Sonendo, Inc. (NYSE:SONX) Q1 2023 Earnings Call Transcript

Sonendo, Inc. (NYSE:SONX) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Good afternoon, and welcome to Sonendo’s First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I’d 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 Bergheim, President and CEO; and Michael Watts, CFO. Earlier today, Sonendo released financial results for the quarter ended March 31, 2023. 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 made on 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 back 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 March 8, 2023 with the Securities and Exchange Commission and available on EDGAR and in 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 May 9, 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 today. For this call, I will start by providing some opening comments and business highlights. Following my commentary, Mike will provide additional detail regarding our financial results before we open the call to Q&A. We had a solid start to the year as we continue to move forward with our commercial priorities and strategic execution plans. Our team delivered 19% year-over-year growth for total revenue of $10.7 million in the first quarter. These results were driven by increased adoption of our CleanFlow technology and higher overall procedure instrument revenue. In the first quarter, we achieved a key milestone, surpassing over 1,000 consoles in our installed base.

This comes on the heels of another significant achievement in December of last year, that being our 1 millionth patient treated with the GentleWave procedure. We are thrilled with the strides we are making to revolutionize root canal therapy and believe both achievements signal the increase in clinical adoption and market acceptance of our innovation technology. As of March 31, GentleWave’s ending installed base was approximately 1,005 units compared to approximately 853 units as of March 31, 2022. In the first quarter, we sold 38 GentleWave consoles. Following the launch of our next-generation GentleWave G4 console last October, we’ve seen strong interest from existing doctors as well as prospective customers, particularly those in higher-volume practices.

This has led to a higher mix of G4 systems relative to the G3 system and higher ASP. The GentleWave G4 launch is progressing well, and our sales team reports that the demand pipeline remains strong. To support the expected growth in G4, we’re working to transfer an assembly from our third-party partner to our Laguna Hills facility, where we currently assemble the G3 console. We believe that this will give us more oversight in the initial launch stages of the G4 and enable greater control of our supply chain and manufacturing. Additionally, co-locating product development and console assembly will facilitate iterative improvements and efficiencies that we think will produce margin growth and product improvement benefits in the near term. This will allow us to accelerate responses to in-market feedback as well as to ensure a timely delivery and installation while maintaining customer satisfaction with our product.

As for procedure instrument sales, we saw sales for third quarter totaling $5.7 million, representing a 33% increase year-over-year. While we’re encouraged by the significant jump in consumables, we believe that this figure will normalize somewhat in the second quarter as some customers purchase a surplus of inventory ahead of the price increase that was effective February 1. We were pleased to see a considerable increase to our gross margin, improving sequentially from 27% in the fourth quarter of 2022 to 31% in Q1. The increase was driven by CleanFlow PI conversion rates among our customers, benefits to our new PI pricing program and operating efficiencies in our consumable production line. As we continue to scale the company towards a single procedure instrument, we’ll be able to recognize further growth in our gross margin profile.

We remain committed to improving this metric throughout 2023 and beyond. Mike will provide more color in his later comments. Relating to our focus on improving gross margins and operational improvements, we are thrilled to welcome John McGaugh this month to the Sonendo team in his role as Vice President, Operations. John brings with him incredible experience in the med tech space with over 20 years of combined global manufacturing and supply chain operations at companies such as Abbott Vascular and Boston Scientific, including earlier time spent at American Medical Systems. John’s strong leadership will be pivotal to growing gross margins, and he has a proven track record in supply chain optimization and installed base performance support. Last week, we had the privilege of hosting meetings at the American Association of Endodontists in Chicago and were encouraged by the excitement coming out of this leading industry conference.

Attendees were able to have hands-on experience with both the G4 and CleanFlow products in our test drive stations. In our booth, customers were able to perform a GentleWave procedure on an extracted tooth and connect the full benefits of the combined offering many for the first time. We are always pleased with the reception we get at the AAE conference. It serves as an important reminder of our fundamental commercial strategy with our focus on endodontists who perform root canal therapy for the majority of their treatments. Based upon current market penetration, there is still significant runway to sell into the 5,000 endodontic practices in the United States and Canada. They represent key leaders in the specialty, and we will continue to invest in clinical training and education in support of these clinicians.

At the same time, we also recognize the market opportunity that exists with the general practitioners who are performing approximately 75% of all root canals in the U.S. and Canada. We have begun the initial stages of a measured rollout to GPs who perform a high volume of root canal treatment within their practice. This commercial strategy will expand further into the second half of this year as our sales team builds out the pipeline of early adopters. As we begin introducing GentleWave to these clinicians, we’re seeing positive reception to both the clinical outcomes and value propositions. As a part of our program in developing this professional network, we’ve begun hosting educational seminars with KOLs and establishing best practices among GPs to capitalize on the efficiency GentleWave can bring to their practice.

We look forward to ramping up our GP strategy throughout 2023 and are committed to maintaining a high level of service and support with both GPs and endodontists alike. Before we move into a more detailed look at our financial performance, I’d like to provide some commentary around the macroeconomic environment and the near-term implications we foresee for the business. Over the last several quarters, we’ve highlighted that macro pressures and the inflationary environment are creating uncertainty around our capital sales cycle. Practitioners are lengthening the time it takes to choose to invest in capital equipment as evidenced by console placements in the first quarter. And while this has been a historic cycle for Sonendo, wherein the first quarter lags to proceed in fourth quarter as a result of the year-end tax incentives, we believe that given the current market environment, some of this hesitancy may extend into Q2.

As you look at our customer base, we see that the purchasers are typically small business owners rather than large hospital systems or multisite ambulatory surgery centers more common in other med tech specialties. Therefore, our customers’ decision process is, in many ways, more personal than a large corporation, weighing a more consumer-based mindset than one might see with other med tech capital equipment businesses. However, we do expect some of these dynamics to lessen in the back half of the year, particularly as interest rates normalize and endodontists and GPs are able to fully appreciate the efficiencies recognized by investing in our technology. Our sales team maintains a robust pipeline of high-quality leads. And despite some of the macro pressures the capital side is facing, I believe Sonendo remains in a strong position to seize upon some significant growth opportunities before us.

We have the benefit of leveraging several growth catalysts in the next 12 to 18 months, and we anticipate that between CleanFlow adoption rates expanding our presence to the general practitioner and CleanFlow interior regulatory clearance, we are poised to capture further market share. I’ll discuss each of these initiatives briefly before asking Mike to review our financial performance for the quarter. As we’ve highlighted before, CleanFlow PI adoption is a pivotal strategy to improve our margin profile while boosting revenue. The use of a single procedure instrument across all cases allows for increased efficiency into operatory and further, our renewed pricing model incentivizes higher utilization. CleanFlow also incorporates fewer components and is significantly less costly to manufacture, which directly contributes to an improvement on the bottom line.

We still anticipate full conversion from the legacy procedure instruments to CleanFlow by mid-2024. Our sales team remains committed to driving adoption. And in the first quarter, approximately 53% of all PI unit sales were CleanFlow, a sequential improvement over the fourth quarter of 2022, where that figure was 47%. As for the GP rollout, we believe this opportunity opens a significant addressable market for Sonendo as there are over 50,000 dentists in the United States and Canada that do not refer out the majority of their root canal cases. We only need to capture a fraction of this market segment to considerably increase revenues over the next 24 to 36 months. By highlighting the efficacy and efficiency of the GentleWave system within the GP cohort, we believe the value proposition becomes highly evident.

We’ve received outstanding feedback from the initial high-volume accounts that have started using GentleWave and believe this trend will continue. As addressed earlier in my prepared remarks, we plan to implement a measured and strategic rollout to the GP space in order to maximize oversight and ensure the same level of quality and service that Sonendo is associated with in the endodontic space. And finally, we’re very much looking forward to the commercialization of our CleanFlow PI for anterior teeth in the middle of this year. The ability to perform a root canal on any tooth with a single procedure instrument is a meaningful development for doctors and has the ability to further increase the efficiency of their practice. Anterior teeth represent approximately 20% to 25% of root canal cases.

And while we currently have a procedure instrument for anterior teeth, we believe that we’ll be able to capture more of this part of the market through CleanFlow. With one single PI, our economies of scale will greatly improve, and we’ll be able to enjoy even further margin inflection. We’ll provide further details on our commercial strategy for anterior procedures on a future call. We’re excited about the many growth opportunities ahead of us, and I’m proud of our team’s hard work and dedication thus far. With that, I will turn the call over to Michael Watts, Sonendo’s Chief Financial Officer, to discuss our quarterly performance numbers. Mike?

Michael Watts: Thanks, Bjarne. As previously mentioned, Sonendo total revenue for the first quarter of 2023 was $10.7 million compared to $9 million for the first quarter of 2022, an increase of 19%. Growth in the quarter was primarily in our product segment, with growth of 20%, driven by increased procedure instrument sales as well as other product segment revenue. In the first quarter, GentleWave console revenue was $2 million compared to $2.1 million in the first quarter of 2022. We sold 38 consoles in the quarter, with 9 being to customers who upgraded from existing G3 systems, resulting in a net increase of 29 to our installed base. Average selling price for the GentleWave console was roughly $66,000 and related to upgrades to G3 to G4 and with higher ASP attributable to the favorable G4 mix.

We attribute the decline in console revenue, however modest, to the macroeconomic impact on the decision-making process, as previously discussed and expect console revenue to grow for the full year 2023. Turning to procedure instruments. PI revenue was $5.7 million compared to $4.3 million in the first quarter of 2022, an increase of approximately 32%. PI revenue growth was driven primarily by the GentleWave increased installed base, procedure instruments sold and an approximate 9% increase in the average selling prices compared to the prior year period. Procedural instruments sold in the quarter totaled approximately 80,600. In the quarter, we did note that our sales out exceeded our utilization at the field level, attributable to our customers buying in at a lower price during the month of January.

Our estimates are that approximately 6% to 8% of Q1 PI sales out will be reflected in lower demand during Q2 and Q3. Total other product-related revenue was $1 million in the quarter. Total software revenue for the first quarter was $2 million compared to $1.8 million in the first quarter of 2022, an increase of 12%. TDO continues to perform well and gave favorable traction in group practices. Gross margin for the first quarter of 2023 was 31% compared to 25% in the first quarter of 2022. This increase was driven by improvements in CleanFlow adoption rates, along with increased procedural instrument ASPs as well as operating efficiencies gained as CleanFlow production increased, offset somewhat by higher initial unit cost of the G4 console.

We are very pleased with this positive inflection both year-over-year and sequentially in margins as we are seeing further efficiencies with our consumables production line and conversion to the CleanFlow instrument. Improving margins continues to be a focus for us in 2023. Total operating expenses in the first quarter of 2023 were $18.2 million compared to $16.8 million in the same period of the prior year. Increases were driven primarily by higher expenses relating to our commercial expansion and related revenues and higher general and administrative costs related to stock-based compensation, recruiting and legal expenses, offset partially by lower R&D spending. Loss from operations was $14.8 million in the first quarter of 2023 compared to $14.6 million in the first quarter of 2022.

Net loss was $15.4 million for the first quarter of 2023 compared to $15.5 million in the first quarter of 2022. Our cash and cash equivalents and short-term investments as of March 31, 2023 were approximately $74.9 million, while our long-term borrowings remained at $40 million. As noted in our earnings release, during April of this year, subsequent to Q1 end, we received $3.2 million of the $4.4 million of the Employee Retention Credit recognized in 2022. As for our 2023 financial guidance, we are maintaining our initial estimates of annual revenue between $48 million and $51 million for the full year. And while it is not our practice to provide quarterly guidance in light of the dynamic macroeconomic environment, we believe it would be helpful to provide some parameters around the second quarter of 2023.

For Q2, we are expecting revenue to range between $11 million and $11.4 million and for gross margin to be in line with Q1 as we ramp up in-house production of our G4 console. These figures reflect our most recent analysis of the sales cycle environment and underlying economic concerns amongst our customers. At this point, I’d like to open up the call for questions.

Q&A Session

Operator: [Operator Instructions] Our first question today comes from Jon Block from Stifel.

Operator: Our next question comes from Joseph Downing from Piper Sandler.

Operator: Our next question comes from Nathan Rich with Goldman Sachs.

Operator: Our next question comes from Erin Wright at Morgan Stanley.

Operator: Our next question comes from Michael Cherny with Bank of America.

Operator: This concludes our Q&A. I now hand back to Bjarne Bergheim, President and CEO, for any final remarks.

Bjarne Bergheim: Well, thank you, operator. We appreciate everyone’s time today, and thank you for your interest in Sonendo. Have a great rest of your day. Thank you.

Operator: Ladies and gentlemen, today’s call has now concluded. We’d like to thank you for your participation. You may now disconnect your line.