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spk13: Greetings and welcome to the Smile Direct Club fourth quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jonathan Fleetwood, Director of Investor Relations. Thank you, Jonathan. You may begin.
spk08: Thank you, operator. Good morning. Before we begin, let me remind you that this conference call includes forward-looking statements. For additional information on SmileDirectClub, 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 Q4 2021 earnings presentation for a description of certain forward-looking statements. We undertake no obligation to update such information except as required by applicable law. In this conference call, we will also have a discussion of certain non-GAAP financial measures, including adjusted EBITDA and free cash flow. Information required by Regulation G of the Exchange Act with respect to such non-GAAP financial measures is included in the presentation slides for this call which can be obtained on our website. We also refer you to this presentation for a reconciliation of certain non-GAAP financial measures to the appropriate GAAP measures. I'm joined on the call today by Chief Executive Officer and Chairman David Katzmann, Interim Chief Financial Officer Troy Crawford, and Global Head of FP&A and Investor Relations Jesse Weaver. Let me now turn the call over to David.
spk15: Thanks, Jonathan, and good morning, everyone. Thank you for joining us today. Last quarter, we talked a lot about the decisions we've made over the past seven years to fulfill our mission to democratize access to a smile each and every person loves and deserves by making it affordable and convenient for everyone. Some decisions have been easier and some tactics have been more impactful than others, but they're all consistent with our mission. One of the hardest decisions we made over the past several weeks was the late January announcement to reevaluate our international footprint for near-term profitability, right-size our operating structure, and allocate capital to our core growth initiatives that can produce the highest return on investment. These initiatives include expanding our professional channel, the Smile Direct Club Partner Network, funding innovations in our aligner products to successfully attain our share of high-income households, growing the oral care product business, and returning to profitable expansion of our small shop footprint in markets with strong consumer demand. We have to part ways with many of our team members in the Americas and rest of the world that made contributions to our success and dialed back some expectations in existing markets. By stressing the importance of generating near-term profitable growth, we are focused on markets and businesses that best support our mission and have existing or a more direct line of sight to profitability. Troy will discuss what impacts these decisions will have on our 2022 forecasted results in a moment. And I will close my remarks later with what all this means for re-engaging growth, profitability, and positive cash flow within the next five years. First, let's talk about one of the primary reasons that we have needed to evolve our tactics this past year. There are economic realities influencing our core customers' consumer spending. Recall that this is a customer base with median household income of approximately $68,000. This customer traditionally has been priced out of teeth straightening options, but with our offering, we've been able to expand the market to this demographic and bring teeth straightening to more than 1.5 million customers worldwide. Since late in the second quarter of last year, we have pointed to economic factors such as inflation affecting their ability to spend on discretionary items. With inflation existing everywhere now, I don't think we need to make our case as forcefully as we have in the past on that point. I think there is broad consensus today that not only is our customer base challenged, but that the lower to middle income consumer is as well. We have included several updated charts in our earnings deck that provides a little more color on what we are seeing, such as inflationary pressures appear to be the most logical source of consumer friction this past quarter, and consistent with what we've experienced for nearly three consecutive quarters, as the cost of non-discretionary items has increased sequentially every month since early to mid 2021. In January 2022, the cost of non-discretionary items was even higher with an 8.5% increase. All this reinforces our decision to expand our reach upstream with higher income demographics that are less price sensitive and have more capacity to spend on discretionary goods and services. With the child tax credit ceasing in January, that could have impact on the capacity to spend. This last July, approximately 36 to 38 million households have been pre-receiving half of their credit on a monthly basis. Given the income qualification requirements, we believe this payment stream of more than $400 per household has benefited households with less than $150,000 in adjusted gross income. These headwinds are clear and ongoing challenges to the business, but we've overcome a lot of adversity the last several years. Unlike other small, non-vertically integrated DTC competitors who have followed their tents and moved on in the past few months or have a dramatically curtailed online marketing presence over the last few months, our differentiated assets allow us to be nimble with our offering to our existing customers or expand upstream and develop additional customer acquisition channels. These assets include 30 patents issued for innovation, the only vertically integrated MedTech platform for straightening teeth at scale. an unparalleled customer experience, a state-of-the-art FDA clear technology and registered facility, home to one of the largest fleets of 3D printers, and the largest clear liner manufacturer in the U.S. We believe these assets, along with our SmilePay captive financing, are incredibly difficult to replicate and necessary for long-term success. While we have the assets for success, tea straightening is a highly considered purchase, and choosing a brand to trust your smile with is an important decision. When making that brand decision, we know that customers rely on three important channels for their information. They go online to check reviews, they talk to their friends and family for references, and they solicit the opinion of a dental professional. This is why we have spent the last seven years investing over $1 billion in marketing to build a brand that customers know and love and believe that's important that we continue to build our brand credibility across all three of these channels. Last July, we launched our Challenger campaign to target Invisalign's end users with our value proposition and ramped up the ad buys throughout the quarter. Our Challenger campaign ads are demonstrating excellent breakthrough and recall. They have really cemented our position in a two-horse race in the U.S. It's worth noting that this is not an all-or-nothing campaign. This ad campaign is just a piece of a much larger concerted effort to expand our brand's reach to high-income consumers. Based on our research, our product and customer experience remains competitive with Invisalign and is 60% less expensive. But we have to continue to change perception across the channels, as I noted earlier, to gain meaningful share in this demographic. Given that we have not previously focused on this end user base, which is the majority of the 21 million annual orthodontic case starts across the world, a fractional percentage could be very material to us. To further our brand reach with consumers, credibility with professionals, and capability in treating our customers, we accelerated many of the tactics we had underway during Q4 by deepening our investment in the partner network to drive adoption and utilization in dental practices. We appointed Brett Deaver as SVP, General Manager of Partner Network. Brett will help further build and ignite growth for this channel. He brings extensive knowledge of global commercial strategy, sales, customer service, and professional education from the dental and healthcare B2B space. We announced a partnership with celebrity cosmetic dentist Dr. Amira, who will help advocate for our shared mission of increasing access to care, as well as advocate for GPs to join the partner network. Expanding our brand reach with the formation of the Confidence Council, which included partnerships with Jonathan Van Ness, Tunde Oyanan, and Arielle Vandenberg to reach new demographics by harnessing their influence to shine a light on the transformational power of a smile. Introducing innovative oral care solutions through the launch of our new and innovative fast-dissolving whitening strips, which will hit 4,600 Walmart shelves by the end of February. The strips are our new convenient and easy way to get fast whitening results without the mess of traditional strips. In addition, we continue to launch other whitening innovations, including the wireless pro-whitening system and stain barrier. Finally, in spite of the right-sizing efforts I mentioned earlier, we continue to invest in R&D that supports our mission of providing accessible care. We announced our next-gen proprietary treatment planning software, SmileOS. The leading-edge AI software delivers enhanced treatment outcomes, more accurately predicts tooth movement, and enables doctors to better visualize their patients' treatment. SmileOS adds to the vertical integration of our business, creating a superior customer experience, and most notably will help our network of doctors treat a broader range of patients. Last week, we announced our partnership with CareStream Health to utilize their cutting-edge intraoral scanners throughout our small shops and partner network locations. This exciting partnership allows our partner network locations to leverage the openness of CareStream's platform for greater flexibility in how they can utilize a scanner for expanded functionality in addition to clear aligner treatment planning. As you can see, we continue to bring innovations to the market that we believe will further solidify our foundation for the next phase of our growth. In our earnings supplemental deck, you will see that we've described our long-term outlook on pages 31 and 32. This outlook encompasses 2022 through 2026. With our guidance for 2022 already in the release and Troy walking you through that momentarily, I want to focus on the next five years. Before I begin, I want to highlight that quicker gains in the higher income demographics and faster adoption of our partner network expansion could produce growth rates and require investments above the numbers that I'm about to present. Beyond 2022, we expect revenue to grow at a mid-teens compounded annual growth rate based on aligner shipments returning to 2019 levels by 2026. Annual price increases of 4% to 5% and continued strong growth in oral care products. Gross margin is anticipated to expand by 50 to 100 basis points each year based on increased aligner volumes leveraging our fixed costs with higher Gen 2 utilization. offset by the lower gross margin profile of the oral care products. Selling and marketing is expected to show 300 to 350 basis points of margin improvement each year as we gain leverage on marketing spend from annual liner pricing increases, modest gains on marketing efficiency, and higher shop utilization. DNA is expected to show 200 to 225 basis points of margin improvement each year as the total dollar spend grows at close to inflation resulting in increased leverage from continued revenue growth. CapEx spend to remain in the range of 7% to 10% of revenue. Doing the math here, that would imply that we would expect to return to EBITDA profitability by 2023 and to positive cash flow by 2024 or 2025. The global orthodontics market is large and underserved, and the total addressable market continues to expand. Between the U.S. and the rest of the world, there are approximately 500 million people for whom clear aligners would be an appropriate means to treat mild to moderate crowding and spacing, and who can afford treatment using our SmilePay program. Within that, there are approximately 21 million worldwide orthodontic cases start annually, and the penetration of clear aligners within that is still less than half. It's a tremendous global opportunity that we can't lose sight of during these challenging times with our core customers. We have multiple avenues to achieve outsized growth over and above what I've just walked through. These include organic volume growth and profitable small shop footprint expansion, retail partnerships and adjacent product expansion, professional channel network growth, and successful targeting of higher income consumers. As we've said before, we've only begun to scratch the surface on most of these opportunities. You can expect to hear more from us on all these avenues for growth in the months ahead. And now I'll turn the call over to Troy, who will provide more detail on our Q4 financial results, our liquidity, and 2022 outlook. Troy.
spk09: Thank you, David. I will jump right into our results for the quarter. Please be sure to review our supplemental materials posted to our investor website, which provide additional details on everything I will cover. Revenue for the fourth quarter was $126 million, which is a decline of 8% sequentially and a decline of 32% on a year-over-year basis. This was driven primarily by 66,000 initial liner shipments at an ASP of 1899, the latter of which is up 4% year-over-year. For the four-year 2021, revenue was $638 million, which is down 3% versus the prior year. The Q4 decline is primarily due to the macro factors that David mentioned earlier, and our revenue results were within our revenue guidance range provided in our Q3 earnings call. I'll have more to say on these headwinds when I discuss our outlook for 2022. Providing some details on the other revenue items, implicit price concessions were 12% of gross line of revenue, up from 9% in the third quarter. As we have mentioned in prior quarters, we maintain separate reserves for IPC and cancellations. We analyze and regularly rebalance those reserves based on current information. The higher IPC rate this quarter was due to this rebalancing on overall lower revenue for the quarter. While IPC reserves were up for the quarter, the credit of our AR remained strong with delinquency rates in line with prior quarters. The full year implicit price concessions as a percentage of gross line of revenue was 9%, which is consistent with historical rates. Reserves and other adjustments, which includes impression kit revenue, refunds, and sales tax, came in at 10% of gross line of revenue, which is flat to Q3. Financing revenue, which is interest associated with our small pay program, came in at approximately 10 million, which is slightly down relative to Q3 due to the lower accounts receivable balance. Other revenue and adjustments, which includes net revenue related to retainers, whitening, and other ancillary products, came in at 18 million, which is down slightly to Q3. Now turning to SmilePay. In Q4, SmilePay purchases came in at 58.5% of initial line of purchases. This is down 1% relative to Q3 due to decreases in the U.S., and slightly below historical levels. Since we view small pay customers as more price-sensitive consumers than full pay customers, we believe this decline in the U.S. small pay rate is an additional indicator of macro factors putting financial strain on our core customer. Overall, small pay has continued to perform well, and our delinquency rates in Q4 were consistent with prior quarters. While admittedly our core customers had difficulty with the macro environment, The fact that we keep a credit card on file and have a low monthly payment gives us the confidence that SmilePay will continue to perform well. Turning to results on the cost side of the business, gross margin for the quarter was 65%, representing about a 650 basis point sequential decline. This sequential decline is primarily attributable to the revenue decline causing the deleveraging of our fixed components of our manufacturing costs, along with a couple of items that we don't expect to repeat. including startup costs associated with our SmileOS implementation and lower retail margins due to higher expansion costs in our international retail business, as well as higher retail inventory reserves. Collectively, these non-recurring items had about a 400 basis point impact on our gross margin this quarter, and adjusting for these items would produce about a 69% gross margin in the quarter. Our second-generation automation machines are now producing approximately 91% of aligners up from 89% at the end of Q3 2021, and hit our internal target of at least 90%. This streamlining is helping with our turnaround time, productivity, reduction in scrap, and a more consistent and superior product for our club members. Marketing and selling expenses came in at $99 million, or 79% of net revenue in the quarter, compared to 70% of net revenue in Q3 2021. The sequential increase as a percent of revenue is primarily attributed to the decline in revenue, but is also the result of increased marketing spend to increase international brand building, as well as increased pressure we're seeing with marketing efficiency from the challenges associated with Facebook targeting and the macroeconomic environment. I'll outline later in my comments how the cost actions we took in January will reduce the marketing and selling expenses in 2022 related to exiting some of our international markets. On small shops, we had 188 permanent locations as of quarter end and held 180 pop-up events over the course of the quarter for a total of 368 location sites. That total is consistent with the 365 at the end of Q3 and up significantly from 218 year over year from Q4. These pop-up events have been an efficient way to meet our demand and enable us to fully leverage our small shop resources in order to meet the demand that is coming through aided awareness, referrals, and marketing. We continue to evaluate profitable expansion of SmileShops and other scan distribution models where we believe incremental demand exists to cover the additional cost of these locations. They have also been critical in supporting our partner network. We now have over 657 partner network locations globally that are active or pending training and an active pipeline of approximately 1,200 locations. The reduction from 753 locations in Q3 is primarily due to the exit from the German market and deactivation of DSOs and private practices with low productivity. With the addition of Brett Deaver leading the team, they have been extremely focused on tightening the model to maximize engagement and productivity within active practices. So while the total number of partners has decreased, productivity has increased significantly in the remaining practices with an increase in the total number of case submissions on a smaller base. As referenced earlier, our marketing and selling expenses in the quarter reflect significant investment in brand building to support our long-term growth, and this quarter's results bear out that emphasis. Sales and marketing as a percent of revenue was 110% in the rest of world markets compared to 71% in the U.S. and Canada. We expect our emphasis in marketing and spending to continue through investments in TV, greater reach through influencers, and expansion of the partner network. We believe this high funnel lead capture strategy will be more effective and efficient long term at building improved customer consideration through greater aided and unaided brand awareness. This approach will also result in our business being less sensitive to the volatile performance of our direct response marketing with platforms such as Facebook because we will have increased the pool of prospective club members aware of SDC that we can nurture through our CRM system and sales processes. As expected, Early indicators in the U.S. and Canada are showing important sequential increases in lead capture per visit to our website, and we expect this trend to continue as we lean into this strategy into 2022. We are continuing to diversify our media strategies and investments to ensure long-term efficiency in the face of headwinds from iOS 14.5 privacy updates and subsequent signal loss. General and administrative expenses were $74 million in Q4, compared to $86 million in Q3 of 21. The lower G&A cost was primarily due to lower stock-based compensation costs and a $9 million reversal of incentive compensation costs based on full-year results. Q4 also included a one-time legal settlement cost of approximately $4 million. Other expenses include interest expense of $1.9 million, of which $1.1 million was deferred loan costs associated with the convert we issued earlier in the year. $330,000 was associated with long-term lease accounting, and $500,000 was associated with capital leases. Additionally, other expense was approximately $2 million related to the one-time closure cost of some international facilities. All the above produces adjusted EBITDA of negative $62 million in the quarter, with an all-in net loss of $95 million. Breaking it out regionally, adjusted EBITDA came in at negative $34 million for USA and Canada, which aligns with the underperformance of this region due to the macro factors currently impacting our core customer. For rest of world, adjusted EBITDA was negative 28 million. Moving to the balance sheet, we ended the fourth quarter with 225 million in cash and cash equivalents. Cash from operations for the fourth quarter was negative 44 million. Cash spent on investing for the fourth quarter was 36 million, mainly associated with capitalized labor and software, as well as manufacturing automation and facilities. Free cash flow for the fourth quarter defined as cash from operations, less cash from investing, was negative $80 million. We ended the year with $225 million in cash on the balance sheet and unlocked $120 million in cost savings coming into 2022 and believe we have enough liquidity to execute our plans. We have previously noted that we have access to additional liquidity through our ability to unlock the embedded value in our asset base to support any accelerated investments in initiatives such as partner network, small shop expansion. We often receive unsolicited offers to add additional liquidity on favorable terms, and we are always evaluating our liquidity needs and capital structure. As mentioned previously, in January, we took actions to reorganize our company and meaningfully reduce costs. Overall, these targeted cost reductions optimize our operations to refocus our business on achieving near-term profitability while minimizing any impact on revenue. These actions are expected to reduce costs by approximately $120 million. While the exact breakdown of the components of the cost savings could change during the year, the following should help you understand where the savings will occur. Approximately $5 to $10 million in savings will be realized from cost of goods sold efficiency gains through right-sizing our staffing model and productivity improvements from automation. Reductions due to scaling back our international operations, primarily in targeted markets, We'll reduce marketing and selling expenses by approximately $30 million and general administrative costs by approximately $20 million. We will also save between $25 million and $30 million in operating expense from the remaining markets and corporate support to reduce team members and project-related expenses. Lastly, we will be reducing capital expenditures by $35 to $40 million based on reduced spend for redundancy expansion and disciplined prioritization of capital projects. Turning to our guidance for 2022, I would point to our earnings supplemental deck for the key assumptions underlying our forecast. There are a few points to note. We believe the macro environment will continue to affect our customers through 2022. Our guidance also does not include any outsized contributions to revenue or acceleration of investments related to expansion of our partner network or SmileShop footprints. We anticipate 2022 revenue in the range of $600 million to $650 million. The lower end contemplates a continued worsening of the environment for our core customer. The higher end assumes the macro headwinds impacting customers' ease in the second half of 2022. Gross margin is anticipated to be between 72.5% and 75%, largely driven by leveraging our fixed costs with increased aligner volumes partially offset by higher volumes from oral care products that carry a lower gross margin. Adjusted EBITDA loss between $75 million and $25 million driven by flow-through on revenue. Capital expenditures for the year between $60 million and $70 million. And finally, one-time reorganization costs from our January announcement between $20 million and $25 million. We are pleased to deliver Q4 results in line with our targets provided in our third quarter call. Combining the financial strength of our operations with our continued improvements in brand perception and brand credibility among consumers, provides a solid foundation to help us achieve our 2022 and long-term growth targets and provide the best club member experience. Thank you to everyone for joining today. With that, I'll turn the call back over to the operator for Q&A.
spk13: Thank you. We will now 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 that 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 key. And now, our first question is from Matt Mixick with Credit Suite.
spk14: Please proceed with your question.
spk05: Hey, good morning. Thanks so much for taking the question. So, one question just on... some of the assumptions you made around the pace of inflationary pressure, which is something you talked an awful lot about the back half of the year and its effect on your demographic. Your thoughts and assumptions on how that plays into your guidance for this year and expectations going forward.
spk15: Yeah, I can take that one. We were one of the first companies to start talking about inflation back in the summer, heading into Q3. Back then, it was around 5.5%. In Q3, it increased, I believe, 6.5%, and it was just reported in January approaching 9%, a little shy of 9% now. So, look, nobody has control or knows what's going to happen into 2022. Our guidance is that we anticipate This type of inflation, high single digits, low double digits, is going to continue. And that's the range of, if it worsens, we could be at the $600 million low end of the range. If it starts to ease, based on some of the things that the government's going to do, we believe that we can hit the higher end of the range. So everything is counted for as far as anticipating that this will continue and some of the tactics that we're doing to fight that. are not necessarily built into the model will continue to be agile, come up with tactics and solutions to combat that. One of those is going into the higher household income group, which isn't as affected by this inflation. And then expansion into our partner network, which we believe is incremental and not quite as affected as well.
spk05: Okay, that's helpful. Thank you for that. And then just maybe a follow-up on your, you talked a fair amount about the restructuring and the cost savings and flexibility that's going to drive into your model. Can you talk about maybe the trajectory of marketing spend and brand investment and how some of the savings are factored into that or and what the trajectory of that looks like?
spk15: Yeah, so from a marketing standpoint, first of all, that's a core competency of the group. We play in all channels from digital to offline, TV, direct mail, all of them. And so we have the ability to move in and out of different channels, such as a Facebook that's been affected by the privacy in iOS. But in our long-term model, what we're showing is we're really getting leverage off of the price increases that we just announced. You know, we had not done a price increase. We had done five price increases since we started the business over a five-year period. We paused when COVID hit, and we kind of were watching what was taking place. And now that we're coming out of this pandemic into a more normal state, and with the inflation that's hitting, most companies are taking some form of a price increase. So we're going to be announcing a 4% to 5% price increase in the next month and get back on a regular cadence of price increases over the next five years. So that helps with the CAC and the leverage that we can get on our marketing spend. We do anticipate some efficiencies over the next five years. It's pretty modest, but... The leverage that we'll get will be off of our ASP that will continue to go off 4% to 5% over the next five years.
spk05: Okay, so it sounds like the spend on marketing, investment in brand, is something that you'd say continues at a steady trajectory. Operating leverage and pricing are the things that drive your improving margins growth. at a high level. Is that fair?
spk15: Yeah, that's fair. I mean, there will be some efficiencies as we put more dollars and we've already put a billion dollars in marketing up in the marketplace. We have 54% of the awareness. Our NPS scores are in the mid 50 range now. So that has got to equate into more referrals, which will help lower the CAC. The other thing that we are launching, we haven't really talked about, it's a small tactic, but I think it's one that we've of overlooked is this really a strategy around more viral marketing with our customer base and we have over a million and a half enthusiastic members who are very passionate about sdc and we're going to be harnessing their energy in our new viral marketing efforts this year um you know more posts asking our customers to post more on instagram and tick tock And, you know, currently when the customer has a great experience with us, we ask them to go to Google or Trustpilot and post reviews. Well, we've got a couple hundred thousand four- to five-star reviews on Google. Getting another one is not going to make a difference. So we're shifting our tactics to asking and providing a way for our customer base to do more viral marketing posting, which we think will also reduce our CAC and get more referral business.
spk09: Yeah, just to add to that.
spk05: Thank you.
spk09: Yeah, just to add to that, for our savings initiative, the $120 million, about $30 million of that will come from the cuts we made in international, which will also help drive a little bit of leverage from a marketing and selling standpoint.
spk14: Excellent. Thank you. Thank you. Our next question comes from Nathan Rich with Goldman Sachs.
spk13: Please proceed with your questions.
spk00: Hi, good morning. Thanks for the questions. Maybe just following up on the comments, David, that you made on pricing, both what's embedded in guidance for 2022 as well as the longer-term outlook. I guess, you know, first, you know, how sensitive do you think demand is to price increases in this environment? And then I think if you do take kind of 4% to 5% price increases a year, that's typically above the level that we've seen, you know, from Invisalign in the doctor channel, I guess. So how do you think about kind of maintaining the price differential relative to the GP channel to kind of maintain that value proposition that you have?
spk15: Good question, Nathan. So we had taken five price increases. You know, we started this business at $995 ASP. We knew that was not sustainable, but we just wanted to take price out of the equation and see how the customers would transact. Once we saw the demand, we started raising our prices every year for five consecutive years. We're still the low price leader, right? I mean, there's a couple of smaller competitors who follow our lead. If we go up, they go up because the unit economics are not nearly what ours are. There's no reason, especially today, with the advancements we've made in our product and our treatment planning and our manufacturing, which is outstanding, by the way. All the work that we've done with our SmileOS treatment planning, our Gen 2 automation, our laser cut lines, the fit to comfort. The point is that we're 60% less than braces and current clear lighters therapy in the marketplace. So for us to go up over 4% to 5%, if you look at the model in the investor deck and where it gets us to 2026, it's still pretty insignificant. It's still a 50% or better savings than what's out there with other clear aligners. And so to protect our consumer who relies on smile pay, we don't anticipate going up on the monthly payment. We'll go up on the single pay. So if we're at 1950 now, if you take a 5% increase, you do the math, we're at 2050. So we went up $100. Well, that $100 is meaningful. On 350,000 units, that's $35 million annually right to the bottom line. But on SmilePay, which is 60% of our business, we're going to maintain that $89 a month because that's the sweet spot. We've tested different price points. And so from an affordability standpoint, as long as that consumer can spend $89 a month to straighten their teeth, all we have to do and what we plan on doing is extending the term. So instead of 24 months, it may be 26 months. We take another price increase in maybe 28 months. So from an affordability standpoint, and by the way, we've seen in the past when we've taken these price increases, it has not affected our conversion. So we feel very good about the ability to take this 45% increase. And by the way, Invisalign is not selling to the consumer, and they're not offering financing to the consumer. So they're selling to the doctor who either absorbs the price increase or... or raises their prices to the consumer. So for us, it's a little different matter. And I think by having this captive financing and having the smile pay and the flexibility of the terms that we can use, we can have our take in either two.
spk00: Great. That's helpful. Maybe just a quick follow-up on the revenue outlook for the year. You know, maybe how are you thinking about kind of the pacing of growth over the year? You know, I guess kind of going back to how we were thinking about revenue growth in 2021 and looking sequentially, it seems like if we kind of apply that for 2022, you'd be looking at kind of high single-digit sequential growth quarter-to-quarter growth. Is that sort of what you're expecting, or is maybe growth maybe more weighted towards the back half, just given some of the near-term pressure on the consumer? Just anything you could do to help us with cadence, that would be great.
spk09: Yeah, I can take that. So we definitely believe that the back half of the year will be a little stronger than the front half, just because of the macroeconomic conditions we're in currently. We do expect Q1 seasonally to be a little bit better than Q4. And probably if you look at the full year, we would see 45% to 50% of the $600 million to $650 million being in the front half with 50% to 55% being in the back half of the year. That's kind of the way we're looking at it.
spk14: Great. That's helpful. Thank you. Thank you. Our next question comes from Chris Cooley with Stevens.
spk13: Please proceed with your question.
spk10: Hi, this is Ben on for Chris. Thanks for taking the question. Just want to dive in first to the new demographics that you're looking to reach. Could you help us better understand the timing and magnitude of the related marketing spend over the next few years? And how long do you think it'll take to develop these new markets? Thank you.
spk15: Yeah, good question, Ben. Nothing is in the model today for capturing more of that market. We do get $125,000 household income and higher, but we under-index. Initially, we want to get back to indexing and then over-indexing. Like we said, that market right now, the 21 million case starts, if we just get a fraction of that, we think it's very meaningful. It can really get us to another level above and beyond even higher end of the range in the $650 billion that we're giving guidance to. We have plans. It's one of our big initiatives we're working on. It's going to take some time. I think you'll start to see some of this roll out in Q3. It's a very comprehensive plan. It's not just about price, which is what we kind of dabbled in in 2021, making sure customers understood that we don't have this three-time markup, that we are 60% less than braces and traditional liners. but because of the advancements that we've made in our product offering and some of the new innovations that are going to be coming out, we think we can put together a real comprehensive solution for the higher household income. It involves all of our products, all the services that we can offer, and make it very appealing to that consumer. So I can't say a whole lot today, but you'll see the launch of that later in the back half of the year, and then we'll continue to measure and test and expand upon it.
spk10: Okay, great. Thank you. That's very helpful. Then real quick, just jumping back to the price increases, does the forecasted increase in pricing come with historical levels of price concessions and reserves, or how can we think about that moving forward? Thank you.
spk09: Yeah, we expect, you know, our consumer has been pretty consistent, I would say, over the last year. And so from an overall credit perspective, I would think very consistent overall. numbers year over year from an IPC and cancellation reserve perspective.
spk14: Thank you. Our next question comes from John Block with People.
spk13: Please proceed with your question.
spk12: Thanks, guys. Good morning. Maybe just to start, do you have anything more on the partner network? You know, it's been out there for a while, for some time, and I know you talked about those that are signed up and cleaned it up for the international markets that you exited. But any metrics, you know, on practices that have, I don't know, been signed up for more than six months or 12 months or traction that you're seeing from guys that have a little bit more longevity, if you would, on the platform? Because it just seems like this is a, you know, key initiative for you guys from a CAC perspective on how to get volume at sort of better economics. So are there any more color to provide there?
spk15: Yeah, that's a good point, John. So we've been definitely tinkering with it, and we're ready to start growing that initiative. We hired Brett Devers, as we talked about. He's an industry veteran in the dental space. He's already morphed the model to be more of a hunter-farmer model, and we've been hiring up some of our farmers, which are going to be really customer service, calling on accounts once a hunter signs up you know, a practice. So, and you're right on the CAC side, it's, it's, you know, based on the fees we're paying and all the services, it's about a 50% savings. So it's, it's definitely something that will help overall with our marketing spend. And it's incremental. And these are, these are, most of these are customers coming from the practice. These are their patients that are introducing Smile Direct Club, you know, our brand to them. So, And so you'll start to see some real progress, a partner network. The 600 to 650 million guidance, once again, does not include as we really start to grow that out because it hasn't happened yet. We're in less than 1,000 offices today. The pipeline is a little over 1,000. But we're going to start as we get some of these metrics down, and we will report on these metrics. I know you guys want to hear it. similar to what a wholesaler like Invisalign or other clear liner therapy companies do, number of offices, submissions, growth in offices, growth in submissions. So one of the things that we're really working hard on is getting those submissions up. And I think with this farmer model that we're doing and some of these other test and learn kinds of initiatives that we're doing, we're seeing these submissions go up. The number of active partner network locations came down you know, not substantially, but, you know, about 100 offices and our submissions in total went up. So I think in the next couple quarters, as we start to, you know, grow this, we'll start to report on some of the things so that you can model it out.
spk12: Okay. Thanks. That's helpful. And maybe just to shift gears, I know Nathan earlier asked about the cadence of 22, but maybe just overall 22. I mean, when I look at 4Q21, it seems like the exit revenue run rate adjusted for the international markets that you exited was likely shy of 500 million. You've got the 625 million midpoint. You know, it's still tough out there. Inflation surging. You're saying there's no partner network in that number. So can you just talk about, you know, how you get there? It just seems like a very, a very healthy ramp. And what gives you conviction in those numbers? Is that sort of a midpoint of 625? Thanks.
spk09: Yeah, I can take that. So, I mean, you don't have to go back very far. However, you do point out the Q4 21 number, about $126 million from a revenue standpoint, and 66,000 aligners shipped. But you don't have to go back very far to see, you know, we exited Q4 of 2020 on $185 million in sales and 100,000 aligner shipments. Q1 of 21, we did over 100,000 there as well. So, We think that really all we need is a little bit of an improvement in the economy. We should be able to see some growth there. We have obviously other triggers that we can pull as well to drive some additional growth, but really the macroeconomic environment is really what has hurt us so far. So just a little bit of an improvement there. We should see numbers improve from what we exited 21 with. So overall, we feel pretty good about where those numbers are considering the 625 is the midpoint, which is if you take international out, there's about the same number, so really flat to 21. And we do believe we can get some growth with just a little bit of improvement from the macroeconomic environment.
spk14: Thanks for your time, guys. Thank you. Our next question comes from Alex Nowak with Craig Hallam.
spk13: Please proceed with your question.
spk03: Hey guys, good morning. This is Trent on for Alex. I just have one. The company has flipped between high spend and low spend. Do you believe the company was originally long?
spk14: Yeah, I can't hear him. Anybody else?
spk02: Sorry, can you hear me now? Yes. There we go. Sorry about that. Yeah, I just had a few. The company has flipped between high spend and low spend. Do you believe the company was originally wrong to reduce spend back in 2019 and 2020? In other words, was the brand awareness of SmileDirect not quite at the level you expected?
spk15: I'm not sure I totally understand the question when you say high spend, low spend. I mean, so back in, you know, coming into the IPO, into Q4 of 2019, we were definitely in hyper growth mode, if you remember our the back end, the infrastructure of the business did not keep up with the growth. We went from 100, these are rough numbers, 140 million in 17, 450 million in 18, 750 million in 19. And our shipments were going out late. We didn't have our Gen 2 automation. We didn't have our new treatment planning software. We didn't have a lot of the infrastructure that we have today. So we decided to slow down growth. There's nobody chasing us. We own the market on the telehealth side. And so we To me, that was the right thing to do. I mean, we're a company that's very customer-centric focused. We want to have this great experience for our customers. And so we're back at that point right now. We're giving a five-star experience for our customers. Part of the issue that we have today is with the iOS 14 and a lot of the channels that we were using, the signal loss. So You know, CAC starts to go up, so you have to find other channels. The good news is that we, like I said, we play in all the different channels. So shifting, you know, in this quarter, we're looking more at podcasts, direct mail, other vehicles where we don't have that privacy issue. And so, you know, we'll be testing and learning in other channels. The price increase does help allow us to, you know, the 5% annually allows us on our CAC side as a percentage of sales, you know, to continue spending. But at these levels, in a mid-teen CAGR, we feel very good about until the opportunity exists that we can do more. We're a very agile group. And people mistake that, that we flip-flop and we're wishy-washy. We're not. But we can be agile. And if the market throws a punch, we can counter and go the other way. And that's something I would think as investors you would like. versus getting stuck in this big shift that can't turn. The headwinds of inflation came on very fast. The iOS 14, nobody thought it would have the impact that it did, Facebook and others. So I think we're pretty nimble. I think we're pivoting, and we have really good initiatives on the higher household income, the partner network, our Smile Shop expansion, which we haven't talked a lot about on this call. Pre-COVID, we were over 300 shops. And we definitely, like a lot of things we were doing back then, we were overextending and we started to see some cannibalization. So COVID gave us the ability to reset. We shut down all the shops. We now have about 100 shops that have reopened. And what we have seen, especially as COVID has subsided, it is subsiding, that more people want to start the journey through the shop. And so we're slowly going to test into more shops, which are incremental shops. Not only it gets a person to start with SmileDirectClick who otherwise wouldn't want to do a kit in the market, but also that experience going through the shop has a higher conversion than a kit customer. So even if we're able to just shift kits to scans in a DMA, if it's enough of them, it's incremental and it's more profitable for us to have that shop there. So that's something we're going slowly, but we see light at the end of the tunnel there to get to a larger shop footprint which once again is not in the numbers. So that would be incremental if we can get another, I'm just gonna throw a number 50 or 100 shops out there that have a higher conversion to our same dollar spend in marketing, allow more people to start with Smile Direct Club.
spk14: Thank you.
spk13: Our next question is from Robbie Marcus with JP Morgan. Please proceed with your question.
spk06: Oh, great. Thanks for taking the question. Maybe first, you know, just to follow up on that, David, you know, there were some changes with the way online advertising works with iOS and Facebook. And the Smile Shop presence is lower than, you know, let's call it a year or two years ago. How do you think about the ability to increase your selling and marketing productivity as you're decreasing the percentage of sales going forward?
spk15: So, yeah, I think it's a lot of the same stuff that I've been talking about. So to increase the productivity of it, we've got to find newer channels. TV has worked well for us, but it's a longer-term play. It's more of a lead driver and awareness play. So we've seen it in numbers getting up to 54% needed awareness. We've been growing every quarter. Long-term, that'll pay off. So when someone's going to, you know, T-Stream is a considered purchase. The average person is over two years. Depending on their income profile, it could even be more. So that will pay off. It's not as immediate as a Facebook spend where you immediately get a click through and you get a sale. So I think better customer experience will help, better NPS scores, better referrals, more referrals, you know, drives down the CAC. This whole new thing that I'm talking about with viral marketing, it's real. And other companies have been embracing it, especially you're hearing, and a lot of times you hear things first here. You're going to hear a lot more about viral marketing because it's a lot of DTC and companies that deal with the consumer are facing the same issues with their marketing spent on digital. And so that's something that, you know, as I look back on it, it was like, wow, we have these really passionate fans, you know, a million and a half of them, who we need to harness that energy. And we have really good, I think a good strategy of using, you know, at the shop experience, if they're coming out of the shop after that moment, when they open their SAO box, that's their shit that once box, when they get that and how excited they are to start their journey. There's lots of points that we're going to try to use. So if we can get even, you know, 5%, 10% more in viral marketing, which is referral business, that, that will also get, make our marketing dollars more productive. So hope that helps.
spk06: Okay. Uh, and maybe as a followup, um, How should we think about the company's view on international expansion at this point? Is it taken out of the long-term plan permanently or is it still a viable option depending on the market? Because, you know, thinking back, that was one of the biggest drivers of long-term growth originally. So just thinking about how it plays in right now. Thanks.
spk15: Yeah, good question. We've been getting asked that quite a bit since we shut down seven countries. We're six countries now. So it's paused, I would say. It's not forever. We were seeing gains, but it was slow. A lot of these countries had advertising restrictions. They had telehealth restrictions. Germany had just come down with a Supreme Court mandate that telehealth and teledentistry companies couldn't advertise directly to the consumer. Spain was another market that we exited that had really tough laws on advertising, medical devices. You couldn't have certain shots of the teeth in there, no before and afters. So a lot of the restrictive countries, which I think over time, because they're being lobbied now, some of that will ease, which will help us to get back in there. But the current model that we have, this mid-teen CAGR, does not include any expansion other than the countries that we're in today. We will be looking, but the reason we exited them, even though we were seeing improvements, is the marketing costs were so substantial and the return on investment was so long that we said, you know, the position we're in today, and cash is king, we want to make sure that anything we're investing in has near-sight return on investment, such as apartment, such as a higher household income. We're going to see very quickly if we can make that work. We're not going to overinvest with a two- to three-year kind of horizon that ROI on our cash, and that's what was happening in some of these countries. It was just too long-term. We did a lot of work, gate work, what we call on the regulatory side, on the financing side, in India, China, a lot of other countries. So the work's been done. A lot of them we have the licensing for, so it's kind of shelved, paused, and at some point, it's more with the house's money, and we've built up a cash war chest, but we see easing of restrictions. a good market that we launched fairly recently that didn't have as much regulatory environment and marketing was easier. And there was a kit business. A lot of these countries, we couldn't go to market both ways. Like Spain, kits were not allowed. So it was a very expensive proposition to have these shops open. France is a market that we opened, you know, pretty recently and saw really good success. More like what we saw in UK when we opened in Australia, you know, Less regulation, kit business, shops, we don't have to have a GP in. You know, Germany was another market that you have to have a dentist in your smile shop. So there's lots of regulatory issues that cause these things, these countries, to be unprofitable with the long-term horizon. And that just didn't make sense for us at this point in time.
spk09: Yeah, and just to add to that, I'd say just beyond international, you know, the things we haven't really included in our model are If you think about, we talked 20% to 30% growth in the past. We're mid-teens now, but we have so many opportunities around partner network, entering into that higher-income consumer market, which we really haven't tapped into at all, and that's that 21 million case start. So just a small entrance into that category will be an important improvement for us as well as, like I said, small shops, partner network. There's a lot of opportunities for us for growth beyond just that international piece as well.
spk14: Great. Thanks a lot. Thank you. Our next question is from Michael Riskin with Bank of America.
spk13: Please proceed with your question.
spk11: Hey, thank you. This is Peter on for Mike. Just one quick one for me, just digging a little bit more back in there. I know you just touched on it, but maybe can you quantify or give us a sense of what's embedded in that base case through 26th? for your rest of world revenues? I guess maybe in other words, what percent of your mix would you expect those to compose by 26? Thank you.
spk09: Yeah, I can take that. What we're looking at from a U.S. versus rest of world is very consistent between the two of those, I would say. So it's been about an 80-20 split. Again, we did about 15 million last year in the countries that we exited. So we expect to gain some of that back from an international perspective. But overall, I would say long-term, we haven't built in a lot of those growth initiatives that we just talked about. So this is really kind of that organic growth with the existing customer, and we would expect those growth rates to be similar between international and the U.S.
spk14: Very good. Thank you. Thank you.
spk13: Our next question comes from Brandon Couillard with Jeffrey. Please pursue these questions.
spk04: Hey, thanks. Good morning. Just back on the partner network, how many active or pending locations would you expect to have by the end of the year, or what KPIs should we look at to assess your progress in that priority channel over the year?
spk15: Yeah, I think so. We're not, we're not giving those numbers out today as another question on this, on this topic, but we will be happy to do that as they become more meaningful. And that we believe that'll happen this year in the next couple of quarters, things like submissions, um, number of locations that are, that are opening trained and open. So that's what we call active. They're in the pipeline. They come live. There's about a three week training that goes on within those offices to get them up to speed. And there's ongoing, we have what we call those farmers that are constantly calling on these offices, make sure we're front and center. But as this whole thing comes together, it's going to be an engine that we're pretty good at doing. When the Smile Shops, we saw that start to work, we were opening 30 Smile Shops a month. So at some point, we'll start expanding more rapidly the partner network. And as it becomes a more meaningful part of our revenue, We'll start to share that just like we did with the rest of the world. So we'll start talking about X percent of our business. Our liner sales are coming from the partner network. Here's how many offices we're in. Here's how many submissions on average we're getting. Very similar to the wholesale model that you see in other clear liner companies calling on the professional channel. So expect similar metrics, KPIs.
spk04: Just one clarification. You pointed out that the guide doesn't include any potential accelerated expansion of the partner network or smile shops from a revenue or expense point of view. Just curious, what would trigger that? What would be the change that would drive that spending? Is it a macro thing? Is it traction with the network funnel? Just curious what that would be.
spk15: Yeah, macro is a cloud over everything, but I think a little less so in the partner network and the high household income. But specifically on the partner network, what's going to ignite that growth engine is some of the things that we're working on, like this new go-to-market approach with the farmers and the hunters. A couple of other things we're doing, we announced a care stream partnership. We're going to start placing these care streams inside our partner networks. Two-thirds of the dental offices out there are still using impression kits. Two-thirds. Dentists just don't want to invest in them because they have another option. But it's a real good productivity option, and it's great for us because it takes a lot less time for that hygiene patient to get scanned and get loaded into our system by the hygienist. So little initiatives like that, that once we see sustained traction and we can get our submissions to a certain level in our models, that makes sense. then we'll start to accelerate the growth. We are growing. I mean, we are opening new practices. We've got 1,200 in the pipeline. We are continuing. But what you're asking for a little more aggressive growth, we want to see a few more things come to fruition on the submission side. And then I think we'll start to see some more growth in that. Same thing with the smile shops. We have next month, I think it's 10 new smile shops, which we have not opened new smile shops really since COVID-19. I shouldn't say that. We opened our base case back up. We haven't incrementally opened new ones. And these are not only just new DMAs, but also existing DMAs that may have one or two shops where we used to have six. So we're testing into that right now. We always get an initial pop in the first two, three weeks. We've got to wait about four to six weeks to see the incrementality. We have an analytics team, an FP&A team that is measuring all this. And as we see incremental profitable revenue above and beyond just having kits in that market or kits in one shop, then we will start to accelerate that as well and get more shops open, which will add to the guidance that we give. And you'll see that and you'll hear that in the coming quarters that we've gone from 100 shops to 120 shops to 140 shops, et cetera.
spk14: That's it. Thanks for your time.
spk13: Thank you. Our last question comes from Laura Champagne with Loop Capital. Please proceed with your question.
spk01: Good morning. Thanks for taking my question. So if I look at your long-term outlook, this mid-teens growth trajectory, given that it is the macro that's hurting sales trends now, I'm curious what kind of macro expectations you have in that long-term view, whether you think of it as as what level of GDP growth, or how do you frame out the macro backdrop to that mid-teens growth rate?
spk15: Yeah, I take that. Go ahead, Troy. I'll probably add some color. Go ahead.
spk09: Okay. Yeah, so just from a model perspective, we just really see more of a normalization. If you look at the 8% increase in cost for non-discretionary in Q4, we just see more of a normalization of that. So I would say that coming back a little bit, would be what we would expect through the back half of this year, and then much more normalization through 26. Obviously, the inflation can't continue at this rate going forward, so we definitely expect some normalization.
spk15: And I was going to add, and we put this in the investor deck in our guidance, the aligner shipments in 2026, you're talking about five years out, are the same as 2019. I think it's a pretty conservative model. you know, a lot of the 15% increase CAGR is made up of other things, whether it's a price increase, whether it's oral care expansion, retainers, which is a bigger part of our business today, the subscription models that we have for retainers. So from an aligner perspective, it's pretty conservative. And so, you know, getting to the 400,000 plus shipments in 2026, you know, is very doable, we believe, in this environment. And like Troy said, five years from now, we don't expect there to be 9%, 10% of inflation. There will be a correction at some point, which could accelerate the growth, too. And all the things we're talking about, what's going to not end that five-year model, the partner network, higher household income, shop expansion, all those things will add to the model and will update for guidance at the end of the year as these things go through.
spk14: Got it. Thank you. This concludes our question and answer session. Thank you for your participation. You may now disconnect.
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