Sonendo, Inc. (NYSE:SONX) Q3 2023 Earnings Call Transcript

Sonendo, Inc. (NYSE:SONX) Q3 2023 Earnings Call Transcript November 11, 2023

Operator: Hello, and welcome to Sonendo’s Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session at the end of the 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 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 September 30, 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 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 on 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 descriptions 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 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 November 8, 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 with some commentary about third quarter performance, business highlights and forward-looking strategy before turning the call over to Mike to provide additional detail regarding financial results. We will finish with Q&A. The third quarter saw steady capital placements and revenues in line with our initial estimates totaling $10.4 million and representing growth of 6% year-over-year. Procedure Instrument revenue grew 7% year-over-year to $5.1 million in the third quarter. Console revenue growth was in line with the prior year totaling $2.1 million for the third quarter of 2023. As we have seen in prior years, our annual sales cadence for 2023 is shaping up to be reflective of the seasonality we typically encounter.

The first and third quarters are generally lighter in console placements than Q2 and Q4, attributable to buying patterns common in med tech capital equipment. The third quarter of 2023 was no different. We saw lingering macroeconomic pressures in addition to the typical effects of extended vacation schedules and summer slowdowns. However, unlike previous years, we experienced a slowing of utilization and consumable sales in the latter part of the quarter. Consumable sales often rebound from the summer seasonality, but this September proved to be lighter in terms of volumes. As we have visibility to procedures at the practice level, we believe the decline was experienced broadly across many of our endodontist customers, not just a reduction in GentleWave procedures.

Many of our doctors reported a decline in patient numbers as we’ve seen in other areas of the dental market. As we move into Q4, we’re seeing procedures stabilize from the Q3 exit, but we will continue to monitor demand. While the majority of endodontic procedures are nonelective, there remains a certain number that are asymptomatic, which may result in patients delaying treatment and ultimately a shift in patient volumes. In relation to console placement trends, we continue to see a lengthening sales cycle and therefore have implemented new programs to counter these effects that I’ll expand upon later. Despite these dynamics, we were pleased with general solid sales figures and remain optimistic about continued adoption of the GentleWave procedure.

Going forward, we’re committed to three fundamental pillars to drive Sonendo’s success. Simply stated, those are: one, growing top line revenue; two, improving margin profiles; and three, prioritizing cash preservation. I’d like to spend a moment to detail our initiatives as they relate to each of these three pillars and the internal steps we have taken to ensure we execute against our plans for the remainder of the year and into 2024. As for revenue growth, we recently announced an expansion into the DSO channel and the signing of partnership agreements with two specialist DSO groups. DSOs represents an important segment within the industry and these partnership agreements will greatly expand access to the GentleWave procedure in endodontic offices nationwide.

For example, these two agreements now enable us to sell into nearly 200 new target accounts. Outside of the DSO strategy, we’ve begun a limited trial or evaluation program for practitioners to fully experience the GentleWave technology in your offices at no initial upfront cost. This allows doctors and their staff to realize firsthand the clinical practice and patient benefits for the GentleWave system before committing to purchase. We’re still in the early stages of this initiative, we’re noting significant interest and positive impact on moving customers through the funnel more rapidly. We believe the continuance of these trial periods will build upon momentum in our sales pipeline and serve as important catalysts to shorten the selling cycle on a go-forward basis.

Turning to utilization and consumable revenue. With our recent announcements regarding CleanFlow clearance for interior procedures and important improvements with our Gen 2 version we believe the improved clinical workflow enhances the already significant benefits of the GentleWave procedure. With one procedure instrument, we have simplified our training programs to ensure customer success from the start. With regards to margin improvement, we continue to focus on two drivers: first, accelerating our path to full conversion to the CleanFlow procedure instrument which we anticipate being essentially complete as we enter 2024; second, we completed the transition to in-house G4 assembly that have now manufactured over 100 console in our facilities.

A close-up of a dental bracket and wires being fitted into a patient’s mouth.

Enabling us to leverage our existing capabilities as we scale our business. Combined, these initiatives provide us much more control in future cost reductions, including gaining economies of scale, simplifying the product portfolio and achieving supply chain consolidation, all of which ultimately results in higher contribution markets. Moving to cash preservation. Sonendo remains committed to responsible and measured spending to retain a healthy balance sheet. In the third quarter, we were able to reduce quarterly operating cash burn by nearly 30% sequentially from Q2 and 35% year-over-year. We will continue to make necessary adjustments to rightsize the business without compromising long-term growth opportunities. Earlier this week, we completed a reduction force that combined with reductions announced earlier in the year, will conserve approximately $6 million to $8 million in the next 12 months and allow the Company to leverage operational efficiencies in a more meaningful way.

While these decisions are never easy or taken likely, we believe they are appropriate in this environment. Our customers will not be impacted by any of these changes. Lastly, we’re thrilled to announce the submission of our 510(k) application to the FDA for the use of the GentleWave system for cavity indications. A future application beyond our recurrent market of root canal therapy and one that will significantly increase our total addressable market. This is a significant step forward in solving tooth decay in millions of patients worldwide. At the same time, we don’t want to get ahead of ourselves in terms of quantifying this opportunity or even the time line in which we might see the revenue pull through with respect to the application of our technology for cavity indication.

Needless to say, we remain incredibly optimistic about our long-term growth opportunities and a sustainable platform we’re building to capitalize on the potential that exists within the endodontic and broader dental market. I will now turn the call over to Michael Watts, Sonendo’s Chief Financial Officer, and then return for some closing comments after the question-and-answer session. Mike?

Michael Watts: Thanks, Bjarne. As previously stated, Sonendo total revenue for the third quarter of 2023 was $10.4 million compared to $9.8 million for the third quarter of 2022, an increase of 6%. Q3 Products segment growth was 5% versus the prior year, driven by PI revenue increase. PI revenue was $5.1 million, compared to $4.8 million in the third quarter of 2022, an increase of approximately 7%. PI revenue growth was driven primarily by an increase in procedure instrument pricing of approximately 11% offset by a decline in unit PI sold of approximately 4% for reasons Bjarne previously addressed. Total PI sold in the quarter was approximately $69,000. In the third quarter, GentleWave console revenue was $2.1 million, in line when compared with $2.1 million in the third quarter of 2022.

The average selling price for the GentleWave console was just under $60,000 in the third quarter of 2023. We placed 37 consoles in Q3 with one Gen 3 trade in, resulting in a net change of installed base at 36. Our installed base as of September 30, 2023, was 1,076. Total other product-related revenue was $900,000 in the quarter. Total software revenue for the third quarter was $2.2 million compared to $2.1 million in the third quarter of 2022, an increase of 9%. Software growth continues to be driven by an increase in revenue relating to DSOs as well as recurring revenue increases to existing customers. Before moving to margin and operating expenses, I would like to explain an impairment charge taken in the third quarter. The recent decline in our market capitalization triggered us to perform an interim long-lived assets and goodwill impairment test.

As a result, we recorded a noncash impairment charge of $1 million related to the intangible asset and $2.3 million related to fixed assets of our Products segment. Of these impairment charges, $1.3 million is recorded in cost of sales and the remainder in operating expenses. Note again, the impairment charge is a noncash item and that the impairment charge is different from the inventory charges that we reported in the second quarter of 2023. There was no inpayment charge in the software segment. Gross margin for the third quarter of 2023 was 24%. Excluding the Q3 impairment charge, gross margin for the third quarter of 2023 would have been 36%, which is a significant improvement from 24% in the same period of the prior year and reflects our commitment to improve profitability.

We continue to show improvement in CleanFlow adoption at approximately 70% for the quarter and in-house assembly of the G4 console and other operating efficiencies, providing sustained margin improvement. Total operating expenses in the third quarter of 2023 were $18.5 million, compared to $16.9 million in the same period of the prior year. Increases were driven primarily by a $2.1 million impairment charge mentioned above. Higher general and administrative costs within installed based compensation and legal expenses, and higher sales and marketing expenses related to increased revenues, offset partially by lower R&D spending. Loss from operations was $16.1 million in the third quarter of 2023 compared to $14.6 million in the third quarter of 2022.

Net loss was $17 million for the third quarter of 2023 compared to $15.5 million in the third quarter of 2022. Our cash and cash equivalents and short-term investments as of September 30, 2023, approximately $55.9 million, while our gross term loan remains at [$40 million]. As for our 2023 financial guidance, as we move to close our 2023, we are revising our expectation of a full year 2023 net revenue to be approximately $44 million. This is reflective of the lower end of our previous guidance and considers recent macro trends and expectations regarding primarily lower placements of capital equipment and related consumable revenue commensurate with the industry at large. At this point, I’d like to open up the call for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question goes to Jon Block, Stifel.

Tom Stephan: This is Tom Stephan on for Jon. I’ll start with where you left off, Mike, just on guidance. You reiterated the $44 million to $46 million, I think, on the pre-announcement last month, but it has come down slightly now. Mike, you gave some color. But — maybe if you guys can just elaborate a bit more on what over the last month, changed a bit? It sounds like maybe it was more capital, but any comments there would be helpful.

Michael Watts: Yes. Tom, so the guidance that we wanted to place out there has a level of conservatism dialed into it now, given what we know nearly halfway through the quarter. So we had good placements, solid placements in Q3. We’ve had some good traction on the programs that Bjarne mentioned earlier in the call. But at this point, we just feel it’s appropriate to make sure that we communicate a forecast that the Street can dial in appropriately.

Bjarne Bergheim: And at the same time, Tom, I would also just reiterate that. We’re really excited about some of the new programs that we’re putting in place. We recognize the macro environment that we are in and it is imperative to us and incumbent on us to find new and different programs to really drive sales in this environment. That’s why we’re really excited about what the opportunities for this trial can bring and also what the DSO opportunity can bring on top of the other tools that we have in our momentarium.

Tom Stephan: Got it. That makes sense. And then I wanted to ask about the gross margins continue to put up some solid numbers there. Mike, any color you can maybe give on kind of the near to intermediate term. You guys obviously have a lot of initiatives around efficiencies that I think can drive good margin expansion, but any high-level comments about 2024 and what you think that could look like?

Michael Watts: Yes. So I think if we did start with Q4 and what we communicated before was that for the remainder of 2023 would be in the mid-30s, and that’s pretty much where we came out, if you exclude the onetime charge. And when we go back to the reasons for that, it’s around the CleanFlow conversion that we showed good progress on in Q3, and we continue to show good progress in Q4. And related to that, is as we move out of molar and the APM to nearly 100% CleanFlow, we start the year 2024 in that position. So CleanFlow will be now a leading driver of contribution margin for consumables, of course. And then when you look at the console production, the G4 insourcing, that was substantially completed in Q2 — end of Q2, early Q3, and we’re starting to see positive leverage and benefits from that program as well.

So moving into 2024, we have a single PI around CleanFlow and a single console around G4 system. And we think those are going to be good drivers to move us north in excess of 40% for 2024 without trying to get into specific guidance there. I think we feel comfortable with those numbers.

Operator: And our next question go to Jason Bednar of Piper Sandler.

Jason Bednar: Sorry for any background noise here. But maybe if I could start building off Tom’s question there on the guide — for implied guide for fourth quarter. This is going to be a bit of a softer than normal fourth quarter on the capital side than what a lot of us are probably thinking despite this being traditionally, a seasonally stronger quarter for capital to end the year. Can you help us what that means when we think about the exit rate into ’24 when capital sales tend to be lighter in the front half versus the back half, definitely in the first quarter? And then relatedly, are the lengthening sales cycles that you mentioned — are those attributable to both Endos and GPs? Or are you seeing it more concentrated in the particular group?