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Edited Transcript of EAR.OQ earnings conference call or presentation 19-Nov-20 9:30pm GMT

·35 min read

Q3 2020 Eargo, Inc. Earnings Call Nov 20, 2020 (Thomson StreetEvents) -- Edited Transcript of Eargo, Inc. earnings conference call or presentation Thursday, November 19, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Adam Laponis Eargo, Inc. - CFO * Christian Gormsen Eargo, Inc. - CEO, President & Director * Nicholas S. Laudico Eargo, Inc. - VP of IR ================================================================================ Conference Call Participants ================================================================================ * Lawrence H. Biegelsen Wells Fargo Securities, LLC, Research Division - Senior Medical Device Equity Research Analyst * Malgorzata Maria Kaczor William Blair & Company L.L.C., Research Division - Research Analyst * Robert Adam Hopkins BofA Merrill Lynch, Research Division - MD of Equity Research * Robert Justin Marcus JPMorgan Chase & Co, Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Eargo Third Quarter 2020 Earnings Conference Call. (Operator Instructions) It is now my pleasure to introduce Vice President, Investor Relations, Nick Laudico. -------------------------------------------------------------------------------- Nicholas S. Laudico, Eargo, Inc. - VP of IR [2] -------------------------------------------------------------------------------- Good afternoon, everyone, and welcome to the Eargo Third Quarter 2020 Earnings Conference Call. The press release and slides to accompany this call are available on our Investor Relations website at ir.eargo.com. Please note, we have also provided supplemental historical financial information at the end of the slide deck. As a reminder, both this live call and a digital replay will be available on our IR website. Joining me on today's call are Christian Gormsen, President and Chief Executive Officer; and Adam Laponis, Chief Financial Officer. Christian and Adam will provide prepared remarks, and then we will open the call to Q&A. Before we begin, I'd like to remind you that some of the matters discussed in this conference call will contain forward-looking statements regarding future events as outlined in our slides. We wish to caution you that such statements are based on management's current expectations and beliefs and forward-looking in nature and are subject to risks and uncertainties, and actual events or results may differ materially. The factors that could cause actual results or events to differ materially include, but are not limited to, factors referenced in our press release today as well as our filings with the SEC. With that said, I will now turn the call over to Christian. -------------------------------------------------------------------------------- Christian Gormsen, Eargo, Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Thank you, Nick, and good afternoon, everyone. We're incredibly pleased to speak with all of you today on our first earnings call as a public company. Today, I would like to send a special thank you to our founders, early investors, employees, our families, and most importantly, our now more than 49,000 users in the U.S. for believing in Eargo and joining us on our incredible journey. At Eargo, we're dedicated to improving the quality of life for everyone with hearing loss. I also want to thank our new investors for their support in the IPO. We're excited to partner with you on our journey. Since some of you are new to the Eargo story, I would like to start by giving you an overview of what Eargo is all about on Slide 5. We believe we're transforming the hearing aid industry. This is a large, well-established market with significant tailwind from an aging population and focus on quality of life. Hearing loss can make it more difficult to work or interact with family and friends, leading to feelings of isolation, depression and increased stress. According to a study published in Jama, hearing loss has also been linked to accelerated cognitive decline. Despite all of this, there remains a large unmet need driven by the stigma of hearing loss, high out-of-pocket costs and the cumbersome and inconvenient nature of purchasing a device through an in-person hearing plant. At Eargo, we addressed these unmet needs through a revolutionary product that is virtually invisible, but also comfortable and at a lower cost to the user. We provide our product and clinical support through a unique telecare model and a modern efficient awareness creation strategy. This result in a business that has delivered accelerating revenue growth to over 135% year-over-year and strong gross margins. Moving to Slide 6. Hearing aids have been around close to 100 years, and there are many great innovations and products out there, but they have significant limitations. The vast majority are behind or over-the-ear styles that cover most ranges of hearing loss and are comfortable, but they are visible and can be stigmatizing. There are also more discrete on less visible solutions, but many are challenged by discomfort or inclusion of the ear canal. The average cost of a pair of hearing aid through in-person clinics, on average, $4,600 and the more cosmetic in-ear custom hearing aids can cost up to $10,000. Lastly, all hearing aids, as defined by FDA, including Eargo, must by law offer a trial period where the device can be returned. On Slide 7, we believe the hearing industry has failed to deliver what consumers want in order to increase penetration. Products brought to market have not addressed the major shortfalls that have existed for years: Visibility, ease-of-use, comfort, convenience and cost. Eargo addresses these shortfalls by offering a virtually invisible, but also comfortable product that is not occlusive, easy-to-use and can be purchased through our unique telecare model from the comfort and safety of home. This avoids the cumbersome experience of going to an in-person clinic multiple times and waiting weeks to months for your device. We can ship an Eargo device in days and provide free telecare clinical support for as long as customers own the device at approximately half the cost of a traditional hearing aid. But it's more than that. We deliver a truly exceptional customer experience with highly trained staff focused on changing the way people think about solving further hearing loss. We believe Eargo is the first and only technology that has been able to solve for fitting high-quality audiological capabilities into a device that is virtually invisible, nonoccluding and rechargeable. One of the core patented design features that allows for nonoccluding comfort is the tip of the device called Flexi Palms, which allow natural air and to sound pass around and through the device, just the way the natural ear was designed. The resulting audio quality is comparable to much larger, more expensive devices, and Eargo comes with a convenient charging case, which is simple to use. In addition, we have built a highly trained consultative inside sales force, our personal hearing guides and personalized unlimited clinical support by licensed hearing professionals. This virtual infrastructure eliminates the need to visit the brick-and-mortar clinic. By combining a revolutionary product with the telecare support, we have truly transformed the experience of getting a hearing aid. Slide 9. With that, let me touch on some of the key drivers of our performance during the third quarter. By all financial and operational measures, the third quarter of 2020 was a record breaking. Most importantly, we continued to help more people hear better by offering both a revolutionary product and consumer experience. We delivered revenue growth of over 135%, gross system shipped's growth of approximately 92% and a return accrual rate of approximately 25%, down over 10 points year-over-year. We deliberately designed the Eargo business model to generate growth at the lowest cost of acquisition possible. We have achieved that efficiency by diversifying our customer base beyond traditional out-of-pocket payment into the insurance market, accelerating repeat customer purchases, using sophisticated data analytics to constantly measure and refine our media deployment. And finally, leveraging our media investments to simultaneously reach multiple customer types. The best example of leveraging media investment is national TV advertising, which has been a particular successful media investment, generating broad awareness and complementing our digital efforts. We expanded TV advertising in the first quarter and accelerated the investment each quarter in 2020. National TV drives Eargo awareness and volumes in 2 primary ways: First, it increases inbound calls, which our sales consultants typically convert at higher rates; second, the awareness and credibility of national media complements our digital marketing efforts by making them more productive. A consumer may see our ad on TV, go online and review digital content, then request a consultation or simply purchase from our website. The result is accelerated volume growth and significant leverage on our sales and marketing spend. We're very confident in the scalability of TV and have only just scratched the surface of awareness generation. As I mentioned earlier, we deliberately leveraged these investments in TV and other awareness media to simultaneously reach multiple customer types, diversifying our business across cash paid customers, insurance customers and repeat customers. Cash pay, where customers pay out-of-pocket is the traditional way to get a hearing aid, but not the only way. Given our product, service and cost advantages, we see tremendous opportunities in cash pay. Insurance coverage represents a growing segment of the U.S. hearing aid market. Eargo has identified and started to rapidly penetrate pockets of consumers with hearing insurance benefits that cover most or all of the cost of an Eargo. These consumers may see a national Eargo ad that educates them on the possibility of a hearing aid benefit and call us or go to our website. Because we distribute direct to end user, we can offer national claims processing and make it easy. Just give us your insurance number, and we do the rest. Overall, we estimate approximately 12 million consumers in the U.S., over 50, who have both hearing loss and access to hearing aid benefits under certain health insurance plans. Repeat customers represent an attractive long-term growth opportunity for Eargo. Once you need a hearing aid, you need it for life, and customers often get a new device about every 5 years. On average, we estimate repeat customers represent approximately 50% of a typical U.S. in-person hearing clinic's annual volume. At Eargo, our installed base includes over 8,000 first or second-generation devices, but are now over 2 years old. While we're just getting started marketing to repeat customers, we believe our successful efforts to generate repeat customer sales in 2020 prove that Eargo can significantly shorten the upgrade cycle compared to the traditional industry cycle. Insurance and repeat customers generally convert at higher rates and return at lower rates, which has the multiplying benefit of driving up net revenue growth while driving down our overall cost of customer acquisition. We expect this positive mix shift toward more insurance and repeat customers to be a key driver of growth and scalability going forward. Moving to product. Eargo Neo HiFi, which was launched in early 2020, continues to perform well, consistently receiving strong customer reviews. During the third quarter, Eargo Neo HiFi represented nearly 85% of our gross system shipped. The final driver of our 3Q performance is the accelerated consumer adoption of our telecare model. Let me briefly explain what Eargo delivers through its telecare model on Slide 10. At Eargo, we believe that nothing is more important than the user experience, from awareness through consideration to purchase, support and coming back as a returning customer. Audiology as a profession is critical to this, and we do not want customers to lose out on anything by choosing Eargo. At the end of the third quarter, we had 34 licensed hearing professionals on staff full-time at Eargo that are very engaged with our customer base. In the first 9 months of 2020, these licensed hearing professionals provided telecare to over 80% of our customers in the first month of ownership. Our professionals provide personalized, high-quality care by phone, video or chat. This includes initial consultation, hearing screening, proper insertion, charging and cleaning. Most importantly for Eargo Neo and Neo HiFi, customers can and/or we can help customers adjust their audio profile settings in real-time over the phone to ensure your Eargos are solving for their individual hearing loss. Supporting this telecare model is our mobile app, which allows Eargo Neo and Neo HiFi customers to adjust settings themselves or connect with our professionals when it's convenient for them. As we observe our consumers rate the Eargo experience, our support is consistently the highest-rated element of the experience, together with accessing benefits for our insurance customers. We are confident that purchasing a hearing aid in this fashion is the future of solving hearing loss. Additionally, we think the unfortunate rise of COVID-19 has accelerated the long-term consumer shift away from traditional in-person clinic distribution and toward buying a hearing aid remotely. When we look at 3Q specifically, we are pleased to see the shift continue despite volumes at the brick-and-mortar in-person clinics returning to year-over-year growth, according to data collected by the Hearing Industries Association, private commercial sector hearing aid unit sales in the third quarter of 2020 increased by 0.5% year-over-year following 58.6% year-over-year decline in the second quarter of 2020. In addition, many of our customers tell us how thankful they are to have a solution that does not fall off when they're wearing their mask or other personal protection equipment. This gives us a high degree of confidence that despite the beginnings of normalities in traditional distribution, consumers have found a better way to get a hearing a through Eargo. Let me now turn it over to Adam for his review of our financial results. -------------------------------------------------------------------------------- Adam Laponis, Eargo, Inc. - CFO [4] -------------------------------------------------------------------------------- Thanks, Christian. I'm on Slide 11, and I want to add my welcome and thanks to all of our new shareholders. Given Christian's thorough discussion of revenue drivers, I will start with gross system shipped. As a reminder, we defined a gross system is 2 hearing aids, a charging case and starter accessories shipped as a single unit. Third quarter 2020 growth systems shipped were 10,077, up 91.7% year-over-year and 11.5% sequentially, driven by improved media mix, expanded national advertising, and continued accelerated consumer adoption of our telecare model. We saw year-over-year growth across all consumer types driven by insurance and repeat customers. Third quarter 2020's return accrual rate was 25.2% compared to 35.3% in the third quarter of 2019 and 27.1% in the second quarter of 2020. The 10 point year-over-year reduction in our return rate was driven by the mix shift in volumes towards lower returning insurance and repeat customers. Third quarter gross margin was 70.1%, and compared to 53.6% in the third quarter of 2019 and 67.3% in the second quarter of 2020. The year-over-year gross margin expansion was primarily due to higher customer ASP driven by the mix shift in Neo HiFi, lower return accrual rate and lower cost of goods sold. Moving to operating expenses. Third quarter sales and marketing expenses were $12.4 million or 67.9% of net revenues compared to $9.3 million or at 120.2% of net revenue in the third quarter 2019. The increase was driven by an increase in commissions, other personnel-related costs and an increase in direct marketing costs. We continue to invest in sales and marketing to expand our teams and deploy new media while generating significant leverage, driven by a more efficient media spend and higher percentage of insurance and repeat customers. Research and development expenses were $2.9 million or 15.8% of net revenue compared to $3.2 million or 41.6% of net revenues in the third quarter of 2019. We are rebuilding some of our long-term R&D capabilities and personnel after slowing down these initiatives during the initial uncertainty related to the COVID-19 pandemic. We expect to continue to increase our R&D spend going forward to fuel long-term growth and ensure we stay ahead of the innovation curve. General and administrative expenses were $5.2 million or 28.4% of net revenues compared to $3.7 million or 47.6% of net revenues in the third quarter of 2019. We saw an increase in G&A due to increased AR reserves, driven by a higher mix of insurance customers, increased stock-based compensation and the higher cost associated with getting ready to become a public company. Loss from operations was $7.6 million compared to $12.0 million in the third quarter of 2019. Cash and cash equivalents as of September 30, 2019 -- 2020 were $70.2 million. This includes $67.3 million in net proceeds from our Series E equity financing completed in August of 2020 but does not include net proceeds of approximately $148 million from our IPO completed in October of 2020. We also completed a debt restructuring in September of 2020, where we paid down our current debt facility and entered into a new $20 million debt facility, of which $15 million is currently drawn. We believe our cash on hand is sufficient to fund our current operating plans as well as the investment initiatives across sales and marketing and R&D that we outlined during our recent public offering. Now turning to guidance on Slide 12. We expect revenue for the full year of 2020 of approximately $64.5 million, which represents approximately 97% growth over the company's prior year revenue. This reflects our confidence in consumer adoption of Eargo through the fourth quarter and the holiday buying season. I would like to now turn it back to Christian for a summary and closing remarks. -------------------------------------------------------------------------------- Christian Gormsen, Eargo, Inc. - CEO, President & Director [5] -------------------------------------------------------------------------------- Thanks, Adam. The third quarter of 2020 was truly one that set records across revenue, volume growth, return accrual rate, gross margin and sales and marketing as a percentage of revenue. This performance is even more encouraging against the backdrop of the brick-and-mortar industry returning to growth. We head into the close of the year, highly confident that the combination of our product, clinical support and unique demand generation model places us in a strong position to continue our transformation of the large and growing hearing aid industry. We have already proven that our model can perform through the unfortunate peaks and trials of COVID cases and believe our broad consumer appeal will only strengthen over time. Again, thank you for all of your support to Eargo. It is truly humbling. And I would also like to thank all of our frontline workers across the country that are tirelessly battling this pandemic. That concludes my prepared remarks, and I would like to turn the call back to the operator for Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of Robbie Marcus with JPMorgan. -------------------------------------------------------------------------------- Robert Justin Marcus, JPMorgan Chase & Co, Research Division - Analyst [2] -------------------------------------------------------------------------------- Great. Congrats on a very nice first quarter public. I was hoping, it's -- you had a great third quarter. It was a big step-up over second quarter. It's not a surprise to us that fourth quarter is sequentially down. That's how Street models were set up coming out of the IPO, and it's good guidance a little ahead of The Street. I was hoping you could just remind us the rationale for a lower fourth quarter versus the third quarter, especially given that we're seeing COVID trends pick up and you got about half a quarter under your belt already. I was just hoping you could through the rationale again and what you're seeing and thinking in guidance. -------------------------------------------------------------------------------- Christian Gormsen, Eargo, Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Great. No. Thanks, Robbie. And yes, as you said, we had a record Q3 and that is really also the backdrop here. We're incredibly pleased with where this ended out. For Q4, we do expect sequential volume growth. But as we've been discussing, clearly, Q4 is more focused on our cash pay segment, which is also really driven by more promotional activities, resulting in a lower ASP as well as a different return rate profile than what we see from our insurance and repeat segments. And also, as Q3 was a strong insurance quarter. So that's really the fundamental shift. And true, we're well into this quarter. But we also built this own model, looking in at -- we had an election going in, it obviously impacting media. And now we've seen -- starting to see an unfortunate surge in COVID. We feel great about our guidance, where we are and we're quite confident that our business is actually built to perform through the scenario that we're in. I hope that clarifies it. -------------------------------------------------------------------------------- Robert Justin Marcus, JPMorgan Chase & Co, Research Division - Analyst [4] -------------------------------------------------------------------------------- Yes. So maybe said another way, it's not like you couldn't have another great insurance quarter in fourth quarter, but you're just not planning on the same level of really significant strength that you saw in third quarter? -------------------------------------------------------------------------------- Christian Gormsen, Eargo, Inc. - CEO, President & Director [5] -------------------------------------------------------------------------------- Well put, Robbie. I think you have a good view at our business, really what we're focusing on here in Q4 is driving sort of the promotional opportunities around Black Friday and Cyber Monday. So that's the emphasis of our media, making sure that we have this opportunity to really address that demand and awareness that we have created through the year, but that has not yet converted. That's typically our emphasis here in Q4. -------------------------------------------------------------------------------- Robert Justin Marcus, JPMorgan Chase & Co, Research Division - Analyst [6] -------------------------------------------------------------------------------- Great. And maybe one other question. We're getting ready for the Eargo 5 launch in the first half of next year. I was hoping you could run through some of the benefits of that, both to the patient and to the P&L? And just remind us the exact time lines of when we should see a soft launch and a full launch. -------------------------------------------------------------------------------- Christian Gormsen, Eargo, Inc. - CEO, President & Director [7] -------------------------------------------------------------------------------- Great. A couple of points here. But you're right, Eargo 5 is something that we've been working on for quite a few years. This is really the hearing solution, we believe, that can further increase access and motivate people to get in. Key highlights, this is a complete new platform that we're building. So it's a different power technology. So we're moving into a custom-created lithium-ion cell that we co-created with the world leader in micro batteries. So that's sort of on the hardware. This is allowing a smaller size, so a better fit in the ear canal, again, impacting our return rates and providing for more people being able to benefit from it. This new design also allows for a different speaker that actually gives us a better audio fidelity as well as output. So those are some of the mechanical benefits further, we are also integrating in-situ audiometry into our future product, allowing us to actually screen your hearing directly through the devices that's delivering the amplification. Where there's sort of a gold standard of how do we really make sure we drive the best possible listening situation for the users. The final piece of the design, they're rechargeable as all our products are, but we're moving away from contact-based charging to inductive charging, again, in further improving reliability. On that front, it also means that our next-generation will actually be water resistant. We are IPX 7 on our next generation, allowing to actually submerge the device. So again, reliability, taking that to a whole new level. So that's really the patient benefits and what you'll see as a user, better product, but also opportunity to deliver better personalization and better support. We also have a constant evolution of our mobile app so that we can continue to drive that. On the P&L, 1 of the benefits of our new design is that we can actually -- because we don't have any exterior contacts, we can actually salvage key components and reuse them. So again, from a sustainability point of view, this is an important point. But it actually is also giving us the opportunity for returns that we're getting to reuse these components for new devices. So that's a very well-established protocol in the hearing aid industry that we can follow to do that. So as we roll out the product, we will get benefit. We won't get immediate benefits from a P&L point of view. But as we start rolling it out, we will get warranty expenditure benefits out of it. So that's really the P&L side. And then you have one more piece to this, that was the time line. In terms of time, we are completely on track in terms of the development and the building of the product. Given how comprehensive this launch is going to be, we're looking at a more phased approach to launching. And as we built our models and spoken with you about as well, we're really looking at going into a volume launch in Q2, but we will start testing the product as early as Q1. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- And our next question comes from the line of Bob Hopkins with Bank of America. -------------------------------------------------------------------------------- Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [9] -------------------------------------------------------------------------------- So I just have 2 quick questions. I'll ask them both upfront. I apologize. They're both a little bit near-term oriented. But I was wondering if you could comment on 2 things. First is, how you plan on kind of managing the transition to 5? And any kind of risks into Q1 as people become aware that that's coming and may delay purchases? Just how you kind of manage that transition. And then I was also wondering if you could just talk a little bit about the environment we're in right now. Because the COVID environment we're in right now is obviously very different than what we were in Q2 and the early parts of Q3, where there was flare-ups regionally in the U.S. versus now where it's kind of widespread. Does that have any impact in the business? Are you seeing anything different with purchasing trends because of that? So I'd just love you to comment on those 2 things. -------------------------------------------------------------------------------- Christian Gormsen, Eargo, Inc. - CEO, President & Director [10] -------------------------------------------------------------------------------- Yes. Let me start with two, just to take the current first because you're absolutely right. Unfortunately, we are seeing this wide flare up. And for the hearing aid industry, we also saw that growth came back in Q3. There's been a lot of commentary from the established industry that they are seeing concerns and challenges on Q4. I must admit on this backdrop that we are sad to see what's happening here. In terms of how we built our business, we are not seeing any reversing trends on our business. Again, we're well positioned, and we proved that through Q2 as well to operate efficiently and really be a solution for users out there despite shutdowns. And whether that's regional, local or national. And it doesn't have an impact on our business. Again, we don't know how the next couple of weeks are going to evolve. But what we've seen so far is that the way we built our business continues to perform well and in line with the expectations that we've been working on. So that question number two. Let me go straight on to number one and thought of managing the transition to Eargo 5. And I think let's remember, we have a great product. Neo HiFi, our current product, has been our most successful product to date. We're getting a constant stream of great feedback on how the product performs. So this is not an inferior product by any dimension. Our plan here is to really roll into it as we have been doing in the beginning part of 2019, we did it in 2018 as well. So we've been through the drill 2x in terms of making sure that we give people the solution that they need. And if certain customers are hesitant, we will always encourage them to take action on their hearing as soon as possible. If people find out that we have launched the product a month later, we do have a generous 45-day free trial period. So we will upgrade all customers within that period by paying any price differential. So they can actually upgrade to the new generation product if they wish to do so. And what we're continually doing is also having a flexible approach. Ultimately, we want the users to get the best possible product of their need. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Our next question comes from the line of Larry Biegelsen with Wells Fargo. -------------------------------------------------------------------------------- Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Medical Device Equity Research Analyst [12] -------------------------------------------------------------------------------- Just 2 for me. I just wanted to start with competition and how you're protecting your first-mover advantage. What, Christian, have you seen from a competitive response, from the traditional hearing aid companies and some of the newcomers? And if you could touch upon the OTC rule from FDA, when that might come and what the implications might be, that would be great. And I have 1 follow-up. -------------------------------------------------------------------------------- Christian Gormsen, Eargo, Inc. - CEO, President & Director [13] -------------------------------------------------------------------------------- Yes. No, no. As we've spoken about before, but I think it's a great question on competition. It's something that we are obviously monitoring. We are sort of blazing a new path as a vertically integrated offering. And there's nobody else who has the same structure as we have in terms of being vertically integrated across technology, marketing awareness, sales and then support. So that makes us unique. But clearly, what we're seeing from the traditional players, the large manufacturers out there is they are basically continuing the playbook that they've been running off for the last decade plus, that's forward integration, acquiring clinics, right, and launching new products on a 2- to 3-year cycle. There's been a couple of new product launches out there. All of them are focused on behind-the-ear technology. That's really the emphasis and that's, of course, also the majority part of the market. So we have not seen any moves towards invisible and more convenient form factors, such as ours, from any of the big 5. And in terms of distribution from the big 5, it continues to be the acquisition of distribution channel or our clinics out there. Nobody has started up any direct sales efforts. So nothing new there. And even through COVID and so on, there's been no activity for them to get into directly servicing end users. In terms of newcomers, nothing new has sort of come out to market. There are other models out there who procure existing technologies and then market and sell that and even support that. We're not seeing them in any meaningful way in terms of media presence or sort of competing over awareness in that. So nothing new has come out that has sort of called any major attention from our side. I think the most new thing that's sort of going is on the OTC side. Obviously, the dates put out have not been met by the FDA. And again, that was August of 2020 when the rules were supposed to have been enacted. Nothing has been up for commentary yet. So there's no official news. So everything else is speculation. There is a lot of activity right now, both from Senator Warren and from Congressman Bradley in terms of putting more focus again on the need to create better access, the need to create more solutions for users. One, we're doing it. But in terms of how the FDA reacts to this, there's no new time line out there. There's definitely renewed pressure on getting clarity on when the timing will be. When OTC comes out, our belief is clearly that it will drive more awareness around hearing loss, and we see that as a net benefit to our model because we know we have a model that the more focus there is on hearing, we're well positioned to capture demand and interest. -------------------------------------------------------------------------------- Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Medical Device Equity Research Analyst [14] -------------------------------------------------------------------------------- That's very helpful. One for Adam on 2021 metrics. Just any color. It sounds like 2021 should be a good year for you with Eargo 5 coming out. Any color commentary on growth in leads, conversion rate, return rates with the new product coming out? And any reaction to consensus at $885 million. -------------------------------------------------------------------------------- Adam Laponis, Eargo, Inc. - CFO [15] -------------------------------------------------------------------------------- Larry, thanks, everyone. Glad you asked the question I get to answer. In terms of '21, it's still pretty early days for us, and we're going to be giving full guidance in the February time line when we announce our Q4 earnings. I can say right now, given where we are with -- we're feeling very good about Q4 and the forecast we put out there. We're feeling also very good about setting up '21 with the continued tracking on the Eargo 5 launch that Christian talked about. And I think the key things I'll be looking for is not just on the demand generation side, but that refurbishment capability over the course of the year. And really getting into that -- can we get comfortably into the mid-70s in gross margin by the time we exit '21. But obviously, that all comes in with the desire to continue to stay focused on driving efficient growth throughout the business. So we're feeling pretty good about where we're coming into this. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from the line of Margaret Kaczor with William Blair. -------------------------------------------------------------------------------- Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [17] -------------------------------------------------------------------------------- The first one for me is just a little bit of detail maybe on the insurance side. I know it was obviously a great quarter. Part of that is the melee that you guys had kind of directed to reimbursement and insurance there. So if you could give us some idea of how big of an impact that was. And really, the reason I ask is, as we go into Q4 it looks like strict numbers maybe assume a cash-based sequential increase offsets kind of an insurance sequential decline, which to us maybe seems a little bit conservative given how early you are in kind of that insurance uptake. So if you could walk us through those dynamics, that would be helpful. -------------------------------------------------------------------------------- Christian Gormsen, Eargo, Inc. - CEO, President & Director [18] -------------------------------------------------------------------------------- Great. Let me start, Margaret and hand off to Adam on sort of the specifics. How we're thinking about it. Remember that most of our insurance business is really working off the same media that we also use to drive cash pay, right? So that's both on a TV and in the digital. But we drive awareness around sharing loss and we move out. So that's the majority of our demand generation. Specifically for insurance, we are looking for, let's say, pockets of creating specific awareness within the relevant channels there. And what happened here in Q3 that we had an opportunity for 1 of these, I'd call it, targeted efforts. To actually access a database through a partnership that allowed us to mail directly retired federal employees. So that was a great opportunity for us to go out. And we're constantly expanding with a wide range of this. This one worked well for us. It's not something that we can do continuously because that's basically based on the relationship that we're building with the provider. But it worked really successful. And I think, Adam, can you comment on the specific impact here. -------------------------------------------------------------------------------- Adam Laponis, Eargo, Inc. - CFO [19] -------------------------------------------------------------------------------- If I look at our sequential growth in volume from Q2 to Q3, Margo, you asked us the impact to mailing, and it was less than 1/3 of our sequential growth, but it was kind of that order of magnitude in total. So if you kind of look at where we're going in Q4, I feel very comfortable that the insurance business is again, well within range and tracking to our forecast, but that ability to get other channels and activities, as Christian mentioned, activated, could be possible sources of upside for us either in Q4 or beyond. -------------------------------------------------------------------------------- Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [20] -------------------------------------------------------------------------------- Got it. No, that's very helpful. And then one of the frequent questions we got, so I'll an ask it here is, do you guys really see yourselves as a COVID beneficiary so far this year, meaning that the patients that are calling in, are they patients that maybe are scrambling from the traditional channels since it's closed? Or is this really more of a market acceleration and market expansion story, meaning both kind of impact you guys positively next year? -------------------------------------------------------------------------------- Christian Gormsen, Eargo, Inc. - CEO, President & Director [21] -------------------------------------------------------------------------------- Yes. No, Margaret, as we have already discussed, right, we've been asking that question a lot. Obviously, we saw a real acceleration to our business timed with the emergence of COVID in Q2. However, when COVID subsided through Q3, we saw all the metrics improvement hold so really how we look at a COVID beneficiary. I think, yes, to the tune that COVID has accelerated people adoption that there are different ways of getting things done. You don't have to go to a clinic. So I think we're proven as a strong alternative that actually deliver the same benefits that you get from going into a clinic. So that's also why through Q3, we have not seen a slowdown at all. In terms of our -- how we drive our business. So I think what COVID has done, it's fundamentally changed people's perspective on -- and I think it's helped accelerate the willingness to go to remote care. And I feel pretty confident that we're not going to cycle up and down with COVID, right? We will -- we've seen lifts from COVID because there's no alternative. But even when there is a real alternative, we're seeing that our model absolutely holds. So you can say we get a lift when COVID spikes, but we're not getting a drop when it subsides. And again, that's also how -- we believe that this remote access to care is the way forward, right? And again, we designed this before COVID, right? So this has been something that we've been building all along. I hope that syncs with what we've been talking about. -------------------------------------------------------------------------------- Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [22] -------------------------------------------------------------------------------- No, absolutely. And I'll squeeze one more in just because I might be the last one here. But TV advertising, I mean, you guys have done a ton of TV advertising. You've talked about it today right now. So talk about how much -- what percent of the ad spend maybe is going to TV, where do those levels go in the future, whether from a mix or a dollar perspective? And frankly, we've seen a ton of ads just in the last 30 days. So can you give us some context how this compares maybe to the prior quarter as these historical highs? -------------------------------------------------------------------------------- Christian Gormsen, Eargo, Inc. - CEO, President & Director [23] -------------------------------------------------------------------------------- So I'll let Adam give you the details here. But clearly, as we said, we've seen through this year, an acceleration of our TV spend. Having said that, we know there's a lot of room for growth, right? And then we did slow down some of our TV even here in Q4 because of rates tied to the election and so on. So we know it's a lever that we can really actively use to drive the efficiency that we want to have in our media. So Adam, maybe you can provide the more specific splits? -------------------------------------------------------------------------------- Adam Laponis, Eargo, Inc. - CFO [24] -------------------------------------------------------------------------------- Yes. So Margo, the way I'm looking at it and the way I think it makes sense to think about it is we haven't really increased our digital spending sequentially over the last 3 or 4 quarters. We've held it relatively flat. And we've added on more TV with -- into the mix. And I look at Q3, we're talking, call it, roughly 1/3 of our media spend is going towards TV. But it's one that we're -- as Christian mentioned, we're constantly titrating that. And when things like the election come and rates in certain cable news channels go up 3x from what they normally are, we pull back. And then as those to get back to normal as we saw after the election cycle, we go back into those advertising. So it's a pretty fluid dynamic, and it's one that we feel pretty good about using it. And there's a lot of headroom there, but we're still just scratching the surface of what TV can do for the business. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- And I'm showing no further questions. So with that, I'll turn the call back over to Nick Laudico for any closing remarks. -------------------------------------------------------------------------------- Nicholas S. Laudico, Eargo, Inc. - VP of IR [26] -------------------------------------------------------------------------------- Thanks, operator. Thank you all today. This concludes the Eargo Third Quarter 2020 Earnings Conference Call. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- Okay. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect.