SmileDirectClub, Inc. (NASDAQ:SDC) Q2 2022 Results Earnings Conference Call August 9, 2022 8:00 AM ET
Company Participants
Jonathan Fleetwood – Director, Investor Relations
David Katzman – Chief Executive Officer and Chairman
Troy Crawford – Chief Financial Officer
Conference Call Participants
Jonathan Block – Stifel Nicolaus and Company
Lily Lozada – J.P. Morgan Securities
Erin Wright – Morgan Stanley
Michael Ryskin – Bank of America Merrill Lynch Global Equity Research
Laura Champine – Loop Capital
Dylan Carden – William Blair & Company
Operator
Greetings. And welcome to the SmileDirectClub Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.
I would now like to turn the call over to Jonathan Fleetwood, Director of Investor Relations.
Jonathan Fleetwood
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 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 Q2 2022 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 Katzman, and Chief Financial Officer, Troy Crawford.
Let me now turn the call over to David.
David Katzman
Thanks, Jonathan. Good morning, everyone. Thank you for joining us today. I want to start off by congratulating Troy Crawford on his official appointment to CFO. Troy has made numerous contributions to SDC over the past couple of years, most recently in driving efforts around focused investments and financial discipline.
In addition, I want to take this opportunity to welcome both Linda Williams and Alex Dimitrief to our Board of Directors. Both Linda and Alex come to us as accomplished executives in their respective fields and we’re bringing in valuable perspective as we navigate this environment and phase of our business.
I’d also like to thank the contact center team for quickly returning our service levels back to their targets by the end of May. As we discussed in our Q1 call, transition challenges in our contact center temporarily impacted our ability to deliver our customers with the level of care that they have come to expect from our brand. And these challenges were reflected in our Q1 NPS reading. While our next NPS reading isn’t until Q3, internal metrics continue to point to an improving trend that we expect to be reflected in our next quarterly NPS update.
In addition, our internal brand tracker indicators have shown improvement quarter-over-quarter for the US, which further indicates that the work of our contact center team is paying off for our customers.
Our ability to quickly resolve those contact center challenges and substantially complete all other initiatives we implemented at the start of Q1 have enabled us to achieve more than $120 million in annualized cost savings.
As we’ve seen in the past few months, the timing of this transition was critical in light of the uncertainty we’re all facing today surrounding the state of the consumer and trends in consumer discretionary spending.
While we were encouraged coming into the year with our Q1 shipment lift over Q4, challenges on consumer spending accelerated during Q2. And for our business, this acceleration began to materialize in the back half of the quarter.
We did not like to comment on monthly order trends, but we believe it is important for our investors to understand that initial evaluation interest remained relatively stable heading into May. However, aligner ordered trends began to slow in mid-May, before dropping further in June. During this time, we saw traffic to our insurance page increase on a year-over-year basis as we expect more customers were actively looking for ways to supplement their purchase.
Our takeaway here is that demand for our products remain strong, but strains on consumer spending are continuing to hurt our ability to convert at the levels we need to drive revenue growth.
Challenges to consumer spending accelerated faster than anticipated during the quarter, which when combined with reduced stimulus, sustained high inflation and a shift in discretionary spending towards services resulted in less predictable demand curves.
I’m pleased to report that our cost cutting initiatives from Q1 had paid off during the last quarter and we were able to improve both adjusted EBITDA and free cash flow by $11 million and $41 million, respectively despite consumer spending decreases resulting in our top line being down quarter-over-quarter by $26 million.
These efforts can also be seen when you look at our performance year-over-year. While revenue was down $48 million relative to Q2 of 2021, we were able to sustain adjusted EBITDA during Q2 of 2022 within approximately $700,000 of what we achieved in 2121.
Troy will go into the details on how we were able to achieve these results during the quarter, but I do want to thank the team again for their tireless efforts during the past two quarters to further optimize our business operations. With leveraging our operating model, these results reflect a much leaner organization that is better positioned to achieve profitability with modest top line growth.
While these right-sizing efforts have allowed us to make meaningful progress on positioning our business towards profitability, we recognize that we engaging top line growth through innovation is just as important to the long term success of our business.
From the beginning, innovation has been the core to achieving our vision and it’s critical to the next phase of our growth and ability to deliver shareholder value. Our vision and mission are much greater than manufacturing and marketing clear aligners. The aspirational vision of our organization is to be the world’s leading oral health brand by helping more people realize the life changing potential of a confident smile.
From that vision, our mission has always been democratized access to smile each and every person loves. And for us to realize our vision through our mission, we must expand our reach within and beyond our existing core customer base. This is where our focus on partner network, aligner product innovations, SDC+, oral care shop expansion fits into what we do.
Expanding reach comes through continuously bringing transformative innovation to the market across an entire portfolio of both consumer facing and non-consumer facing innovations.
As you’ll see in our investor presentation, our innovation portfolio includes innovations throughout the journey and at the product level. And over the last eight years, our continuous investments across the portfolio have allowed us to consistently deliver in all categories.
Recently, we’ve continued to make progress on making it easier to get started with the overall experience through our partner network and SDC+ efforts. We ended the quarter with 690 locations and have seen meaningful increase in submissions per practice, driving total submission growth of more than 75% quarter-over-quarter and nearly 170% versus Q4 of 2021.
While partner network is still a relatively small contributor to our top line, this foundation is exactly what we need in place for us to further lean into our SDC+ offering, which will be exclusively available either in a SmileShop within a dental practice or through our partner network locations.
The SDC+ offering was designed to specifically target the higher household income consumer. In our intense qualitative and quantitative research, we learned that higher income consumers will be far more attracted to our brand at a premium price when paired with greater access to a general practitioner throughout treatment. We believe the offering that we’ve designed, which includes access to a local GP on an in-office basis, greater access to care through our telehealth platform, retainers for retention after treatment and other SDC products is perfectly designed with the consumers’ needs in mind.
With these additional services, which are augmented by our proprietary tech platform, we anticipate being able to price this offering at $3,900, which improves not only the economics to us and our partner offices, but also enables us to provide this enhanced access to care while remaining price competitive with a premium service.
The SDC+ pilot is currently on track to launch in select partner network markets in late Q4 this year or early Q1 of 2023. This is the first time since we launched SDC that we will offer a choice for our customers depending on the service level that they desire. We’re extremely excited about what this offering means for our customers, our partner network GPs and our business. We will continue to keep you updated on the progress of the pilot and the results we’re seeing as we enter those markets in the quarters ahead.
While we make it as easy as we can to get customers started with our kit and scan options, the journey to purchase today is not ideal. It’s still too difficult and requires too much from our customers before they get to see their new smile and purchase. By using kits and scans has been a viable starting point to get us in the market. It was always a temporary solution until we were able to develop breakthroughs with AI technology that allow customers to use their smartphones to get started and purchase in a matter of minutes.
I think it’s important to illustrate the magnitude of the drop off we experienced with the current kits and scans process when looking at our current website traffic to purchase volume. Today, we have 46 million visitors to our site each month with around 0.5% of them converting to an aligner order after falling out over multiple weeks across several touch points in the journey.
We have illustrated this point in our investor deck. Based on today’s volumes, which is a small improvement of 25 basis points in our site conversion, we would expect more than $200 million in additional line of revenue. That’s $160 million in additional adjusted EBITDA on an annualized basis.
And when benchmarking other ecommerce businesses, this conversion rate should be closer to 2% to 3% of web visitors converting to an aligner order which is four to six times where we are today. The demand here is incredible. And we view closing the gap on our site conversion as one of the most significant near term opportunities ahead of us today.
While we’ve made continued strides to improve the journey and reduce the fall-off between site visit and purchase, the vision all along was to have the AI capabilities to use the power of your smartphone to get an accurate scan and reduce the friction points for customers to buy their new smile.
This is why we’re currently in the process of finalizing development of our mobile 3D scanning application or what we call our SmileMaker platform, which is our proprietary patent pending phone-based scanning app that allows customers to see their draft custom treatment plan of how their teeth will move and how long it will take and then purchase within minutes of downloading our free app.
This technology delivers on the original vision of our founders for making it easy to get started with treatment. And no other clear aligner option out there can do what we’re developing. It has taken years of modeling and machine learning with dozens of AI engineers and PhD scientists to finally get to this point. This transformative experience takes [indiscernible] between site visit and purchase that exists today out of the equation.
We believe the potential lift in conversion here is significant. Our initial SmileShop rollout in 2016 to new markets serves as a good reference point for what the opportunity is here. Prior to shops, customers only had impression kits available to start their journey. With the introduction of SmileShops, we gave people an alternative channel with a better experience that provided treatment plans more quickly. And when we initially rolled out our shops, we immediately experienced more than a 2 times lift in sales net of the control markets with the same marketing spend.
Similar to shops, but on a much greater scale, we believe the opportunity with our SmileMaker platform is going to be a significant growth catalyst for our business. Again, with no change in web traffic or marketing spend, a 25 basis point increase in our site conversion would generate more than $200 million in additional line of revenue and up to $160 million in additional adjusted EBITDA on an annualized basis.
Mobile 3D scanning capabilities were always part of the original vision and had been a considerable part of our R&D efforts for more than three years. From the beginning, we knew that it would take years to capture critical mass of data for the AI to work. And now with more than 1.7 million smiles and more than 3 million treatment plans in our database, our AI team has worked tirelessly to bring this to market. This technology is right around the corner, unmatched by any other clear aligner provider today, and has the power to completely change the trajectory of our business and the experience of our customers.
Current project plans target a launch later this year in one of our smaller international countries with a fast follow in the United States by the end of Q4 or early Q1. We are extremely excited about this offering for the world to experience and we’ll be keeping you updated on progress in the quarters ahead.
As you can see, we’ve been able to deliver so much in a short period with our amazing team of accomplished executives, fully committed hardworking team members, PhDs, material scientists and AI engineers. When we combine these elements, grounded in innovation with rigorous financial discipline, we believe we have a winning formula for achieving our full potential and maximizing shareholder value. This is the beginning of transforming SDC from a marketing-led company to drive growth to a technology innovation led company, with a steady pipeline of new and innovative products to drive growth.
We’ve been introducing new iterations and releases to our AI work as well as new materials for aligner and old oral care products, all of which we will be discussing in an upcoming Investor Day we plan to hold at our manufacturing facility in Nashville at the end of the year or first quarter of 2023.
I’ve said it many times before, but I think it’s worth repeating. With an annual TAM of 500 million customers worldwide and only 4% to 5% of them taking advantage of teeth straightening, the opportunity here is massive. Despite the limitations in serving those customers today, we’ve been able to help more than 1.7 million customers get the smile they love while saving them over $5 billion.
I’m 100% committed to seeing this business succeed and look forward to sharing more in our progress with not only our SmileMaker platform, partner network and SDC+, but also across our innovation portfolio in the quarters ahead.
And now I’ll turn the call over to Troy who will provide more detail on our Q2 financial results and full-year outlook. Troy?
Troy Crawford
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 second quarter was $126 million, which is a decrease of 17% sequentially and 28% on a year-over-year basis. This was primarily driven by a worsening of the macroeconomic conditions and increasing inflation, which has been particularly difficult for our core customer.
We shipped approximately 63,000 initial aligners in the quarter, down 18% sequentially, at an ASP of $1,917. Our ASP increase of $27 over the first quarter was primarily driven by a price increase implemented in the US in May and in the UK in late June, with additional geographies targeted for increases during the second half of 2022.
Our year-over-year revenue results are largely reflective of what we have seen play out in the economy over the last 12 months, combined with challenges associated with privacy changes coming from the iOS 14 rollout that really started to take shape in Q2 of last year.
Providing some details on other revenue items, implicit price concessions were 10% of gross aligner revenue, down from 11% in the first quarter. We do expect IPC as a percentage of gross aligner revenue to trend back towards our historical levels between 9% and 10% as we have seen no significant deterioration in the quality of the portfolio.
The fluctuation in the quarterly IPC percentage is impacted by the overall level of revenue recorded in the period as well as the rebalancing of reserves. As we’ve mentioned in prior quarters, we maintain separate reserves for IPC and cancellations. We analyze and regularly rebalance those reserves based on current information.
While our second quarter revenue was impacted by the continued macro headwinds affecting our customers, our restructuring plan implemented in January is driving meaningful improvements in our cost structure and free cash flow.
Despite $26 million sequential drop in revenue from the first quarter of 2022, we improved EBITDA by $11 million and improved free cash flow by $41 million. Compared to the second quarter of 2021, despite a $48 million reduction in revenue, we saw less than a $1 million decrease in EBITDA and free cash flow was $17 million better.
Reserves and other adjustments, which includes impression kit revenue, refunds and sales tax, came in at 8% of gross aligner revenue compared to 7% in the first quarter. Financing revenue, which is interest associated with our SmilePay program, came in at approximately $9 million, which is in line with Q1, but down approximately $3 million year-over-year 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 or 14% of second quarter revenue. Other revenue and adjustments were down sequentially due to the launch of our new whitening strips and strength of initial orders in the first quarter.
Now turning to SmilePay. In Q2, the share of initial aligner purchases financed through our SmilePay program came in at approximately 61%, which is in line with historical levels. Our SmilePay program is an important component to drive affordability with our customer base and, overall, SmilePay has continued to perform well with our delinquency rates in Q2 consistent with prior quarters.
While admittedly our core customer has had difficulty with the macro environment, the fact that we keep the card on file and have a low monthly payment gives us the confidence that SmilePay will continue to perform well. Despite the macro headlines in the market, we have not seen an increase our delinquency rates in our SmilePay portfolio.
Turning to results on the cost side of the business. Gross margin for the quarter was 73%, which was 131 basis point increase from the first quarter. Despite lower revenues that reduced operating leverage, this gross margin increase was driven by improvements in labor efficiency, along with other cost control initiatives. Our team will continue to focus on efficiencies to drive solid margins across the business, and we’ll see further improvements as the top line returns to growth and we get the added benefit from operating leverage.
Marketing and selling expenses came in at $71 million or 57% of net revenue in the quarter compared to 64% of net revenue in the first quarter. The sequential decrease as a percent of revenue is primarily the result of the heightened focus for our teams on driving increased marketing efficiency across platforms coming out of Q1 and into Q2, when we see demand typically soften.
A key focus for 2022 is seeking to find efficiency in our spend. We have been experimenting more with pulsing spend with targeted dark weeks versus having an always on strategy in our top of funnel channels such as TV, which allows us to take advantage of our 60% aided awareness and optimize our marketing spend.
It is important to keep in mind that digital marketing is a highly fluid process that requires daily discipline of spend analysis, assessment and reallocation. We’re always testing and analyzing new channels and the impact of channel mix amongst all segments. With a targeted focus on efficiency and quality leads, we are continuing to calibrate spend across a diversified platform base in order to optimize continuously through the period to achieve the optimal balance of high funnel leads and bottom funnel aligner sales.
On SmileShops, we had 118 permanent location as of quarter-end, and held 114 popup locations over the course of the quarter for a total of 232 location sites with a net increase of eight shop locations from the first quarter.
The increase in shop locations was split evenly at four each between the US and international markets. We will continue to strategically expand our shop footprint to locations that support incremental demand without cannibalizing sales from existing channels. We are encouraged by the early results of this deployment strategy and expect to continue these measured shop expansions for the balance of the year.
We now have 690 North America partner network locations that are active or pending training, increasing our footprint from Q1. Partner network team has been extremely focused on tightening the model to maximize engagement and productivity within active practices, and we’ve seen positive momentum on productivity throughout the year.
As David mentioned, we have seen momentum through increases in submissions per practice, which has driven total submission growth of more than 75% over the first quarter and almost 170% versus Q4 of 2021.
A growing partner network footprint will not only scale our operations for current submission trajectory, but it will also serve as a key channel when we begin scaling our SDC+ premium service offering to the market in 2023.
General and administrative expenses were $72 million in Q2 compared to $71 million in the first quarter. G&A expenses decreased $3 million when excluding stock-based compensation and depreciation and amortization costs quarter-over-quarter. Excluding the same items when compared to the prior year, G&A is down approximately $14 million as a result of cost savings initiatives taken back in January of this year.
Other expenses include interest expense of $4.5 million, of which $2.9 million is related to our new secured debt facility issued in April and $1.3 million is related to deferred loan costs associated with the convert we issued in 2021. Additionally, one-time costs related to the lease abandonment, impairment and other store and restructuring costs was $3.2 million, consisting primarily of costs related to our January restructuring actions, including costs associated with severance and retention, as well as store and facility closure costs related to our international operations. We also incurred $5.8 million in other expenses primarily related to the impact of unrealized foreign currency translation adjustments.
All of the above produced adjusted EBITDA negative $23 million in the second quarter, which is an $11 million improvement over the first quarter despite a $26 million decrease in revenue.
Our second quarter net loss was $65 million compared to a Q1 2022 net loss of $73 million.
Breaking out adjusted EBITDA regionally, the US and Canada came in at negative $13 million and rest of world adjusted EBITDA was negative $10 million.
Moving to the balance sheet, we ended the second quarter with $158 million in cash and cash equivalents, $222 million in net accounts receivable, and $65 million drawn on our new $255 million debt facility with HPS.
Cash from operations for the second quarter was negative $18 million. Cash spent on investing for the second quarter was also $18 million. Free cash flow for the second quarter defined as cash from operations less cash from investing, was negative $36 million, which is a $41 million improvement over the first quarter of 2022. This amount represents the strongest free cash flow in any quarter since Q3 of 2020 as the cost saving and efficiency measures we’ve been discussing have started to show effects. In fact, we delivered better free cash flow than Q1 of 2021 when we reported our best revenue quarter ever at over $199 million.
As we have discussed, we continue to see macroeconomic challenges that are impacting our customers’ willingness to make a purchase decision. Without any signals of improvement in the near term, our outlook shows a trajectory of lower aligner orders for the remainder of 2022. Based on this view, we are revising our full-year 2022 guidance, which assumes no material impact from currency fluctuations and includes all incremental investments for the year associated with partner network and incremental sharp expansion.
This guidance also does not include any material impact from the launch of our SmileMaker platform in the back half of the year. SmileMaker could have a meaningful impact on our conversion rate as the purchase of aligner has accelerated and the customer journey reducing between one to three weeks of time between scan to treatment plan review and purchase. This will help effectively manage funnel drop-offs which should lead to impactful potential sales increases.
You can see this funnel conversion highlighted in our earnings deck posted on our investor website. This increase in conversion requires no additional marketing. So any increase will impact EBITDA at a very efficient rate.
For full-year 2022, we now expect to deliver revenue between $450 million and $500 million, gross margin between 69.5% to 71.5% based on reduced operating leverage due to lower top line, adjusted EBITDA between negative $180 million and negative $140 million driven mainly by top line results.
Our CapEx outlook remains the same at $60 million to $70 million and our one-time costs from our reorganization action in January remains the same between $20 million and $25 million.
We have added guidance on our year-end cash balance with a range of $120 million to $160 million, which is dictated by our financial results and includes expected borrowings on our existing credit facility.
While the second quarter came in at the bottom of our guidance range, we have taken some significant measures to strengthen our balance sheet with a new credit facility that was put in place in early Q2. We’re also on track with cost cutting measures we initiated at the beginning of the year to right-size the organization, and have put in place additional efficiency initiatives to lower costs to offset the impacts of lower volumes. All of these initiatives have played a role in contributing to what we’re experiencing with better adjusted EBITDA trends in the quarter.
In this very challenged environment, we are extremely focused on operating efficiency to offset the impact of the macroeconomic environment. We are also on the cusp of launching a couple of very important new initiatives in our SmileMaker platform and SDC+, which can have a material impact on the company’s results.
I would like to turn the call back over to David for some closing remarks.
David Katzman
Thanks, Troy. In spite of the macro business challenges we’ve been facing, I’m extremely encouraged by what’s ahead and the innovation we’re bringing to market. From the very beginning, our vision has been to allow people to start the journey to get a smile they love from a device in the palm of their hand.
We look forward to sharing more exciting updates regarding our technology innovations, including our SmileMaker platform and SDC+, along with other innovations over the coming months.
Thank you for joining today. And with that, I’ll turn the call back over to the operator for questions and answers.
Question-and-Answer Session
Operator
[Operator Instructions]. Our first questions come from the line of Jon Block with Stifel.
Jonathan Block
Troy, maybe one for you. Several questions to it. And David, then I’ll circle back. Troy, the $120 million to $160 million cash year-end, does that assume the full drawdown on the $255 million securitization facility? I think I’ve got that number right.
Let me just tack on a couple more. Just any thoughts around 3Q, 4Q rev/EBITDA cadence? Maybe one more to just tack on that. The 2023 EBITDA positive that I think you guys have previously alluded to, is that still intact? And then I’ll just ask my follow up to David after.
Troy Crawford
To start with the cash balance, $120 million to $160 million is what we’re targeting at the end of the year. It does include an assumption of some borrowings on our facility. But a lot of things will go into that end number, including kind of what the revenue number is for the back half of the year, as well as some of the cost savings initiatives that we’re working on as well. Also, we’re being opportunistic in the marketplace around what could be available. So we’ve kept kind of our contacts in place. And to the extent that we can drive more liquidity in the marketplace, we will do that. So there’s a lot of factors that go into that, does include some draws, I’d say, but I don’t think it takes all of that. And certainly with a lot of other factors involved to get to the full cash balance.
From a cadence standpoint, I would say we don’t generally give quarterly guidance, but I would say you can kind of split it up pretty evenly, I would say, but I don’t know – depending on how the overall market goes and what the macroeconomic looks like, it could be a little different between quarters, but I think you can safely kind of split it.
Your final question was on 2023 EBITDA, I believe. Obviously, we’re still sticking to our long-term guidance, which includes the mid-teens CAGR that goes out to 2026. We do feel like that’s relatively conservative when we think about getting back to 2019 volumes by 2026. But it’s not going to be completely linear. We have big initiatives that we’re launching towards the back half of this year, which we believe can be meaningful to the impacts on 2023 earnings. And I think as we get closer to 2023, we’ll be able to give more specific guidance about that EBITDA number for 2023. But right now we’re sticking with our longer term guidance.
Jonathan Block
David, just on the follow up, you talked to the trends throughout the quarter. Your cases were down I think high teens sequentially. The biggest player was flat sequentially, give or take. There was a smaller player up 20% to 30%. Q-over-Q. I know maybe your average household income is a little bit lower than the others, but it just seems very different from some of the figures we’ve seen from the other major clear aligner players in the industry. So maybe if you can speak to that. Is this all a function of your lower end household income consumer? Or is there more to it around the NPS on the mend and a couple other things?
David Katzman
John, definitely is not a result of the NPS. We’ve quickly corrected that action, as I mentioned in my prepared remarks, with our contact center and we’ll report on that new NPS score in Q3. It really is a function of – our core demographic is $65,000 a year which was hit the hardest by this compounded inflation effect. And we saw it accelerate in Q2, as we stated. When you talk about comparison, companies in the clear aligner space, they’re targeting a much higher income consumer, a $5,000, plus ASP. So there is a difference and part of our new initiative to go after that higher household income will help. We’re not abandoning our core customer. We think especially with the new tools that we have in our SmileMaker platform, we’re going to be able to convert at a higher rate. Even when demand is down, the conversion will be higher, if you don’t have to go through that gauntlet, as we talked about with kits and scan. It’s finally here. It’s very exciting times for us. We’ve been waiting for this for years. It was always the founding vision of how to go to market using this kind of technology.
And I’ll say, John, other businesses I’ve disrupted, we’ve had the same issues where it takes time to develop the tools that fit your go-to-market strategy. And in order to grow prior to having these innovative tools, we were more of a marketing-led company. And what you’re seeing is the beginning shift. It’s the first time we’re talking about our SmileMaker platform with the leading mobile 3D scanning device. You’re going to see a shift now from our ability to grow, which has been marketing led to innovation led. There’s a pipeline of innovations that will continue to come out in the marketplace on both the scanning side, on material side, new materials for aligners, all kinds of new stuff, which is truly what this company was built for – the innovation.
And when we have you in for our Investor Day, which will be the first one we’ve had since we went public in 2019, we’re going to open the hood. You’re going to see – and I think you’ll be really surprised that the innovations, the technology, our manufacturing facility and our gen 2, it’s going to be very exciting for our investors and analysts to come in and take a look.
Operator
Our next questions come from the line of Robbie Marcus with J.P. Morgan.
Lily Lozada
This is actually Lily on for Robbie. I saw you guys implemented a price increase in the quarter. So just given how sensitive your core demographic has been to these inflationary headwinds, have you seen that price increase affect demand? And how should we be thinking about price trending over the rest of the year?
David Katzman
I can take that one. So, it was a 4% to 5% price increase depending on the country. It’s still not fully rolled out. We still have two more countries. It is rolled out in the US. And we didn’t see any type of conversion detriment at all. On the SmilePay side, which is really about the affordability, we kept the $89 per month and we just extended two months to the term. So, instead of 24 months, it’s 26 months. So for that price conscious consumer, still very affordable. It’s the least costly option out there if they want to straighten their teeth.
Prior to COVID, we have been taking regular price increases and we saw the exact same thing when we took it this time. No fall off in conversion. At the end of the day, demand is down, and we’ve adjusted our marketing spend accordingly. People just aren’t spending on discretionary items, especially goods versus services, that $65,000 a year customer is doing everything they can with almost 10% inflation now to stay on top of their expenses. So demand down, conversion about same. And so, as far as price increase, didn’t hurt the business at all.
Lily Lozada
As a follow-up, moving into the higher income demographic is obviously a big strategic shift for you guys and puts you up against some of the bigger competitors more directly. So, are there any metrics you can share on the success of the challenger campaign so far and how well you’ve been winning in this higher income market?
David Katzman
The challenger campaign was something that was really a marketing story to really alert the world and the consumer who’s interested in teeth straightening that you’re paying a three time markup for a similar type of service.
What we did find through, as we stated, some really intense qual and quant research, that consumer likes the telehealth platform, but doesn’t want to have a pure telehealth play, and we need to play in that market for the higher income consumers to be able to have a physical location that they can go to, especially to start their journey. They want to they want to see a GP or an ortho in an office, get an exam and then use that telehealth platform in addition to the brick and mortar for convenience, for added service, 24/7 coverage.
That’s what our SDC+ does. It’s a premium price. First time since we launched it, it will have two different price points. We have our $2,000 pure telehealth play and SDC will have a $3,900 price point and that was tested in our research as well. What is the right price point? Consumers felt that was still a value to the current offerings out there at $5,000 plus. Because what you’re getting, you’re getting the exact service that you’re getting at the brick and mortar. You’re going to have the doctor involvement. You can go – if you never want to interact with our telehealth platform, you don’t have to. There’s no requirement.
What we what we saw on the research is that people intend to start their journey at the brick and mortar, get introduced to the doctor. Then also you’ll have a second doctor on your case, our telehealth ortho or GP, and then a dedicated success team, 24/7 access, ability to upload and monitor yourself from home. So there is no need to go back into that office if you don’t desire to do so.
The research shows that this is the offering that the consumer wants, this dual access to both a brick and mortar and a telehealth play.
Operator
Our next question comes from the line of Erin Wright with Morgan Stanley.
Erin Wright
Can you speak to the traction with your partner network? It looks like it ticked slightly higher quarter-over-quarter and the stickiness of those relationships and the feedback and engagement level of the practitioners and how do you think the practitioners respond to innovation like the SmileMaker platform?
On that platform, do you still need a separate scan? I guess how do the logistics work? And what do you need in terms of regulatory approval? When will that materialize for you in terms of meaningful financial contributions?
David Katzman
A lot in that questionnaire. Let’s start with the partner network location. So, partner network was launched ahead of SDC+ and the research that we did on that high income consumer. It was designed to get the current GP market get some of their patients into SmileDirectClub.
Now that we have SDC+ and that is scheduled to launch in select DMAs – we’re launching in four DMAs at the end of the year – partner network has really morphed into SDC+. It’s really one initiative now. So, every office that we sign up will have two offerings. One would be exactly the telehealth SDC play which is the current partner network, and then they’ll also be able to offer that $3,900 dual approach where that GP in that office will play a bigger role in servicing that patient.
The fees are much higher to the office. We also did research on that, both existing GPs that are in our partner network location and potential GPs and it came back very, very favorable as far as the added fees and the ability for us to send new leads into those offices. Every single SDC+ customer that comes to our site that wants to transact will start their journey in one of those GP offices. So, that’s a lot of lead flow and higher income lead flow that’s going to be going to those offices. So, that was very appealing to them as well.
As far as the SmileMaker platform that you asked about, the regulatory approval, so what this is, is we’re able to take through your smartphone a video of your smile, takes about a minute, there’s about nine poses, we call it, and we’ll demonstrate that to you in the months ahead. What it does is, is getting all of your teeth – for the ability for us to take a 2D image into a 3D image, which then allows us to create that treatment plan that everyone knows in this industry.
That treatment plan today, it has enough fidelity to allow the customer to see how their teeth are going to move, it looks identical to what they would get after doing an impression kit or an intraoral scan at a dentist’s office. It has the 3D viewer, it shows you your top arch, your bottom arch, and you can see how your teeth will move over time and also tells you the duration of how long it’s going to take to move your teeth.
What it doesn’t do today is it doesn’t give you enough detail to make an aligner. You need to close to 100 microns of detail, so that aligner fits snugly on your teeth. So, after the consumer scans their teeth, takes about a minute, very easy to do, they’re going to get their, what we call, draft treatment plan. But it will be almost identical to what the final, what we call, smile prescription plan will be, which is signed off by the doctor which allows us to make those aligners.
The consumer will be able to buy because that’s what they’re after. You have to understand what the new smile is going to look like, how long is it going to take. So the ability to buy moves way up funnel as we illustrated in our investor deck from one to three weeks today because you’ve got to order kits, you’ve got to do the kit, you’ve got to do it right, you’ve got to upload your photos to get that treatment plan.
Today after scanning with our mobile 3D scanning app, they’re going to be able to get that custom treatment plan within minutes. And then the next step is buy with PayPal, buy with Apple Pay, enter a credit card and buy your aligner and you’re off to the races. What we do need to do is after they buy, we will we will then send out an impression kit today to get a more high definition or high fidelity impression in order for us to make the aligners. But their order is in place, we commit to a certain date as long as they get that impression kit back in time that we will do that.
Our plans are to continue to iterate on this SmileMaker platform. The next 2.0 version will be where we don’t need to do that kit. We have another interim step to get a more high fidelity scan. And then, eventually, what we call the holy grail will be that we won’t have to do anything at all. It’s all about just more data sets, more machine learning, being able to take a fraction of that back molar and recreate it with accuracy enough to make an aligner.
This is a good first step. This is revolutionary in the industry. Consumers today can’t get – see what the new smiles will look like unless they complete an impression kit or go to a local brick and mortar office with an intraoral scanner to see and then have to wait.
The other part of the AI that’s really compelling is the fact that we automated this treatment planning process. Prior to today, before the SmileMaker platform, it takes about 30 minutes for a CAD/CAM setup tech to create a treatment plan. Most of them are in Costa Rica, we have a big labor force there. We have automated that and we have, through AI, been able to create that treatment plan within a matter of minutes. If we weren’t able to do that, then this whole thing wouldn’t work. The consumer won’t be able to see instantly what their new smile would look like and be able to make that buying decision. So that’s another huge element to the success of the SmileMaker platform.
Erin Wright
You mentioned splitting third quarter, fourth quarter evenly from a top line perspective, I believe. But what gives you visibility on that? Does that assume an incrementally worse macro backdrop for you? What more can you do from a cost discipline standpoint if we do see that macro backdrop doesn’t improve from here?
Troy Crawford
I think what we’ve proven is that we’ve been able to be very flexible. We’re looking at a lot of cost savings initiatives. We started the year with $120 million savings initiative. We’re well on track for that. We continue to look at efficiency measures across the organization to find additional savings, certainly.
I would say general guidance around how to split up Q3 and Q4, but we really didn’t give that guidance overall. But I’d say if you look at what the overall for the year is related to EBITDA as well as revenue, we don’t really expect the end of the year to get any better. We did see some decline, obviously, between May and June and into July as well. So, it’s really a little bit of an unknown and that’s why we gave the guidance range that we did. But it’s hard to predict right now with what’s going on with 40-year highs in inflation and things like that, really seeing the stress on our consumer to kind of predict exactly where Q3 will shake out.
Operator
Our next question is coming from the line of Dylan Carden with William Blair.
Dylan Carden
I’m just trying to sort of understand guidance here. You gave the sales outlook and the gross margin, but there seems to be a pretty heavy lift to boil it all down to your EBITDA. And sort of between marketing and sort of G&A, how should we think about where to sort of posit some of that cost pressure?
Troy Crawford
Coming into the year, we gave the full year guidance. We saw Q1 come in with a lift over Q4, we felt really good about it. What we saw again in early May and starting to come into June and July is that consistent decline. But we’ve focused on efficiency throughout and looking at cost savings through the end of the year.
I think one of those triggers we can pull based on where we see the sales coming in is certainly marketing. And I think what you saw in Q2 was better EBITDA results, better free cash flow results, and much of that came from efficiency measures inside of marketing as well. So. we typically don’t give the breakout between G&A and marketing from an overall expense standpoint, but rest assured that we’re looking at all of those as potential levers depending on how sales come in over the back half of the year as to where we pull those triggers to reduce cost and save EBITDA which has been the trend we’ve seen coming into Q2. We really feel good about the cost initiatives that we put in place and our ability to execute on those. We’ll continue to be very cost conscious through the rest of the year to make sure that we lessen the impact on EBITDA of any additional impacts from negative sales trends.
Dylan Carden
I guess my question is, it seems like just to get to the EBITDA guidance, you’d have to assume homeless peak costs for both those line items. Am I thinking about that wrong? Is there’s sort of one-time items that are embedded in that outlook?
Troy Crawford
We do have some investments in partner network and small shops that we outlined in the investor deck. But, overall, we have a very flexible environment. There’s some fixed cost there, but we’ve taken a lot of those out. So, you do see a lot of flow through from the negative sales trends all the way to EBITDA. On the other side of that is these initiatives are able to provide additional revenue in the back half of the year and certainly into 2023. We’ll see the exact opposite of that, which is that revenue will flow through at a very efficient EBITDA rate as well.
I think one of the things we talked about was even a 25 basis point change in our conversion rate would drive an additional $200 million in sales and about $160 million in EBITDA. It also works the opposite way with some of those sales, as we’ve taken costs out of the business down to just what is really the variable cost there left.
Operator
Our next questions come from the line of Michael Ryskin with Bank of America.
Michael Ryskin
I want to follow-up on something that you touched on a couple of times with the SmileMaker platform. Could you just help us triangulate that 25 basis point lift in conversion? Why is that the right jumping off point? What work have you done to show that that’s the uplift could be expected? Is there further upside to that over time? Is that the second generation that you talked about having the – completely cutting out the impression kid. Is that’s what’s necessary to achieve that, the timing and the rationale for that metric?
David Katzman
First of all, it’s on slide 10 of our investor deck. You can see the funnel, current state versus SmileMaker state. That 25 basis point was an illustrative example. Now, it wasn’t just finger in the air and said hey, what if we get a 25 basis point improvement? It was based on current state. Our call to action today is. am I a candidate? That’s our lead gen workhorse. That’s how people typically start to see if they’re a candidate. They take a very simple assessment or a quiz. And on the other side of it, they hit a lander that says either you are or you aren’t and then your next step is to buy a kit or book a scan.
Today, with the new SmileMaker, what’s going to happen is, the call to action is see your new smile. Download our free app and within 60 seconds, you’ll see your new smile. We’ll show them the app in full view, how cool it is and all the AI technologies. You can see that one of the slides, we took some snapshots from the video. So what we do is we just said, Hey, if X percentage of people today are doing the smile assessment, let’s just assume the same percentage of people download the free app and do the mobile 3D scan. Okay? It’s actually a more compelling thing. You’re getting more out of it than you are just a green light or red light. You are a candidate or you’re not.
But we just assume, let’s just say it’s the same. And then we just said, okay, now from there, we can convert, they can actually buy their aligners. They don’t have to book a scan or buy a kit and go through that whole gauntlet to get it back or show up at the shop, and then have us make a human plan for them. And we applied a pretty modest conversion rate to the number of downloads that we’re getting. They’re not all going to buy right there on the site, just like not all of them when they get to the end of the smile assessment will buy a kit or book a scan. A good chunk of them do. And then the rest come through CRM or our contact center.
But at the end of the day, we said, hey, they have the ability to buy now, they can see their new smile with their custom treatment plan. Know exactly how long it’s going to take. We’ve made it very easy with PayPal options. And if you look at other ecommerce companies, most ecommerce businesses I’ve been associated with over the years, 2% to 5% visitor traffic conversion, depending on the ASP and the complexity. But we’re 0.5% right now. And it’s not because we’re at 0.5% of our demand. The demand is pretty good. Getting 150,000 to 200,000 visitors a day is pretty darn good. People are interested in this product. What happens is we made it very difficult for them to get to the finish line to buy their aligners.
Once they have the treatment plan in our current model, the conversion is extremely high. It’s surprisingly high. Again, to get to that 25 basis point improvement, we didn’t apply that same conversion, not even close. We just made some assumptions that – anything can happen. It could be something less than that, it could be something much higher than that. As we said, if you get up into the normal ecommerce conversion, when the person is emotionally charged, and they’re excited about the product, when they’re on the site and they can see what the their new smiles can look like, what will that conversion be. Time will tell. But it’s around the corner. This was not something that we dreamt up as a way to fix the current macro environment. This was something that we looked at doing when we founded the company, how difficult was it going to be to use your smartphone, to do a scan, to get a treatment plan, to buy your aligners and it’s taken all these years.
Fortunately for us – and when it comes to AI and machine learning, you don’t know when it’s going to be available. It’s not like a software and a cadence of releases and you can time it. It just hit sometimes, after a certain number of models that the team has worked on. And for us, it hit back in March, very exciting time in the company. And then, the company has been hyper focused on getting this out to market. We have to rework all of our websites, all of our marketing, to feature SmileMaker platform in all of our advertising. And like we said, the plan is to – we are going to launch this in Q4 in a smaller international country, work out some of the bugs with a fast follow on by the end of the year, or if not very early in Q1, in the US. And we’ll see what those numbers are and we’ll share those numbers. But they can be meaningfully bigger in this. Time will tell.
Michael Ryskin
The follow up I had was on just going back to the global macro condition and the situation today. I think you’d indicated that you expect that to linger for the rest of the year. Could you talk us through a scenario where it continues to remain under pressure next year? I think for Bank of America, our base assumption now, just among our strategists, is that the economic conditions persist for at least the first half of next year, possibly the entire year. So, how would that factor into your plans? You talked about flexibility in your cost base, sort of walk us through the scenarios if this is around for another year, year-and-a-half, the challenges for the consumer.
David Katzman
I can chime in and, Troy, you can add any color if you want. But we have two levers to pull. One is on the cost savings side which we started those initiatives in Q1. And you can see in Q2 here, even though the top line wasn’t there, it did pan out. We were able to preserve cash. We had the least amount of cash burn that we’ve had, even with a record Q1. We found a very efficient way to play with marketing, which is our biggest operating expense line by flighting, not always on. We have 60% aided awareness, we don’t have to be on 52 weeks a year in all the different channels that we have. So we’ve been able to pull back, save some money and not have it affect top line or help actually with the bottom line, cash saving. So, we’ll continue with the cost initiatives. We also have a lot of things that we’re working with our vendors and our software suppliers, getting better cost there. So we have a constant focus improving the operating expense structure within this company.
And the other side of it is the two – and they are the only initiatives in the company, right? There are no other initiatives other than SmileMaker platform and SDC+. And both those counteract the macro environment. So, they’re both going to launch by the end of the year, we’re going to start to see results. And hopefully, both work the way that we think they’ll work based on the research that we’ve done and the conversion funnel improvements that we think we’re going to get, which will really help with the macro because SDC+ is going after that higher income consumer, which is doing better than our $60,000 consumer in this environment. So, that’s going to help.
Even on the conversion side, even if the lower demand, all of a sudden that demand goes from 150,000 visitors a day to 100,000, if you’re still converting at 25 bps better, that’s going to significantly help your cash situation, your EBITDA situation. So, we’re fortunate that we have both these things that we’ve been working on for quite some time that are going to launch in the market. So, whether the economy gets better or not, if either or both those initiatives start to bear fruit, it’s really going to help our total revenue and EBITDA profile.
Troy Crawford
Both those also come with very little additional marketing spend, if any. So we’re really able to leverage those two initiatives for higher sales with very little additional marketing.
Operator
Our next questions come from the line of Laura Champine with Loop Capital.
Laura Champine
The technology to replace the kits, when does that roll out in full? And what kind of marketing spin do you intend to support that with?
David Katzman
It’s going to launch in Q4 in an international country. We’re not identifying that country. You’ll obviously hear about it when it does. It’s a smaller country. But we’ll get good learnings from it. And we’ll see what kind of technical bugs we have. We’re trying to understand what percentage of the customer base we’ll be able to scan with their smartphone, whether it’s Android or iPhone. And we’re not going back to all the early, early versions, but we would like to capture about 95% of the people who’ll be able to get a good accurate scan and a treatment plan fast follows. So that’ll happen in Q4.
Our anticipation is 60 days – 45 days to 60 days later, we will launch in the US as the next country. And then UK and Canada will follow on in Q1 and Q2. But we’re going to start to see results in Q4 here from this initiative. And we’re obviously very excited to report on that. And so, you’ll hear more about that.
Was there a second part of the question, besides the launch timing?
Laura Champine
What level of marketing spend do you intend to use to support it?
David Katzman
The way we built the P&L and the forecast, it’s the same marketing spend. Because when we market out there, whether it’s TV or Facebook search, the consumer doesn’t necessarily know what to expect when they get to the site. What do I have to do to engage with the brand. Well, they slowly learned that, oh, I got to order an impression kit or I’ve got to book a scan and go to a smile shop. What they’re going to learn with the same marketing spend is that you can interact with the brand today, use this cool technology, this phone scanning device, and then see what your new smile is going to look like, play with it, it’s got six different views, spins around in 360 degree fashion. So, we don’t anticipate a higher marketing spend.
There is a lot of debate internally that we would actually be able to stretch our marketing further because the same marketing spend showcasing this technology could get more people to interact with the brand. Versus today, it’s all about convenience, price and come to SmileDirectClub and get started for free versus we will now start to showcase the scanning technology in our advertising, show them what they’ll get in a full blown treatment plan and how long it’ll take to get your new smile, which could have your marketing dollars stretch further and get more people, let’s say, with the same spend.
Laura Champine
Just a housekeeping thing. Where do you expect equity-based compensation to be in the back half?
Troy Crawford
We typically don’t break that down fully. But I would say we’ve had some volatility in the first part of the year. A lot of that had to do with the restructuring initiatives that we were operating under. So, it was a little lower in this quarter. I’d say our general run rate is probably in the – more like in the $10 million range, but we’ve seen some volatility just because of the turnover we have related to some of the cost changes that we’ve made.
Operator
Our final questions come from the line of Dylan Carden with William Blair.
Dylan Carden
I realized that we haven’t spoken to and maybe you won’t, but the economics on the SDC+, the 3900, how you’re booking that on your own from revenue standpoint, sharing it with that partner, any color you can give on that?
David Katzman
You can follow-up. We’re not giving a lot of detail, but it is significantly more to the partner network GP office, is our current partner network offering. So, a big chunk of that extra $2,000 is for the doctor. There’s also cost that we have for the success team and also for sets of retainers that are included with it. So there’s some additional cost. But the net-net margin, there’s a lot more margin increase out of that $2,000 on the top line that goes to SDC. I don’t know if we’re sharing out the exact percentage of that, Troy.
Troy Crawford
We estimate it to be about 30% that we will share with – obviously, the GP will get a bigger chunk of that, which will give them incentive to get excited about the program, but should flow through at about 30% 30%.
Dylan Carden
30% to you of the $3,900.
Operator
Thank you. We have reached the end of our question-and-answer session. This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
Be the first to comment