SmileDirectClub declines following Q1 earnings

On Monday, SmileDirectClub reported Q1 losses as revenue estimates lagged. Julie Hyman, Brian Sozzi, Myles Udland, and SmileDirectClub CFO Kyle Wailes discuss the future of the company’s growth and the impact of a recent cyber attack.

Video Transcript

JULIE HYMAN: Smile Direct Club came out with its numbers, the company's first quarter revenue up 1%. But being affected by costs related to a cyber attack and the company's second quarter forecast was hit by that in particular, the shares trading sharply lower here this morning. Let's get some more clarity on what's going on at Smile Direct Club. Kyle Wailes is joining us now. He's the chief financial officer at the company.

Kyle, it's good to see you. I'm trying to sort of tease out here, related to the cybertech, you guys talked about the costs that are related to that. Can you give us some more information on the exact impacts to the business? I know there were costs because there were sort of a pause in continuity, if you will, as you guys were grappling with that. But going forward, now what? Are you spending more on cyber security? Are you having to change how you're doing your marketing? Talk to me about the continuing effect on the business.

KYLE WAILES: Sure. Well, first off, great to be here. Thanks for having me. So that's right. We had a cyber attack on the day of April 14. And I think our team just did an incredible job to shut down our impacted systems. And most importantly, no patient or club member data was breached or impacted. And no team member data was impacted. And we paid no ransom as a result of the attack. And so our team rebuilt our systems over the better course of a week.

But what happens when that happens and we can't do treatment planning or manufacturing? We get a backlog, right? And when we get a backlog, people coming into the system are less likely to convert because it takes us longer in order to get them a treatment plan. And so, we've estimated that that's a $10 to $15 million impact, really exclusive within the second quarter. It's going to take us the better part of about a month to catch that up. So our expectation is over the course of the month of May here, we'll catch that up. And it might slip into June a little bit, but certainly isolated within the second quarter.

So, again, truly an incredible job by our team. And it really has no impact as we think about the longer term fundamentals of the business and really executing against that controlled and profitable growth strategy that we've talked about so much. So, you know, if you think about the third quarter and the fourth quarter and beyond, we remain laser focused on our mission, which is about democratizing access to care and executing against that 5% to 7% sequential growth plan and doing it profitably that we've outlined.

BRIAN SOZZI: Kyle, on the call last night, you talked at length about 20% to 30% revenue growth per year for the next five years, in the first quarter, it was 8%. When do you start accelerating towards that goal? In other words, when is that inflection point? And what gets you there?

KYLE WAILES: Well, I think we're in it now. So the 20% to 30% is an annualized target. And so if you break that down on a quarterly basis, that would be about 5% to 7% sequential growth on a quarter over quarter basis. And you have seen that over the past several quarters. So if you look at the fourth quarter, we were up over 9%, so ahead of our 5% to 7% target on a quarter over quarter basis. And if you look at Q1, we were up over 8% on a quarter over quarter basis.

So, you know, that's a strategy that we've been executing against since Q4 of 2019 and doing it well with the longer term revenue growth targets that we've outlined and have been executing against, but also doing it profitably. So this was our third consecutive quarter of EBITDA profitability. That's in spite of continuing to overinvest in these international markets, which we believe are going to drive and support the longer term growth that we see as a business. But in the short term, it is obviously more expensive from a customer acquisition cost as we build our brand awareness and aided awareness in those markets to get it to where the US market is today.

MYLES UDLAND: Well, then, Kyle, and in talking about that investment that you guys are making in the international business, certainly, the pandemic continues to play out differently across the globe versus how it does here in the US. I mean, how is that, if at all, impacting your plans? Certainly, there is a large element of your business which doesn't require anyone to meet with anybody else. But you did mention that you have those pop-up shops I think at 350 some odd as in the latest quarter. And, you know, that's another pillar that I'm guessing cannot be as prominently used in a lot of those international markets.

KYLE WAILES: Yeah, that's right. You know, for us, it really goes back to the omnichannel choice that we always talk about. And, you know, that's a massive differentiator that we have in our business, as we were driving demand to the website through our aided awareness or through referrals, which is about 20% of our business today, or through marketing. And we're empowering the consumer to choose between an impression kit or a smile shop, and now our partner network as well, where they can go into a dental practice and start their journey there as well.

And so, you know, smile shops are, be it a permanent location or a pop-up event, are an important component of that. And international is no different. So we look to launch into these markets in a very similar fashion, as we do here in the US, providing that omnichannel choice. Now every market is going to be slightly different. And so, in some markets, impression kits as an example don't play as big of a role as they do here in the US. Or, you know, in certain markets, there's obviously been different COVID spikes at different times. And that's something that we've had to adapt to.

But I think what it points to is the overall agility and flexibility of the business model and of our team. And we remain laser focused on executing against those longer term plans that we've outlined in spite of the pandemic over the past year. And I think your team's done an incredible job at that.

BRIAN SOZZI: Kyle, before we let you go, if investors were sizing up how you performed in the first quarter versus your main competitor, Align, why should they invest in Smile Direct Club compared to Align?

KYLE WAILES: Well, look, I think, you know, if you look at the market today, you know, clearly a massive opportunity, right? I mean, there's 500 million people on a global basis that we think have some type of crowding or spacing, but can also afford to pay the $89 a month that we offer with our Smile Pay Program as well. And so, you know, if you think about the programs that we offer, we offer a very safe and clinically effective outcome. You know, if you think about the market today, we're treating about 90% of those cases that are coming to us, so truly an incredible stat that I think most people are not aware of.

And people are getting great outcomes associated with that. But we're doing it in a way that removes the 3x markup that's associated with invisible aligners and traditional orthodontics. And so, on average, we're about 60% cheaper than what you'd get from other competitors out in the marketplace, yet still getting very similar, safe, and effective outcomes as well. So, you know, incredible opportunity. I think we're very well positioned by giving consumers the ability to access care in the manner in which they choose and cover the country with the ability to do that through our impression kit model, through smile shops, and also through our partner network as well with dental practices.

JULIE HYMAN: Kyle, thanks for joining us this morning. Thanks for taking the time. Kyle Wailes is Smile Direct Club CFO. Be well, Kyle. Thank you.