SmileDirectClub, Inc. (SDCCQ)·Q2 2023 Earnings Summary

Executive Summary

• Q2 revenue declined 15% q/q and 19% y/y to $101.8M as seasonal demand and macro headwinds weighed on volumes, but adjusted EBITDA improved y/y for the fourth straight quarter to $(13.6)M, and management reiterated a path to positive EBITDA in Q3 and positive free cash flow in Q4 .
• Management raised full-year revenue guidance to $425–$475M (now including SmileMaker Platform and CarePlus), nudged gross margin higher to 73–76%, but widened adjusted EBITDA loss to $(40)–$(10)M and lowered capex to $30–$35M, reflecting later launch timing and added cost investments offset by efficiency gains .
• Key product initiatives advanced: AI-powered SmileMaker Platform launched in the U.S. in late May (top-10 Apple App Store medical category) and CarePlus (premium hybrid offering) to be available in all U.S. SmileShops by end of August; ASP reached an all-time high at $1,976, aided by reduced discounting and late-July price increases .
• Liquidity remains a focus: $10M founder-funded revolver to bridge growth initiatives; $58M cash and $179M net A/R at quarter end; $137M drawn on the $255M HPS facility; discussions ongoing to expand ABL and restructure the balance sheet .

What Went Well and What Went Wrong

• What Went Well

  • Continued bottom-line momentum: “fourth straight quarter of year-over-year adjusted EBITDA improvement” and “fifth straight quarter of improved year-over-year free cash flow” with Q2 adjusted EBITDA improving to $(13.6)M and FCF to $(28.1)M .
  • Pricing/mix tailwinds: Aligner ASP reached an all-time high of $1,976 (lower discounting; price increases late July), with implicit price concessions improving to 10% from 11% in Q1 .
  • Strategic launches on track: U.S. launch of AI-powered SmileMaker Platform (SMP) in late May; app in Apple’s top-10 medical category; CarePlus priced at $3,900 rolling out broadly via SmileShops/Partner Network, supporting upsell and efficiency .

• What Went Wrong

  • Top-line pressure: Total revenue down 15% q/q and 19% y/y to $101.8M; unique aligner shipments fell 21.6% q/q to 46,774 due to seasonal Q1→Q2 pattern and macro headwinds .
  • Gross margin compression: 71.6% vs 72.5% in Q1, driven by fixed-cost deleverage on lower sales .
  • Liquidity and legal overhangs: Reliance on $10M founder-funded revolver and plans to restructure; discussion in Q&A of a potential $63M Align matter (company disputes; not final), keeping balance sheet risk elevated .

Financial Results

KPIs

Cash Flow and Liquidity (select items)

• Cash from Operations: Q2 $(17.8)M; Q1 $(32.6)M .
• Free Cash Flow: Q2 $(28.1)M; Q1 $(40.6)M; Q4 2022 $(63.3)M .
• Balance Sheet: Cash $28.9M; Net A/R $178.8M (current + non-current); LT Debt $863.4M at 6/30/23 .

Guidance Changes

Management reaffirmed expectations for positive adjusted EBITDA in Q3 2023 and positive free cash flow in Q4 2023 .

Earnings Call Themes & Trends

Management Commentary

• “We remain on track to achieving EBITDA profitability in the third quarter and positive cash flow run rates by the end of the year.” – CEO David Katzman .
• “Since the U.S. launch, the [SMP] app has consistently been in the top 10 in the Apple Store medical category… SMP is showing signs of driving stronger marketing efficiencies… reducing our cost per lead.” – CEO David Katzman .
• “CarePlus priced at $3,900… provides an upsell opportunity… from our trained SmileShop team members who can then refer customers to a nearby partner network location.” – CEO David Katzman .
• “Aligner ASP… $19.76 [per hundred dollars = $1,976]… a record during this quarter… price increases… and CarePlus… we expect the ASP to continue to increase.” – CFO Troy Crawford .
• “Gross margin for the quarter was 71.6%, down from 72.5% in the first quarter… driven primarily by deleveraging of fixed costs on lower sales.” – CFO Troy Crawford .

Q&A Highlights

• Contributions from SMP/CarePlus: Too early to quantify; expect higher ASP and contributions in H2; plan to provide more color as metrics stabilize .
• Consensus/guide bridge: One analyst characterized results as “pretty much in line with consensus,” with revenue step-up into H2 driven by SMP/CarePlus and pricing; core guidance reduced on cautious macro, offset by initiatives .
• Liquidity runway: $10M founder-funded revolver intended to bridge to EBITDA/FCF inflections; active discussions to expand ABL and pursue broader balance sheet restructuring .
• EBITDA drivers: High-flow-through CarePlus dollars (~60% EBITDA flow-through), lower CAC from SMP, store expansion as profitable investment, and ongoing G&A run-rate savings into H2 .
• Legal risk: Align arbitration not finalized; petitions to vacate filed; appeals possible; multiple funding options if needed .

Estimates Context

• Wall Street consensus from S&P Global was not available for SDCCQ in our data feed. However, on the call a JPMorgan analyst noted the quarter appeared “pretty much in line with consensus numbers,” and management raised full-year revenue guidance while detailing H2 drivers from SMP/CarePlus and pricing .
• Given the guidance mix shift, Street models may need to reflect: higher FY revenue range, modestly higher gross margin, lower capex, and wider adjusted EBITDA loss range (but Q3 EBITDA+, Q4 FCF+) .

Key Takeaways for Investors

• Execution on initiatives over revenue growth: Despite a 19% y/y revenue decline, EBITDA/FCF improved y/y; near-term stock drivers are proof of Q3 EBITDA+ and Q4 FCF+ rather than top-line inflection .
• Watch adoption metrics: SMP U.S. scaling and CarePlus rollout across all U.S. SmileShops by end of August are catalysts; sustained ASP expansion and CAC efficiency are key to margin inflection .
• Guidance mix matters: Revenue range raised (now includes initiatives) and gross margin nudged higher, but EBITDA range widened lower and capex cut—models should reflect higher H2 ASP and initiative mix with cautious core volumes .
• Liquidity path underpins equity case: Founder-funded revolver, ABL expansion talks, and restructuring process are pivotal; monitor cash burn trajectory and financing milestones alongside operating progress .
• Legal overhang: Align matter remains unresolved; while management disputes it and notes appeals, potential cash obligations add uncertainty to the balance sheet .
• Tactical setup: Near-term catalysts include August/September rollout milestones, Q3 print confirming EBITDA+, and any financing/restructuring update; delivery against these could reset sentiment despite macro headwinds .