Post-IPO Review: SmileDirectClub Guides To Potentially Strong Q3 Result

IPOStreet

SmileDirectClub (SDC) went public in September 2019, raising $1.3 billion in gross proceeds from an IPO.

The firm sells teeth alignment and related products via its online service, professionals, corporate partners and its ShileShops retail stores.

SDC is guiding new orders to a strong growth bounce back in Q3 2020, so I’m Bullish on the stock from here.

Nashville, Tennessee-based SmileDirectClub was founded in 2013 to provide patients in need of teeth alignment with aligners directly through its telemedicine platform, both through static SmileShops and through SmileBus-a mobile SmileShop.

Management is led by David Katzman who has been with the company since its inception and is also Camelot Venture Group 's founding and managing partner.

The firm's 300 SmileShops are places where users can learn more about the company's aligners and acquire a free 3D image of their teeth. They are spread throughout the U.S., Puerto Rico, Canada , Australia, and the UK.

SDC's tooth aligners are acquired through a process where the user takes a free 3D image at a SmileShop or SmileBus, or purchases an online 'impression kit' which allows them to take a mold of their teeth and send it to SDC where a licensed dentist or orthodontist reviews the clinical information and prescribes alignments with an average six-month treatment plan.

Below is a short summary video of the company's offerings:

Source: SmileDirectClub

Aligners are shipped to customers via mail, while the dentist who prescribed them is responsible for examining the user 's progress through the company's telemedicine platform at least every 90 days.

Management believes the lower cost, less time and physician visits required, as well as SmileDirectClub's wide accessibility, represent the core competitive strengths of the firm.

Access Dental Lab, a wholly owned subsidiary of SDC, is responsible for producing the company's aligners.

The global dental braces market is projected to grow at a CAGR of 8 percent between 2018 and 2023, according to a Research and Markets 2019 market research report.

Rapid technological advances as well as an increasing need for dental treatments due to rising oral healthcare concerns are the main factors driving forecasted market growth.

Major competitors providing or developing dental braces shall include:

  • 3 M (MMM)
  • Align Technology (ALGN)
  • Danaher (DHR)
  • DB Orthodontics
  • Dentsply Sirona (XRAY)

The company's aligners require fewer (or none) doctor visits, less cost to acquire, and are delivered through the mail, while inspections are done through a telemedicine platform, thus providing better and easier accessibility for the customer.

SDC 's quarterly topline revenue was uneven in 2019, and sharply contracted in Q2 2020 as a result of the Covid-19 pandemic effects.

sdcrev

Quarter-by-quarter gross profit worsened in 2019 and fell sharply in Q2 2020, as shown here:

sdcgross

Operating losses per quarter also fell, but in the most recent quarter were notably reduced:

sdcop

Earnings per share (Diluted) remained negative but, in Q2 2020, the company posted its best result:

sdceps

Source for chart data: Seeking Alpha

Since its IPO, SDC 's stock price has dropped 59.6 percent vs. the U.S. A rise of 14.4 percent in the Medical Equipment index and a 16.7 percent rise in the overall U.S. market over the past 12 months, as shown in the chart below:

sdcchart

Source: Simply Wall Street

Commentary

In its last earnings call, management highlighted exceeding its expectations and the ‘strength of our teledentistry platform.’

Management is focused on driving new customers through three channels, professional dentists, corporate partnerships and retail.

Notably, the company continues to confirm that its small shops footprint serves primarily as a fulfillment network-most demand comes from its Website and teledentistry program.

So, management said its omnichannel approach ‘provides the ability to drive more demand through a fixed infrastructure over time.’

The company's international channel is also a focus, with management seeing 35 percent of its total adjustable international market.

As for its financial results, revenue decreased by 45 percent over the second quarter of 2019, due to the decline in aligner shipments due to the negative impact of the Covid-19 pandemic.

In Q2 2020, 67 percent of the company 's customers bought through their SmilePay program, which was the same as in 2019.

Additionally, it noticed no change in delinquency rates for its SmilePay financing program.

Management has consolidated operations as a result of the change in work from home environment since the onset of Covid-19, which may increase closure costs in the short term but in the longer term reduce operating costs.

SDC closed the quarter with $389 million in cash and equivalents, and the quarter produced a negative free cash flow of $35 million, an improvement of 64 percent sequentially over the previous quarter, so the company has ample cash resources.

For Q3, 2020, the company expects to ship 83,000 to 87,000 aligner orders based on recent demand versus 57,136 orders in Q2, a quarter-over-quarter increase of 49 percent.

If SDC achieves this, it will represent a strong bounce back from the likely worst of the Covid-19 pandemic's effects on the firm's results.

Most analysts knew Q2 would be a dismal outcome for companies like SDC. While the stock has recovered from its low of $3.99 to its current $7.75, I don't think the firm has been given enough credit given the strong guidance based on previous 30-day results.

SDC stock was at $15.00 just prior to the onset of the pandemic and now it is trading at half that figure.

I believe investors haven't caught up with the firm's potential growth rates based on management's expectations.

Combine that with ample cash reserves to weather continued pandemic uncertainties and an online focus and I’m Bullish on SDC from here.

BULLISH

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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