Sonendo Inc

Q2 2024 Earnings Conference Call

8/7/2024

spk02: Good afternoon and welcome to San Mendo's second quarter earnings conference call. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session at the end of today's call. As a reminder, this call is being recorded for replay purposes and would now, I would now like to turn the call over to Louisa Smith from the Gilmartin Group for a few introductory comments.
spk00: Thanks, operator. Good afternoon and thank you for participating in today's call. Joining me from Sunendo are Bjorn Berghain, President and CEO, and John Bostanczyk, CFO. Earlier today, Sunendo released financial results for the quarter ended June 30, 2024. A copy of the press release is available on the company's website. But before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements made on this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. All forward-looking statements, including those relating to our operating trends and future financial performance, expense management, expectations for hiring, growth in our organization, market opportunity, revenue guidance, commercial expansion, and product pipeline development are based on our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recent quarterly report on Form 10-Q, filed today, August 7, 2024, with the Securities and Exchange Commission and available on EDGAR and in our other public reports filed periodically with the SEC. This conference call contains time-sensitive information and is accurate only as of the live broadcast on August 7, 2024. Sunendo disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. With that, I will turn the call over to Bjorn.
spk01: Thanks, Louisa. Good afternoon, everyone, and thank you for joining us today. I'm pleased to note that Sunendo had a very strong second quarter, and I'm very happy with the progress we made in just a short time since we initiated our reset strategy. Our team is diligently focused on executing against the commitments we've laid out, and I'm eager to share some additional areas of focus moving forward. During this call, I'll provide insight into some of the initiatives driving the improved performance, as well as the associated operating metrics. Then I'll introduce you to John Wojcicki, our newly appointed CFO, and he will review in more detail our second quarter results. Sonendo continues to revolutionize how tooth decay, the most prevalent chronic disease in the world, is treated. We are establishing general wave technology as the standard of care for root canal therapy by demonstrating strong clinical outcomes and superior cleaning via a less invasive and more efficient procedure as evidenced by nearly 1.5 million patients treated with general wave to date. However, with only 20% of endodontists in the United States and Canada currently performing the general wave procedure, the Sunendo team remains very excited about the significant growth potential ahead. In May, we announced a strategic reset that is intended to enable Sunendo to capitalize on that significant opportunity in a more focused and efficient manner. While we're still in the early stages of that journey, I'm really pleased with the results we've achieved so far. More importantly, I and the rest of the leadership team are so humbled and impressed by the energy, commitment, and engagement that the entire organization has demonstrated as we embraced on this new strategy together. Successfully navigating change of this magnitude is not easy, so I want to thank all of our employees and customers for their contributions, as well as their trust and confidence. We made good progress on each of the three pillars of our new strategic direction, commercial execution, gross margin expansion, and cash conservation. From a commercial execution standpoint, we have reengaged with our core Endodontics customer base and have realigned our direct sales team incentives to drive focus on increasing utilization of the General Maze system. We can measure our progress and define success in a number of ways. For example, One, we sold more console this quarter compared to the second quarter of 2023, generating 7% year-over-year growth in console sales, while also carrying over a healthy unit backlog for the second straight quarter. Example number two, of the 48 units we sold this quarter, 35 units were for customer upgrades from the legacy G3 system to the enhanced and even more reliable G4 General Wave system. We continue to consistently and significantly reduce unplanned service calls, or USC's, for both the G3 and G4, with the G3 USC rate decreasing from 1.7 in 2023 to less than 1 in the second quarter, and the G4 USC rate decreasing from 0.6 in 2023 to 0.4 in the second quarter. Executing the G4 upgrade program is a strategic priority for us in 2024, as we believe that improving the customer experience will re-energize our legacy customer base, which in turn should drive greater and more positive peer-to-peer influence. Those factors should enable us to expand our market share and procedural instrument utilization in the long term. Example number three, we're seeing progress within utilization And while PI sales for the quarter decreased 15% year over year, substantially all that was volume related and we believe that we have stabilized the underlying utilization rate as evidenced by a few key data points. First, PI utilization in the second quarter decreased by only 3.1% year over year, while the first half of 2024 it increased 3.5% sequentially compared to the second half of 2023. We believe that the second half of 2023 marked the low point for PI utilization. Second, we remain focused on driving customer utilization through forging closer relationships with our doctors and realigning our sales team's compensation incentives away from PI sales and towards utilization. This discipline focus led us to once again not offer any end of quarter sales discount programs, which helps maintain higher ASPs and they enabled us to work through a significant number of PI units sold in excess of utilization over the past two years. Year to date in 2024, our customers have utilized 22,500 more PIs than we sold, which compares to the 29,000 PIs we sold in 2022 and 2023 in excess of customer utilization. Based upon this progress, we expect PI shipment and sales to more closely align with customer utilization going forward and for PI sales and utilization to increase in the low single digits in the second half of this year. Example number four. We are excited by the recent hiring of Brian Ganey as Vice President of Sales. Brian brings to Sunendo a wealth of sales leadership experience in the dental market. One key focus area for Brian will be to help our consumable sales team drive even higher procedure instrument utilization rates with our existing customer base and ensure a seamless onboarding of new customers to enable and sustain higher PI utilization right from the start. By better educating our customers about the efficiency and ease of use of general-made procedure, we're helping them to provide better clinical outcomes for their patients while improving their own practice economics. Based upon this progress and our ongoing confidence in our commercial strategy, we are raising our revenue guidance for the full year 2024 to range between $31 to $32 million as compared to the prior guidance range of $29 to $31 million that we provided on our first quarter earnings call in May. As it relates to gross margin expansion, we have made substantial progress. GAAP gross margin for the second quarter of 2024 increased to 37.5% compared to 28.4% in the first quarter of 2024 and negative 5.5% for the prior year quarter. Adjusted gross margin for the second quarter of 2024 was 40.7% compared to 34.8% in the first quarter of 2024 and 28.7% for the prior year quarter. These results demonstrate just how well we were executing on multiple fronts for meaningfully reducing USC's and the related service and warranty costs incurred by our in-house service team. As I touched on earlier, to driving down the material and labor costs in the manufacturing of our consoles and handpieces through value-based engineering projects and collaborative strategic sourcing arrangements with our suppliers. As a result of these early successes, we're also increasing our expectations to now deliver adjusted gross margins in the 40 to 41% range for the second half of 2024, as compared to the high 30% range we discussed in our first quarter call. Moving forward, we remain confident that we will deliver on our prior commitments to reach the mid to upper 40s as we exit 2025, and then well into the 60% range longer term. Finally, for the last pillar of cash conservation, We continued to build upon the success of the first quarter by driving total year-over-year operating costs down in the second quarter by 7.1 million to 9.8 million, a 42% reduction compared to the prior year, and a 2.5 million sequential quarter reduction versus Q1 of this year. While most of our operating expense reductions have come from sales and marketing, where we're operating with more focus and efficiency, We have also meaningfully reduced R&D and G&A costs. Within R&D, we will continue to invest judiciously in product and software updates that will further Sunendo's mission to become the standard of care in root canal therapy and support doctors in driving efficiencies within their practices. For example, we're excited to announce that later this year, we expect to launch ProControl for our G4 console. This software upgrade will allow a clinician the flexibility to speed up and tailor treatment protocols to their patient's specific needs using our clean flow procedure instrument. These operating expense improvements combined with a significant expansion in adjusted gross margin grow a 6.4 million decrease or 53% improvement in year-over-year adjusted EBITDA loss to 5.7 million for the second quarter of 2024. This represents a $1.9 million sequential quarter improvement versus quarter one of this year. Based on our updated revenue guidance and expectations for adjusted gross margin, coupled with our continued focus on operating expense discipline, we anticipate further reducing our adjusted EBITDA loss in the second half of 2024. And for the full year, we now expect that the loss will be between $25 to $26 million. which reflects a 41 to 44% year over year reduction compared to an adjusted EBITDA loss of 44.4 million reported for the full year 2023. Simply put, we're doing more with less and we are working smarter and executing better. While we are encouraged by our year to date results, we know that there is far more to do and we will continue to relentlessly execute on the three pillars of our strategic reset. We remain confident that we can return to double-digit revenue growth in 2025, and we have full confidence in our commercial team and the commitment we have from the entire organization to work together to build a position of leadership in the market. Before I turn the call over to John to review financials, I also want to reiterate that management and the board are continuing to actively explore multiple financing options, including a combination of debt, equity, and non-dilutive sources, to strengthen our balance sheet. This is the number one priority for me and John. We will provide more details as those discussions progress. With that, I would like to now introduce to you John Bustanczyk, Sanando's recently appointed Chief Financial Officer to review the second quarter financial results in more detail. John comes to Sunendo with extensive experience in the medical device industry with over 20 years in financial and operational leadership roles at publicly traded companies, and I'm excited to have him on the team. John?
spk04: Thanks, Bjorn, and thank you all for joining us on today's call. Please refer to this afternoon's press release and forms 10-Q and 8-K filings for more details on specific financial results, including reconciliations between GAAP and non-GAAP financial results and management's methodology and reasons for reporting non-GAAP financial results. Please note that we have slightly modified our reporting methodology for non-GAAP financial results compared to prior practice, and we have included these recast non-GAAP results and reconciliations for all six quarters dating back to Q1 2023 in Exhibit 99.2 of the 8 filing. Total revenue from continuing operations for the second quarter of 2024 was $8.3 million compared to $8.8 million for the second quarter of 2023. The decrease was driven by lower PI sales volumes and a lower console ASP, which was partially offset by higher console volumes and an increase in extended service contracts revenue. In the second quarter, Genta Wave console revenue totaled $2.4 million compared to $2.2 million for the prior year quarter. The average console selling price was approximately $50,000. We sold 48 consoles in Q2 2024, 35 of which were upgrades for Gen 3 trade-ins. We increased our installed base by 13 units during the quarter to 1,155 as of June 30, 2024. Q2 PI revenue totaled $4.7 million compared to $5.6 million in the second quarter of 2023. As Bjorn previously mentioned, substantially all of this sales decline was volume-related, and it far exceeded the 3.1% year-over-year decline in the underlying PI utilization. We believe that we have stabilized the underlying PI utilization and, going forward, we expect PI shipments and sales to more closely align with customer utilization and that PI sales and utilization will grow in the low single digits in the second half of this year. Other product-related revenue totaled $1.2 million in the quarter compared to $1 million for the prior year. This increase was driven by higher extended service contracts revenue. GAAP gross margin for the second quarter of 2024 increased to 37.5% compared to 28.4% in the first quarter of 2024 and negative 5.5% for the prior year quarter. Adjusted gross margin for the second quarter of 2024 was 40.7% compared to 34.8% in the first quarter of 2024 and 28.7% for the prior year quarter. The primary difference between GAAP and adjusted gross margin relates to the exclusion from adjusted gross margin of the impact of $241,000 and $2.9 million in excess and obsolete inventory charges we recorded in the second quarter of 2024 and 2023, respectively, in connection with recently discontinued products. Total operating expenses in the second quarter of 2024 totaled $9.8 million, a $7.1 million decrease compared to $16.9 million for the same period of the prior year. The decrease was primarily driven by lower employee-related compensation and benefit expenses, including stock-based compensation and recruiting expenses, as a result of the reductions in headcount across all P&L lines. The decrease was also attributed to lower marketing spending as we reprioritized our commercial organization to increase the adoption of our products among existing and new customer accounts. GAAP operating loss totaled $6.7 million in the second quarter of 2024 compared to $17.4 million in the prior year period. Adjusted EBITDA loss totaled $5.7 million compared to $12 million in the prior year period. Net loss from continuing operations in the period totaled $7.4 million compared to $18.1 million in the prior year quarter. As of June 30, 2024, our cash, cash equivalents and short-term investments totaled $24.2 million, and we had $20.5 million of principal payments outstanding under our term loan facility. For the second quarter of 2024, we reduced our free cash flow burn by $3 million to negative $6.7 million for the second quarter of 2024. As Bjorn noted earlier, we have revised and improved multiple elements of our forward-looking financial guidance compared to our Q1 call in May. We have increased our revenue guidance for the full year 2024 to a range of $31 to $32 million. We now expect to generate adjusted gross margins in the 40% to 41% range for the second half of 2024, and we expect to generate an adjusted EBITDA loss in a range of $25 to $26 million for the full year 2024. Our full year 2024 revenue guidance contemplates lower console revenue for the second half of the year compared to the second half of 2023, and for PI sales and utilization to increase in the low single digits compared to the second half of last year. I'll now turn the call back over to Bjorn.
spk01: Thanks, John. Sunendo's management and the board remain optimistic about Sunendo's outlook, and we are encouraged by their early indication of success in our reset strategy that we have shared with you today. The entire Sunendo team of dedicated and committed employees is fully engaged and excited about the opportunity ahead of us to transform Endodontics and therapy for tooth decay and to deliver on our mission to save teeth and restoring health. With that, I will open the call for questions.
spk02: We will now begin the question and answer session. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you are using a speakerphone, please remember to pick up your headset before asking a question. We ask that you please all note to limit your questions to one, along with one follow-up. We'll pause here briefly as the questions are registered. The first question is from the line of John Block with Stiefel Financial Corporation. You may proceed.
spk03: Hey, everyone. This is Joe Federico on for John. Thanks for taking the question. I wanted to start with gross margin. I mean, that was, you know, to us, at least the standout in the quarter, it was well above our estimate. I know that you had, you know, previously laid out the upper 30% range and, and, you know, the mid to upper 40% range for next year and updated that on this call. So first, just to clarify, what were you targeting exiting this year now and in the updated outlook? And then I was just curious, you know, with the upside seen in this quarter, why that out-year estimate is reiterated and not maybe brought up? Is that just some conservatism?
spk01: Well, first of all, the target now for the end of this year is about 40% to 41%. I think the key thing that really drives this more than anything else, Joe, is, I would say, strong leadership here. on both the operations team and the R&D team. We have a very, very unique plan. We're executing to the plan. And obviously, like we talked about in our prepared remarks, it's about really driving transition to G4, improve reliability, continue to focus on value-based engineering, focus on reducing material labor costs, et cetera. So we're super, super obviously excited about the progress. There are some, I would say, step function elements that we have implemented this quarter, you know, inclusive of now completely having been converted over to clean flow. But we have obviously more work to do. But at this point in time, we are proposing that 40 to 41% is a good target for the rest of this year.
spk04: And then longer term, you know, we're really pleased with where we landed in the second quarter. And it's probably too early to take up the 2025 guidance. But, you know, we're going to continue to monitor that. And with, you know, future savings and material costs that we've yet to realize but are going to start to show up in inventory costs as Amortize out, we'll definitely keep an eye on it. But it's probably just too early to adjust 2025 right now. But still a clear path to 60-plus long-term.
spk03: Okay. All right. Very helpful. Great. Thanks for that. And then, you know, just taking a step back, you know, kind of just with the whole strategy reset that was laid out in May. I know in the past we had kind of you had provided kind of a revenue target to achieve cash flow break even. Do you have any updated thoughts around what that amount would be?
spk01: You know, I think it's a little too early to tell it. The first thing for us right now is that we wanted to show to the world that, uh, as through this reset, that we can do significantly more with less specifically around, um, you know, execution on the commercial side and also how we drive a margin, uh, you know, margin here. Uh, that's the, those are the first and two key things for us to show and show what it is, what is possible. You know, it's interesting if you go back, you know, in time, right? In 2017 to 2021, we were one of the fastest growing med tech and dental companies around. And we want to get back to that growth trajectory. So that's the key focus for us right now, really driving that commercial execution, margin preservation, and really doing that for less cash. And, you know, we've made great progress this quarter. We have a lot more work to do. So we're not prepared to give a revenue target for cash flow breakeven yet. But as you can see in some of the numbers that we have provided, right, I think we have a 53% reduction in EBITDA loss year over year. That's something obviously that we're super excited about. And that gives a good, I think, indication of some of the things that are possible in this business as we go forward.
spk03: Okay, got it. That makes sense. And then maybe I can just sneak one more in and take the rest offline. But the procedure instrument sales were a little bit below us. I know that you called out some volume dynamics there and that you think the underlying utilization has stabilized. I know in the new strategic plan, the sales force is more incentivized to increase utilization rather than, you know, push procedure instrument sales. Do you see that playing out real time? And that's kind of, you know, what's driving the expectation for growth in the second half?
spk01: That's exactly right, Joe. You know, if we go back in 2022 and 23, like we talked about in our prepared remarks, we sold more at 29,000 more procedure instruments that were utilized. But as we look here in this year, that number, we utilized 15,200 more than was sold in Q1 and 7,000 more than was sold in Q2. The first data point here in July actually is actually very good. We're seeing that utilization in July actually was spot on. So we think that's a good indication that we're starting to get closer to that equilibrium that we would like to see.
spk03: Great. Thanks for taking the question.
spk01: Thank you, Joe.
spk02: Thank you. Now I'd like to pass the conference back over to the management team for any further remarks.
spk01: Yeah, thank you, operator. Thanks for a good call today. We appreciate everyone's time. Have a great day. Thank you.
spk02: Thank you all. This concludes today's conference call. We appreciate your participation. We hope you have a wonderful day, and you may now disconnect your lines.
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