Sonendo, Inc. (NYSE:SONX) Q4 2022 Earnings Call Transcript

Sonendo, Inc. (NYSE:SONX) Q4 2022 Earnings Call Transcript March 8, 2023

Operator: Good afternoon and welcome to Sonendo’s Fourth Quarter Earnings Conference Call. At this time, all participants are in listen-mode only. We will be facilitating a question-and-answer session towards the end of today’s call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Louisa Smith from The Gilmartin Group for a few introductory comments.

Louisa Smith: Thanks operator. Good afternoon and thank you for participating in today’s call. Joining me from Sonendo are Bjarne Berghei, President and CEO; and Michael Watts, CFO. Earlier today, Sonendo released financial results for the quarter ended December 31, 2022. A copy of the press release is available on the company’s website. Before we begin, I’d like to remind you that management will make statements during this call that include forward-looking statements within the meaning of Federal Securities laws which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results, or performance are forward-looking statements.

All forward-looking statements including those relating to our operating trends and future financial performance, the impact of COVID-19 on our business, expense management, expectations for hiring, growth in our organization, market opportunity, revenue guidance, commercial expansion, and product pipeline development are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business please refer to the risk factors section of our most recent annual report on Form 10-K filed today, March 8th, 2023 with the Securities and Exchange Commission and available on EDGAR and in our other public reports filed periodically with the SEC.

This conference call contains time-sensitive information and is accurate only as of the live broadcast on March 8th, 2023. Sonendo disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements whether because of new information, future events, or otherwise. And with that, I will now turn the call over to Bjarne.

Bjarne Bergheim: Thanks Louisa. Good afternoon everyone and thank you for joining us. For today’s call, I will provide opening comments and the business update, followed by Mike who will provide additional detail regarding our quarterly and full year results, and guidance for 2023 before opening the call to Q&A. We are pleased with Sonendo’s performance in 2022 with this being our first full year as a public company. Revenue for the fourth quarter of 2022 was $12.2 million, representing growth of 24% year-over-year. Revenue for the full year was $41.7 million, a growth of 25% over 2021. Our fourth quarter was marked by some significant milestones including the launch of our next-generation GentleWave G4 console and the one millionth GentleWave procedure.

Coupled with the launch of our CleanFlow procedure instrument earlier in the year, we’re proud of the advances in innovation we have made since we began commercialization and look forward to continuing to redefine the standard-of-care for root canal therapy. As of December 31st, GentleWave’s ending installed base was approximately 976 units compared to approximately 820 units on December 31st 2021. In the fourth quarter, we sold 58 GentleWave consoles. Since the initial launch of our GentleWave G4 console, we’ve seen demand shifting primarily towards the newer model over the G3 console, which will ultimately lead to increased practice efficiencies and an improved ASP mix. With respect to procedure instrument we were encouraged by strong procedure utilization rates, equating to approximately 75,000 procedures across our installed base for the quarter and we have also been pleased with the initial adoption trend for the CleanFlow PI that we launched in April 2022.

The GentleWave system and its CleanFlow technology provides a less invasive and less painful alternative to traditional root canal therapy while also creating a simplified workflow into operatory. We continue to convert accounts from our legacy PIs to CleanFlow and we are maintaining our previously stated pace to achieve full conversion by mid-2024. In the fourth quarter, approximately 47% of PI unit sales were CleanFlow. Customer adoption of our CleanFlow technology is a critical factor for margin inflection in the business, as it uses fewer components and is simpler to assemble. This coupled with the eventual obsolescence of the previous generation procedure instruments will improve our gross margin profile. The consumable team of our recently bifurcated sales force is continuing to support the conversion of doctors to CleanFlow, onboard our new practices and oversee account management responsibility of our users.

Providing support on how to efficiently incorporate the devices into dental practices has been a critical piece of the team’s approach and we expect that throughout 2023 that we’ll be able to expand the opportunity for increased practice volumes. Lastly, on February 1, we launched a new tiered pricing model for procedure instruments similar to what we had pre-COVID. PIs will have a set price with discount tariffs based upon quarterly procedure volume and purchase quantities. Pricing now begins at a higher base with multiple tier discounts available ranging from $74 to $89 per PI. This new pricing model incentivizes higher utilization. Before reviewing additional business updates, I’d like to provide some commentary on our perspectives of the current macro environment and how we foresee potential impacts on the business.

In our third quarter call, we observed that supply chain headwinds have negatively impacted our gross margins. We’re pleased to have navigated those uncertainties by establishing stability throughout our supply chain and inventory channels. We expect gross margins to improve going forward, as the CleanFlow adoption rates rise and as we realize operational efficiencies related to higher growth as well as seeing the impacts of our new pricing model. As anticipated, system placements increased in the fourth quarter sequentially 53% higher than Q3 likely due to year-end tax incentives, the buying habits of our customers and the GentleWave G4 launch. As we move into 2023, we expect historical seasonal trends to continue with Q1 and Q3 being our lowest periods and Q4 being the highest.

Still as we have discussed previously, based upon the macro environment and higher interest rates, we continue to see underlying conservatism around purchases of capital equipment. And as a result, we may experience longer selling cycles throughout the year. Although demand remains strong, it is important to point out that we remain steadfast in our value proposition and that our capital sales team is still experiencing strong lead generation and pipeline opportunities. We’re confident that our technology is well positioned to support doctors in expanding their practices and improving the patient experience. I’ll finish with some recent business highlights before asking Mike to review financial results in more detail. As I briefly mentioned at the start of my commentary, in December we hit a significant milestone for Sonendo, the one millionth GentleWave procedure performed since we started commercialization.

This is a testament to Sonendo’s commitment to innovation in dentistry and endodontics and the increased adoption and utilization of our revolutionary technology. As underscored by the results of a recent survey, the GentleWave procedure resonates well with consumers because of its ability to preserve to structure and enable an enhanced level of cleanliness all while promoting faster healing with minimal to no pain. The survey conducted in December indicated that 93% of respondents would prefer to undergo the GentleWave procedure over traditional root canal therapy and that 63% of patients would be willing to search for a new doctor that offers our technology if their existing provider did not. Additionally, 81% would be willing to pay at least $250 to access the technology.

So it is clear that we are elevating the patient experience in delivering incredible outcomes through this minimally invasive procedure. We’re thrilled to be at the forefront of modern root canal therapy. To that end, we’re committed to getting the GentleWave system into the hands of many more doctors to help elevate their practice efficiency, patient experience and become the standard of care for root canal therapy and tooth decay. Our near-term focus continues to be on endodontists who perform root canal therapies for the majority of their treatments as evidenced by our support of over 20 endodontic residency programs since 2020. We have invested in clinical training and education of emerging and established clinicians and we remain supporters of the specialty.

Sonendo was sponsored the American Association of Endodontics’ Save Your Tooth Month in 2023 and 2024 and we’ll keep advocating for the training of endodontists on the GentleWave system as part of their clinical education. With that said, we also recognize that general practitioners represents a significant market opportunity, performing 75% of all root canal therapies across US and Canada. Our GentleWave G4 system is well-positioned to improve workflow efficiency across all practices. We’re beginning to introduce the technology to higher-volume GP practices that are less likely to refer to root canal procedures to endodontists. With the GentleWave procedure, these GPs will be able to offer their patients an elevated experience while seamlessly incorporating our technology across multiple laboratories to experience the benefit of the GentleWave procedure.

The initial feedback we received from early GP adopters has been overwhelmingly positive and we believe this next phase of our commercial strategy has the opportunity to transform the endodontic landscape. We plan to implement a measured and responsible rollout to GPs throughout 2023 to ensure that they receive the same level of industry-leading support from our sales and clinical teams. And finally, we’re looking forward to being able to commercialize CleanFlow technology for anterior teeth towards the middle of the year. Anterior procedures account for approximately 20% to 25% of root canals performed today. Transitioning anterior cases to the CleanFlow PI will support increased adoption, improved margin profile and enhance practice efficiencies.

Adding to CleanFlow’s present clearance for molar and premolar teeth, we’re excited about the opportunity to offer customers a single PI for all root canal therapy applications. With that, I will turn the call over to Michael Watts, Sonendo’s Chief Financial Officer. Mike?

Michael Watts: Thanks Bjarne. As previously mentioned, Sonendo total revenue for the fourth quarter of 2022 was $12.2 million, compared to $9.9 million for the fourth quarter of 2021, an increase of 24%. Growth in the quarter was primarily in our product segment, which grew 29% driven by increased procedure instrument and GentleWave console sales, as well as other product segment revenue. In the fourth quarter, GentleWave console revenue was $3.9 million, compared to $3.1 million in the fourth quarter of 2021. GentleWave console average selling prices in the quarter were roughly $66,000 with higher ASP attributed to favorable G4 mix. Turning to procedure instruments. PI revenue was $5 million compared to $3.8 million in the fourth quarter of 2021, an increase of approximately 31%.

PI revenue growth was driven primarily by the GentleWave increased installed base, procedure instruments sold and an approximately 9% increase in average selling prices compared to the prior-year period. Procedure instruments sold in the quarter totaled approximately 75,000. Total other product related revenue was $1 million in the quarter. Total software revenue for the fourth quarter was $2.4 million compared to $2.2 million in the fourth quarter of 2021, an increase of 6%. Gross margin for the fourth quarter of 2022 was 27% compared to 25% in the fourth quarter of 2021. This is in line with our previously stated range provided during prior earnings calls and will continue and improve as CleanFlow adoption rates increase along with increasing revenues.

Total operating expenses in the fourth quarter of 2022 were $18.1 million, compared to $16 million in the same period of the prior year. The increase was primarily driven by higher personnel expenses relating to our commercial expansion and related revenues, as well as higher general and administrative costs, primarily legal and accounting associated with operating as a public company. Loss from operations was $14.8 million in the fourth quarter of 2022, compared to $13.6 million in the fourth quarter of 2021. Net loss was $10.9 million for the fourth quarter of 2022, compared to $13.7 million in the fourth quarter of 2021. Please note that for Q4, we recorded a $4.4 million gain relating to the US government’s, Employee Retention Credit program.

The ERC credit was recorded in other income and expense, with the receipt of funds dependent on the internal revenue services review and acceptance of our application. Turning to our 2022 full year results. As Bjarne mentioned previously, 2022 marks Sonendo’s first full year as a public company. Total revenue for the full year was $41.7 million, compared to $33.2 million in 2021, an increase of 25%. GentleWave console revenue for full year 2022 was $10.8 million, compared to $8.4 million in 2021. Average selling price of the GentleWave console in 2022, was approximately $61,000. PI revenue was $18.9 million in 2022, compared to $14.4 million in 2021, an increase of approximately 30%. Procedure instruments sold in the year totaled approximately 287,000 units.

Total other product-related revenue was $3.6 million for the full year 2022. Total software revenue for 2022 was $8.4 million, compared to $7.4 million in 2021, an increase of 13%. Gross margin for the full year 2022 was 25%. Total operating expenses in 2022 were $68.7 million, compared to $52.7 million in 2021. Loss from operations was $58.2 million for the full year 2022, compared to $44.4 million in 2021. Net loss was $57.1 million for 2022, compared to $48.5 million in 2021. Our cash and cash equivalents and short-term investments as of December 31 2022, were approximately $91.4 million, while our long-term borrowings totaled $40 million. Moving to our financial guidance. For 2023, we are anticipating our annual revenue to be in the range of $48 million to $51 million.

Lastly, today we filed an S-3 registration statement, commonly called the Shelf registration allowing us to register shares, with a value of up to $100 million, which we view strictly as a matter of good corporate housekeeping. At this point, I’d like to open up the call for questions.

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Q&A Session

Operator: Our first question is from Jason Bednar with Piper Sandler. Your line is now open.

Jason Bednar: Hi, good afternoon, guys. Thanks for taking the questions, Nice close to the year here. Wanted to ask around guidance the $48 million to $51 million in revenue. Can you talk about, what’s embedded here for capital sales? And maybe, how are you thinking about net user growth versus maybe replacement systems? It looks like you might have had several upgrades or replacements that may have occurred here in the fourth quarter. So, I’m just trying to piece out, what to expect your growth and net growth in 2023?

Bjarne Bergheim: Hi, Jason and thanks for the question. Maybe I’ll take the first part of that and then Mike, can add on to the second part. I think on a shorter-term horizon here, as we sit in Q1, capital equipment demand and trends have been similar to what we’ve seen in the last half of 2022. In other words, we don’t see that it has necessarily deteriorated further. But, as we look further into the year, a key unknown for us and a lot of other capital equipment companies out there of course, is the economy. And specifically the macro environment, thinking about interest rates of course thinking about also whether or not the economy is going to have a soft landing or a hard landing. At the same time, though, we remain very excited about the long-term growth story here at Sonendo.

Specifically for this year, the upside for us is going after the GPs. But so far, we’ve been really focused on obviously, the specialist endodontists. Now we’re starting to go after the GPs, which is a big opportunity for us. We are now giving our sales reps significantly more doctors to call on. Obviously, still early, but still very, very excited about this opportunity, we found it’s typically an easier sale. The value proposition resonates very well. And the GP opportunity, we think will add to an already strong pipeline that we have on the endo side. So as we sit here at the start of the year, we’re excited about the fact that we have obviously a new GentleWave G4 platform and we also have a new procedure that’s being CleanFlow. So, very excited about the commercial opportunities ahead.

So I think as we think about the guidance, which I think is the first part of your question here, we’re really excited about the opportunity ahead, but we’re giving guidance that’s reflective on the macro environment. And then with regards to user growth, obviously, it’s just a big lever obviously in the business we’re going to be acutely focused on what we can control this year, specifically being acutely focused on driving G4 sales, which is the main kind of lever in the business, right. Of course, also continuing to drive CleanFlow sales in both into the endodontist and GP segment setting us up for a long-term growth story. I don’t know, Mike, if there’s anything else you want to add?

Michael Watts: No. Just to answer the second part of your question, Jason, just about the net users versus replacements. So we did in Q4 as we launched Q4, we had a lot of people were very excited and saw it come out and we offered a limited program for certain existing customers in Q4. So our growth placements in the quarter were actually 58. You’ll do the math and see that we had 42 net. So roughly 16 of our customers took advantage of the upgrade program. Now, as we head into 2023, we’re not offering any special incentives. We did have some customers that have taken advantage of the program in Q4 that will work through in Q1 of this year. But right now, we don’t have any special incentives in place for people to trade up their G3s into G4. The G3 system is still a very good system. It’s excellent. For many of our providers, it’s sufficient for what they need today, and we continue to look at the programs that we offer. So I hope that answers your question.

Jason Bednar: Yeah, yeah, no it definitely does. Thanks so much. I actually do want to come back to that the GP initiative. I know something, a lot of us have been looking at, or you’re talking about for quite some time with the story kind of the potential opportunity. So maybe, just I guess how are you planning to support this channel? Do you need a partner to assist in the go-to-market and support activity? It sounds like right now you’re going it alone. I’m just curious in your thoughts there and so having a pack of several in here. But I know part of the hesitancy here in the past and going after GPs is not to frustrate the referral pattern and disrupt or upset the endos out there. I guess, how are you planning to navigate this dynamic with the move to GPs, or maybe said, a different way what’s changed strategically that makes now the right time to go after this really large market opportunity?

Bjarne Bergheim: Hey, Jason, good question. So maybe I’ll start by tackling the last part first. What has changed strategically? What has changed is that, we now have this CleanFlow procedure instrument that makes this procedure very, very simple and straightforward to do. And that coupled with a very nice G4 platform, we really believe we have the product that’s appropriate to go after the GP segment, because it is a simpler and easier procedure to do now. Then with regards to the other part of your question in terms of not frustrating the referral pattern, I think that’s another thing that we have spent a lot of time thinking through and thought about. If you do a subset analysis of the GPs here, there’s roughly about 50,000 GPs that keep the majority of their cases in-house meaning that they’re not referring out to endodontists, and that is the segment that we’re initially going to go after.

And specifically, what we’re doing is that, we are almost doing another subset analysis looking at out of those 50,000 non-referring GPs, who are the ones that are doing the most of root canal procedures, which €“ and then on top of that, who are the GPs that have technology like CAD/CAM et cetera, that can complement and be very complementary as we roll out the GentleWave procedure to the GPs. So that’s the thinking there to be very careful about exactly how we profile the GPs. With regards to the first part of your question regarding support we — our plane is to do this alone. We do not currently plan to have a distribution partner for example to do this and we think we’re well set up actually to go after the segment alone with our current sales reps.

Jason Bednar: All right. Understood. I’ll hop back in queue. Thanks so much guys.

Bjarne Bergheim: Thank you, Jason.

Operator: Our next question is from Jon Block with Stifel. Your line is now open.