say, 2019 and then sort of look at your case volume in the U.S. Where do we sit and when would you expect there to be sort of meaningful case growth relative to 2019? I mean, I understand your business went through a huge tumult during COVID and everything, but as we use that baseline, how should we think about that kind of growth?

Yeah, I would think about it very consistent with what we've been saying and outlining previously. since Q4 of 2019. So it's all about the controlled and profitable growth strategy, and it focuses on the club member experience at the center of that. And so that strategy is really more about a sequential target. And again, that target is more on revenue from a 5% to 7% perspective. It's not necessarily on volume. But with flat pricing, obviously, that gets back to volume being within that 5% to 7%. So that's how I would think about it. Sequentially, quarter over quarter, we expect to be within – that 5% to 7% target, less so on how that compares to 2019 or even the early parts of 2020, where we were spending over 70% of revenue on sales and marketing. We just spent 49%, so much more cost-effective, but also significantly ramping up in newer markets, which is driving that above the longer-term target of 40% to 45%. It's really about executing within that strategy of controlled and profitable growth.

All right, that's helpful. I guess one quick follow-up. I mean, if I think about the growth, if your ASP is at 1860, roughly, if that's going to be relatively flat for the year, over 2020, that's sort of half the five to seven. It's 3.5% sort of growth. So I'm just trying to, in international, you see what I'm trying to get at. I mean, really one of the big overhangs has been the U.S. market and trying to figure out how the U.S. market's growing. And I wish you could just provide just a little bit more detail around the expectations for the U.S. growth, even if you break that out sequentially or not, you know, how much of that would be U.S. versus international.

Yeah, I think, you know, more importantly, the growth is all fungible, right? So to us, whether it's coming from the U.S. or sort of rest of world markets, we're targeting 85% to 7%, and we have the levers to be able to drive within there based on the overall efficiency of sales and marketing and where we're seeing that growth coming from. I would say all else being equal, you know, in the near term, we would prefer more of that growth to come from rest of the world because of the nuances of those markets. So if you look at the U.S., We've got a great head start here in the U.S. We've overinvested to gain market share as we've talked about in just a few short years. We are the low-cost provider. We've got the best unit economics with that. And as we look at a competitive landscape, we don't feel like anyone is chasing us within that teledentistry space. And so we think now is the right time as we look at the international markets, which are highly fragmented and see a lot of those similar dynamics, but we don't have the brand awareness that we have here in the U.S. And so we're spending heavily to gain that footprint, which we think long-term is really going to support that growth. And so we're going to continue to invest in that. I would expect the international markets to grow faster than the U.S. markets, as you look at sort of the 5% to 7% sequential targets. But if for some reason it's taking longer and conversion curves, you know, take longer for people or club members to ultimately convert, then we do have that lever to look back at the core U.S. market and spend more here as well. So... I would think about it as fungible with a preference for the rest of the world, assuming they convert like we expected to. That's great.

Thanks so much.

That's really helpful. Yep.

Thank you. Our next question is from Robbie Marcus with JP Morgan. Please proceed with your question.

Yeah. Thanks for taking the question. Two for me. Maybe first, Kyle, you know, back to the first question on 5274. percent sequential growth and does that uh is that now off the lower second quarter so i just want to make sure versus you know the prior guidance of five to seven percent sequentially and and now off of the lower base in second quarter it's essentially taking 2021 revenues down by some like what 10 15 million dollars versus prior expectations so just want to make sure uh that's the right way to think about it in the resulting second half uh growth

Yeah, so I think I'll just sort of reiterate what I had said before in my sort of summary section of closing that out. As we think about spending marketing dollars in the back half of the year, we're spending those dollars to execute against the 5% to 7% sequential growth. So that's off of the 195 to 200 that we expect to close out Q2 with. But there is potential upside to that, and you saw that as an example in Q4 where we were 9% sequential on a quarter-over-quarter basis as leads came in better than we expected to. And so there is the potential where the leads that did not convert within the second quarter could mature as you look at Q3 and as you look at Q4, and we have the ability to be slightly ahead of that. It's obviously very difficult to predict if and when that will happen just based on the nature of those conversion curves, but that ability is there. If they come in So, you know, within that time period, as I said, just sort of closing that out, the most important thing we won't do is jeopardize sort of what we're seeing with the club member experience, and that includes our internal metrics on things like how long it's taking us to ship aligners, but also consumer sentiment metrics as well. It's something that we track very closely online. So we'll keep a close eye on those in the event that these leads are coming in sort of better than expected. But in lieu of that, I would expect us to be at that 5% to 7% based on where we close out Q2.

Got it.

David, I was going to say, David, anything you'd add to that?

Yeah, I was on mute. Sorry. No, I think, you know, we said earlier, there's also that call it the 15 million that we've identified that was affected based on this long cycle because of the cyber attack. Those are sources of referrals as well. And even those that didn't cancel may not be that happy with us right now because it took a little bit longer than what we had told customers. Remember when they leave that that scan shop, that small shop, we're telling them within 72 hours you're gonna have your treatment plan, we're gonna get your liners ordered, and then the phone starts ringing. It's been five days, it's been seven days, it's been 10 days, so forget about the ones that canceled and didn't convert. You still have some customers out there that may give us some low remarks for that short period of time. We're back on track right now completely as far as timeframes for treatment planning. We're still a little bit behind on impression kits, but manufacturing is up to snuff. So I think there's that effect of, Robbie, if you say, well, guys, you should be able to make that up. But the way to make it up, if you're not going to make it up, is part of your mix is referrals. Right now, overall sales and marketing, part of that mix is referrals, and you've got to spend more on marketing. And right now, I don't think we want to do that. I think we want to keep our marketing spend where it is and see what happens. I think it may not be second quarter. It's probably not going to be. But maybe we pick it up in third and fourth, and we'll give you guidance at the end of the quarter and see how those customers are coming along.

Got it. And then maybe just to follow up on the last question, I saw in the queue that you filed today that 83.3% of revenues came from North America. It does look like that's lagging a bit more than we were thinking here. So maybe just to follow up and see any trends you can talk about, in North America coming out of first quarter into second quarter here and how we should think about the progression of North America versus the better incremental growth you're seeing outside the U.S. would be really helpful. Thanks.

Yeah, so that percentage, you know, we talked about it on the year-end call last quarter was about 13% for the full year of 2021. We did see sequential growth. Obviously, that includes total revenue within there. So that's normally a liner revenue, but it's also financing revenue, and it's other revenue associated with retainers and retail products as well. So that percentage is pretty flat on a quarter-over-quarter basis, as you think about that, 83% approximately. But again, I think it goes back to what I had mentioned to Kevin, is that as we think about the overall spend and where we're expecting that growth to come from, we look at it first and foremost as executing against that 5% to 7%. Second to that, our view is growth is generally fungible. And with a preference, we prefer to come from international markets. But the conversion curves there, just given the nature of sort of our aided awareness and brand awareness, is still maturing. And so it's a little bit more difficult to predict how those orders ultimately convert in these newer markets. And so We have the lever with the core U.S. business and the growth engine there to be able to spend into that on a quarter-to-quarter basis if needed to hit that sort of 5% to 7%. But generally, I would expect our rest of the world markets to grow faster than the U.S. market as we continue to overinvest there to gain market share in the foreseeable quarters here.

Great. Thanks a lot.

Thank you.

Our next question is from Erin Wright with Credit Suisse. Please proceed with your question.

Great. Thanks. On the international side, I guess thinking about your omni-channel approach and the various channel strategies that you have, I guess, can you speak to what strategies you plan to deploy or currently are deploying in international markets? What works well? What doesn't work well relative to U.S. markets, whether it's doctor-directed partnerships or traditional DTC approach? I think you originally said that you would enter these markets with an impression kit type of strategy and then move on from there, but where do you stand on that front in various markets?

Yeah, so I can take that one, Kyle. So pretty much they're mirroring the U.S. There are certain countries that we don't have impression kits, just the way they classify them as medical devices, very few. For the most part, we open up small shops and We are doing what we call clinical lease partners, where we're opening up smile shops inside dental offices, where we'll run it with our smile guides, and then try to bring on those dental partners as what we call office direct, where they're then also offering smile direct clubs. So this new model that we've taken on here, what we call partner network, is definitely in play in all countries, the UK, Germany, we're signing up partners today, Spain, All of our countries, we're going with that model. We think it's another on-ramp for customer wants, those that want to see a dentist and sit in the dental chair. So it's pretty much the same. Probably a little less heavy on smile shops and more on what we call clinical leases. We can get them open up quicker. The rent factor is a little bit less than going into a full retail environment. But we still consider those as we look at new markets.

Okay. And then can you speak to the teen demographic, what the initiatives are there, and how much volume is attributable to teen today? I mean, how big could that realistically be for you longer term?

Yeah. So today it's still about 10% of our business in total. I think if you look at the market, it's about 75% of total case starts. So clearly a massive opportunity that we're really in the early stages of going after there. I think if you look at the team product that we launched last summer, it continues to evolve, and it's part of our longer-term growth strategy that we've outlined, and that's a core component of that growth strategy. I think when we launched that product, if you think about it from a parent perspective, we needed the brand credibility that we have today and continue to improve to be able to address a large portion of that market. And I think we have that today. And so that was a good time to launch it. As you think about some of the more complex cases with teens, that's something that we continue to evolve. So mixed dentition is a great example of a product that is currently in development with our treatment planning and we're expecting to launch in the future at some point. But today, If you look at more mature teens, we can already address a large percentage of those cases today with the existing treatment planning platforms that we have, and it's a core component to our longer-term growth strategy, as I said, but it's in the very early stages of continuing to ramp that platform and that product. David, anything you'd add to that?

No, it's a huge opportunity for us. Of our three big initiatives, I think that's the one that's going to take the longest. You know, partner network, we're already seeing gains in that. International, obviously, with 13 countries open up and a couple more coming on soon. The team, we're going to get there. It's a huge market for us, and I think we're doing all the right things right now with improved treatment planning, like you said, the credibility that our doctors have with the customer. Great report. It's actually in the investor deck. You can see some excerpts from it on one of the slides. Take a look at that. You know, it's something that we initially did not go after, but we have the product offering, we have the credibility, and we're going to start improving our teen offering for sure.

Okay, great.

Thank you.

Thank you.

Ladies and gentlemen, we have reached the end of the question and answer session. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation. Have a great day.