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

Jon Block: Thanks, guys. Good afternoon. Mike, I think, I’ve got a $67 ASP for the PI for the quarter call that realized. And then Bjarne, I believe on the call you talked about the sort of $74 to $89 for the new tier of the PIs depending on usage and utilization. So can you just talk to that $74 to $89 on the tiers versus the $67 ASP realized for 4Q? And when we walk that back to the model for 2023 what that does or does it mean for the PI’s ASP?

Michael Watts: Jon, I’ll take a first step at this and then pass it back to Bjarne to provide additional color. But — so when you look at when we launched the pricing initiative came out February 1. So we allowed certain customers, of course, to make their buy ins in January. But it is a pricing program that is dependent on purchase volumes and you need to fight those volumes radically over the quarter so not significantly stocking up in that front. So when you look at the pricing as we move throughout the year what we’re looking at is in Q1 our pricing will land between that $67 to $74 range at around $70. And then as we move on from Q2 to Q4 we’re expecting pricing to land on average in the mid-70s for that range as people — it’s focused on higher adopters or higher utilization and we expect that most people will start to look at how they’re using the system and how they can benefit from the new pricing model.

Bjarne Bergheim: And Jon maybe I’ll take kind of the other part of that and maybe step back for a second and think about price in endodontic procedures and root canal procedures. I would say that a typical file company would extract on the order of about $25 per case. And as we look at where we are right now we’re effectively extracting three times that. That’s some context to roughly where we are. The other thing is in general right. We have done quite a significant quite an aggressive price increase here. And the reason why we’re doing that is that we believe we’re offering a lot of value and that we haven’t quite charged for that value so far. And also leading up to this price increase we did quite a bit of research looking at the price sensitivity and elasticity rather of this procedure. So we feel good about this move even though we recognize that it is an aggressive move. And it just goes back to the value that we feel that we’re offering in the procedure.

Jon Block: Yes. No understood. I think a lot of us are sort of a fatter proponent of the price. One clarifying question and then just a new one I’ll ask both of them upfront. The clarifying is everything that you guys just discussed on the price for the PI that was whether you’re CleanFlow or not. I just want to make sure that’s sort of an all-in number. It’s not contingent on if you’re one of the 50% or so of that moved to CleanFlow. So that was the clarifying. And then just a second question can you guys talk to the gross margin ramp throughout the fourth quarter? It was a good number was 27-and-change and within the band of the 25% to 28%, but where do you exit call it 4Q? And then what are the thoughts for a 2023 gross margin and how that progresses throughout the year as well? Thanks, guys.

Bjarne Bergheim: So maybe I’ll take the first part of that the clarifying question and then I hand it back over to Mike. So yes to your point we are charging the same for CleanFlow our current CleanFlow procedure instrument, our molar procedure instrument and also our anterior premolar procedure instrument. So there is no actually price differentiation there at this point in time. So I’ll hand it over to you Mike.

Michael Watts: Yes. So, Jon, I think for gross margin, we feel very good about how we exited 2022. We had talked in prior calls just about how we had some challenges in Q3. We expected those challenges to be worked through early to mid-Q4 and it played out just as we expected. So as we look forward into 2023, we look at the new pricing model. One of the big levers as well is the leverage from higher volumes for overhead and also just the mix of G3 and G4. Production of G4, as it begins to ramp up, we’re starting G4 production at lower levels. And similar to what we had experienced with CleanFlow, the initial cost of the G4 are going to be higher than when we hit a run rate of larger production. And we’re expecting that larger production run rate to hit middle of 2023, mid-summer.

And then, with all of that said, as you look at Q1 2023, we’re not expecting a significant uplift in gross margin from when we jumped off for the whole of Q4. So Q4, we ended at 27%. Q1 we’re in that same range, largely because of seasonality. So we talked a lot about seasonality of our business, where Q1 and Q3 tend to have lower capital sales volumes in Q2 and ultimately Q4 has the highest sales volumes. And we anticipate that seasonality will play out in Q1 this year. So with the lower volumes we see some downward pressure on margins, but we expect to offset with the higher price a little bit, but still come in at that 27% for Q1. And then, I think as we look to the rest of 2023, we can give more insights as we move forward into the year and as things progress, but we are expecting to see continued improvement in our gross margin position.

Jon Block: Thanks for the color, guys.

Bjarne Bergheim: Thank you, Jon.

Operator: And our next question is from Erin Wright with Morgan Stanley. Your line is now open.

Erin Wright: Hi. Thanks. A follow-up on the GP initiative. Does guidance reflect a meaningful contribution from GPs versus endos, or will that be a more measured approach? And how should we think about the mix of the installed base of GP versus endo by the end of the year? And as we think about that over the next several years, what does that look like for you? Thanks.

Bjarne Bergheim: Yes. So to your point, I think, on your point about guidance, right, guidance is — there’s really two key elements to the guidance. One is the uncertainties in the economy. But on the other side, we are thinking about the opportunity to go after the GPs here in 2023. And as we go through this, maybe, Erin maybe it’s worthwhile to give you a little bit of context. So if you look at our pipeline of deals right now, substantially the majority of our pipeline is in the endodontist segment, meaning that, that’s where our deal and pipeline resides. We have piloted going after the general practitioners in 2022. Now, as we go into 2023, we’re going to allow all of our sales reps to go after that — to go after the GPs. We are currently going to go after, like I alluded to earlier, about 4,000 GPs, because they’re doing the majority of — they’re doing the most root canal cases and they have technologies that complement the GP at GentleWave procedure.

So those — so that’s where who we’re going to be calling upon. And so, at the beginning of the year here, we have our sales team starting to call on these GPs, so we’re going to see them as we go, we think, into the year a higher and higher contribution of capital sales moving towards the GPs as the pipeline, if you will, of deals and the activities on the GP increases. And as we talked about in our prepared remarks, we are going to do this in a measured responsible way. We’re going to now continue to build out the infrastructure such that, as we continue to go into the year we can go after the GPs more and more aggressively, such as building out our professional education side, such as building out KOLs, et cetera, that will help drive GP demand more as we continue to move into this year.