A true ‘Megatrends’ IPO with good alternative data metrics
The US IPO market continues to be very healthy, and we continue to post our ratings here on some of the more exciting companies to come on the market: Today’s post focuses on SmileDirectClub (proposed ticker SDC ) but also check out our recent posts on
You may already know Invisalign (through Align technology, a company with nearly twenty years of history in the public market): transparent plastic “orthodontic appliances” which have grown enormously in popularity over the years for the treatment of certain cases of malocclusion. From the client’s perspective, the main difference between ALGN and SDC is that the SDC service does not require in-person visits to an orthodontist, and the lowest cost for SDC. Looking at ALGN most recent 10-K repository, we can see that the company has grown its revenue at a 27% CAGR since 2014 and ended 2018 with almost $ 2 billion in revenue.
There is a more recent crop of entrants to the transparent aligner space, the most notable of which is SmileDirect. We read the S-1 and the S-1 / A with great interest because SmileDirect is at the intersection of several mega-trends. This is not hype: we really mean it. SmileDirect has both sales growth and now sales volume to prove it. Income grew 7-fold from 2016 to 2017, then almost 3-fold from 2017 to 2018, and is now on track to more than double in 2019. Patients (or, if you prefer the more modern word choice of the company, “members”) are now over 700k cumulatively.
For comparison, it took ALGN double from 2010 to 2014, going from $ 387 million in revenue to $ 761 million, when it looks like it will only take a year for SDC to double to roughly the same starting point for about $ 400 million in revenue.
SDC’s explosive growth has, in our opinion, been fueled by genuine megatrends. These megatrends are:
- Direct to Consumer (DTC) with subscription and omnichannel features
- Innovations in healthcare delivery
- Access to health care and affordability
And SmileDirect appears to be winning across the board with vertical integration of cutting edge technologies, in-house funding, highly skilled regulatory offshoring / arbitrage, and good marketing.
The customer journey at SDC begins with a visit to one of the 300+ SmileShops (co-located at CVS and Walgreens in the US; also UK, Canada, PR, Australia) for a scan, or by a print at home kit. Company staff in Costa Rica (orthodontists and technicians) then prepare a treatment plan, which the client approves, with final approval (prescription) being performed by a licensed American orthodontist. The alignment sequence is shipped in one shipment from a US facility (one in TN, one under construction in Texas), with periodic checks required. The main advantages, as described in S-1, are (1) lower cost (list price less than $ 2,000 versus $ 5,000 to $ 8,000); (2) expanding access to treatment through teledentistry (no office visits; the company also reports that less than 40% of US counties have orthodontists); (3) shorter processing time (5-10 months vs. 12-24 months, although it is not clear to what extent this is due to the specifics of the case), and (4) captive funding (with access ” network ”recently extended with two large American insurers).
We see the “megatrends” at every step: DTC infrastructure enables direct relationships, omnichannel presence increases reach, and of course the product / service is 100% personalized. The combination of DTC and lower-cost, highly skilled operations expands access by reducing costs (although two state dental boards, in LA and GA, have contested the latter – we consider this to be ‘regulatory arbitration to have the last “point of contact” done in the US, and the SDC is currently suing both entities). There is much more of management’s presentation on the total market potential and others. aspects on Retail Roadshow (link usually available before the actual offer). The history of management is very interesting: CEO David Katzman has a long history of involvement in disruptive services (Quicken Loans being the most famous, but also a direct lens business sold to the leader in this space, and a business previously acquired by Home Depot). The subscription element is the growing activity of retainers after treatment (a substantial percentage of patients are people who had braces years ago but whose teeth have receded).
The internal financing part is also an interesting aspect of the operation: the company offers a financing option “without credit check” at 17% APR ($ 250 down payment, which covers the cost of the aligners, then $ 85 of monthly payments over 24 months). ). The default rate is less than 10%. The most recent data shows that 65% of customers use SmilePay, indicating both the importance of having an affordable and transparent option for discretionary procedures. Tour CEO said previous experience with third-party funding was negative (too big drops). Complications of consumer finance regulation form an additional ‘gap’ for the model.
We also looked at the marketing side of this remarkable growth story: the company claims to have around five million unique visitors to its website each month, and that it is able to convert around 1% of them. in new customers, compared to 0.5 previously. % in 2016. The company also improved its appointment rates in SmileShops and the acceptance of impression kits. The company also lists more than 300,000 followers on Instagram and more than 500,000 likes on Facebook, as of June 2019. These figures are currently more than 360,000 followers on Instagram (20% growth in three months) and 531 000 likes on Facebook. The company also improved the very high review scores (4.9 / 5.0) and the Net Promoter Score of 57 (extraordinarily high, tied with Zappos, according to the roadshow linked above).
We’re seeing some really good long-term trends for major search trends for transparent aligners, as a research topic (a larger collection of searches, versus a specific term). This is a valid signal because aligners are a high investment buy, both in terms of money and time (or, as the company calls it, a ‘highly thoughtful buy’ with long delivery cycles: the roadshow presentation mentioned that many of the customers are 7 to 12 month prospects). We can also see spikes in research interest in January, similar to interest in fitness and other self-improvement topics. (interactive graphic link)
The customer journey can start with broad searches, but a lot of the research is then done on company websites. We pulled the Alexa data for SDC, ALGN, as well as the DTC competitors that SDC lists in S-1: CandidCo, SnapCorrect, and SmileLove. We can clearly see that the industry’s overall web traffic has increased and that SDC is now more important than ALGN. We display 30-day moving averages (Interactive graphic link)
Perhaps most interesting for us is the ‘market share’ of web traffic that SDC holds compared to the historical leader ALGN built from the aggregate chart above (what percentage of industry traffic goes to the top two players? ). We can see that SDC now consistently captures more traffic compared to ALGN, which probably indicates future growth in the actual share. (Interactive graphic link)
We expect this offering to be very popular given the defensible growth characteristic of the company and the relaxed attitude of current investors regarding governance / related issues (this is not the subject of this article). but SDC is an IPO JOBS Act, with multiple share classes, classified array, numerous related party transactions including tax debt settlement, underwriter conflicts, corporate structure and much more).