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SmileDirectClub CFO: 'We're looking at rebuilding the business in a very profitable way'

Kyle Wailes, SmileDirectClub CFO, joins Yahoo Finance’s The First Trade with Alexis Christoforous and Brian Sozzi to discuss future outlook for the company, its recent partnership with Smile Brands and much more.

Video Transcript

ALEXIS CHRISTOFOROUS: It's been a challenging year for Smile Direct Club. Since going public in September, the stock is down some 54%. And shipments of its teeth aligners fell last quarter. So what does the future hold?

Here to discuss is Small Direct Club CFO Kyle Wales. Kyle, it's good to see you. Thanks for being with us. We should note that--

KYLE WAILES: Thanks for having me.

ALEXIS CHRISTOFOROUS: --even though the top and bottom line were-- were lower compared to the same time last year, you still did beat expectations. And I know that the company's focus this year has been on profitability. Is Smile Direct club still on track to be profitable in the fourth quarter?

KYLE WAILES: We are. Yeah, absolutely. So that's been a focus for us since the beginning of this year. We're still tracking to be EBITA positive by the fourth quarter, as you point out.

And also, as you pointed out, you know, a nice quarter overall. We beat our top line by about 20%. We beat our EBITA expectations as well by just over 20%, both of those off of very efficient, you know, sales and marketing spend as well within the quarter in comparison to where we were in Q1 and Q4 last year.

And if you look at the guide that we provided for Q3 as well in comparison to-- to late Q2, up about 25% sequentially quarter over quarter. So tracking very well from a growth perspective and getting back to more historical norms in terms of volume. You know, that sequential growth quarter over quarter is about 85% of where we were last year. So, again, tracking back to those historical norms, but also doing it in a much more profitable way than where we've been historically.

BRIAN SOZZI: Kyle, talk to us about Smile Direct's-- Smile Direct's push into dentists. It's a recent initiative. I suspect it's very important to the future of your company. Where are you? And how does the rollout look like?

KYLE WAILES: Yeah. Great question, Brian. So it's-- it's still early, you know, in our rollout. We've always-- if you look at our model historically, we've always been sort of agnostic to how a consumer wants to start their journey.

So the way it works is, you know, we're driving people to our website. And we're doing that through [INAUDIBLE] awareness, which is about 50% today around the country, or through referrals. About 20% of our business is coming through referrals or through marketing.

And when someone hits our website, we're giving them the option to choose either one, an impression kit, or two, book an appointment at one of our Smile shops around the country. We don't have a third option for that, which is for consumers who want to start their journey in person at a dental office. And so it's really removing a friction point for those consumers that want to start their journey in person with-- with a dentist.

ALEXIS CHRISTOFOROUS: Hey, Kyle, I know that it must have been a tough decision for you. You had to furlough much of your-- much of your workforce a few months back because of the pandemic. Can you give us a status update on those furloughs? Have you called people back? Or have some of those positions become permanent layoffs?

KYLE WAILES: Yeah, absolutely. Great-- great question. So, you know, when-- when COVID first started, obviously the world was-- was in a state of chaos. In many ways, you know, still-- still recovering from that, which made it a very complex operating environment. And so, you know, not knowing what to expect from demand, you know, our first priority was to make sure that we were preserving our cash and keeping us in a very strong position from a balance sheet perspective.

And we were able to do that, you know, raising additional liquidity at a very-- at a very tough time. Alongside that, we had to make the tough decision to furlough some of our team. We've actually brought back a lot of those team members to date. So, you know, if you look at our Smile shops, or our manufacturing, or corporate at our headquarters, you know, we've-- we brought back a lot of those team members. We still do have some today that are still on furlough, and we hope to be able to bring them back in the near future as the world recovers.

BRIAN SOZZI: Kyle, we're-- we're still living in a world of disconnects right now. Look, we're double digit unemployment. The stock market's touching new record highs. On the disconnect front, you have said con-- consistently over the past two quarters-- fourth quarter adjusted EBITA profits-- it doesn't seem like Wall Street is-- is believing in the story yet. What gets you-- what gets the Wall Street analysts and that community on board with the story?

KYLE WAILES: Yeah. Look, it's-- it's a great question. And I think for us as a business, you know, we're in a-- we're in a very good spot, right? We're the-- we're the low-cost provider.

We've got incredible unit economics. We're in a massive market opportunity. And we're focused on, you know, rebuilding the business from the early stages of COVID in a very profitable way. We put out great numbers in the second quarter. We put out a good guide for the third quarter.

And so overall, you know, I would say we're in a good-- a good position. And I think the one question that people are really asking is, what's happening on a month-to-month basis? So if you look at March into April, you know, into May and now trending into August, how has the business trended month to month?

And for us, that's not necessarily the best indicator of demand. And so what happens is the front end of our businesses is-- is incredibly complex from a customer acquisition perspective, right? So someone hits our website, they become a lead, right? So we capture their email.

From there, they're choosing if they want to, you know, make an appointment at a dental office, or order an impression kit, or book a scan, and ultimately at some point, purchase aligners. But there's hundreds of drop-off points within that acquisition funnel. And so that-- that funnel could make the end of one month look very strong and the beginning of another month look-- look for a week or vice versa.

And so it's not necessarily a great indicator of demand. You've gotta look at it over a couple month period. And I think when you look at it over a couple month period, as we demonstrated for the guide in the third quarter, you know, we're-- we're tracking very well with that 25-- 25% sequential growth on a quarter-over-quarter basis and getting back to more historical norms.

So look, I think for us, we're focused on continuing to-- to operate the business. I think we're incredibly well positioned. And we're looking forward to continuing to prove that in the quarters to come.

ALEXIS CHRISTOFOROUS: Kyle, how much do you think the legal issues sort of swirling around Smile Direct Club have held the stock back and have held investor enthusiasm about the company back? I mean, you're also, in addition to being targeted by some lawsuits, you're also suing NBC, we should mention, for a story they did, an exposé they did on Smile Direct Club a few months back.

KYLE WAILES: Yeah. Look, I mean, I don't want to comment too much on sort of a pending, you know, litigation, I think. But-- but that case in particular is really more focused around mistruths that were put out there. And so, you know, we had to defend our-- our brand against that.

Look, I think when we-- when we first came to the markets, you know, we're-- we're a very disruptive company, right? If you look at sort of the status quo, we're bringing access to care. We're making care more convenient. We're making it much more cost effective.

You know, on average, only about 40% of counties in the US have access to an orthodontist. We cover 100% of those counties with our teledentistry platform. And we do it up to 60% cheaper on average as well.

So, you know, we've-- we've caused a lot of disruption in the market and gave-- gave consumers an incredible option. And I think anytime you-- you do that, the status quo is gonna push back against that. I think that's what you saw sort of in the early stages of us coming to market.

And some of the-- you know, the legal fights that we've had historically are associated around that. I think at the end of the day, what-- what investors long term are really focused on, you know, is the fundamentals of the business, which are-- are very strong and improving. And I think as we continue to execute quarter in and quarter out, then-- then we'll be rewarded for that over time.

ALEXIS CHRISTOFOROUS: All right. Smile Direct Club CFO, Kyle Wales, good to see you this morning.

KYLE WAILES: Thank you. Thanks for having me.