Q1 2024 Sonendo Inc Earnings Call

Participants

Louisa Smith; IR; Gilmartin Group LLC

Bjarne Bergheim; President, Chief Executive Officer, Director; Sonendo Inc

Chris Guo; Interim Chief Financial Officer; Sonendo Inc

Jon Block; Analyst; Stifel, Nicolaus & Company, Inc.

Presentation

Operator

Good afternoon and welcome to Dice First Quarter Earnings Conference Call. At this time, all participants are in listen only mode. We will be facilitating a question and answer session at 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 Louise Smit from the Gilmartin Group for a few structuring comment.

Louisa Smith

Thanks, operator. Good afternoon and thank you for participating in today's call. Joining me from Fernando are Bjorn Burcon, President and CEO, and Chris Gault, Interim CFO. Earlier today, Synenco released financial results for the quarter ended March 31st, 2024. 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 and 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, expense management, expectations for hiring growth in our organization, market opportunity, revenue guidance, commercial expansion and product pipeline development 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 description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recent quarterly report on Form 10 Q filed today May 8, 2024 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 eighth, 2024, and Endo 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.
With that, I will now turn the call over to Bjorn.

Bjarne Bergheim

Thanks, Lisa, and good afternoon, everyone, and thank you for joining us today. Today's call will be structured slightly differently than in the past. While we will review the first quarter results. I plan to spend most of my time providing information about a strategic business reset that's tremendous management and Board have undertaken together to drive fundamental change in the organization.
Fernando is truly revolutionizing how to K the most prevalent chronic disease in the world is treated. We have an incredible technology and recently crossed the milestone of 1.4 million patients treated. Only 20% of endodontics in the United States and Canada performed a gentleman procedure.
So the Company has significant growth potential going forward. We understand the value of what we have, but the change of strategy is needed. Following several years of outsized initial growth from 2017 to 2021, we decided to initiate a more ambitious and complex commercial plan through tried to capitalize on what we believed to be valuable growth opportunities.
We made significant investments in programs such as sales force, bifurcation and consumer marketing. We changed the incentive structure for our sales team, focusing primarily on capital sales and procedure instruments by losing focus on helping doctors with utilization and building their practices. We also shifted the attention of much of our sales team to general practitioners and lost focus on our core endodontic customers and KOLs.
As these changes took effect during 2022 and 2023 we did not realize revenue growth commensurate with the level of investment made in our commercial strategy. For example, excluding our software business, sales and marketing expenses increased 61% from 2021 to 2023.
While console revenues only increased 10% over the same period, we could not support the associated cash burn with a number of programs we pursued. We needed to make a strong pivot in our approach to return the Company to growth, and we have subsequently reset our focus on our core strategy and opportunities. We are adjusting the organization to the current realities of the market and are moderating commercial investments in the near term to achieve financial strength in the long term.
As part of the reset we are providing more transparency around financial milestones like operating expense management, gross margin targets and timing management. And the Board have set the 2024 plan with reduced commercial spending and increased focus guided by our learnings over the past three years, we decided to capitalize on the areas in which we have previously been successful, and the early results have supported the shift in our approach.
We had a solid first quarter with revenue of $7 million, exceeding our $6 million guide and were encouraged by several proof points in the quarter. Regarding our unfolding strategy, we reduced sales and marketing expenses by 37% over the first quarter of 2023, yet still had a productive quarter. We received orders for more consoles than we shipped and built a healthy backlog of capital sales orders.
Gaap gross margin for the first quarter of 2024, it was 28% compared to 23% for the first quarter of 2023. Non-gaap gross margin increased from 23% to 30% and more than 700 basis points improvement year over year. Non-gaap operating loss decreased from $12.8 million to $7.5 million, a 41% reduction.
As a result of these early successes and our confidence in the reset strategy, we're increasing our 2024 full year revenue guidance to $29 million to $31 million from the prior range of $28 million to $30 million while we are happy with our first quarter results, we know there's far more to do. We see this quarter's performance as early indications of a step in the right direction.
I would now like to spend time outlining the three initiatives for our plan, which are commercial execution, cash conservation and margin expansion. I'll provide some details on how and why we're focusing on each of these key targets and some commitments related to improving each going forward.
The first focus of our 2024 strategic reset is commercial execution. As I mentioned earlier, having experienced rapid growth between 2017 and 2021, we invested heavily in several commercial programs starting in the second half of 2021. While these investments did convert into sales.
The effectiveness of our ability to place consoles and our ability to drive utilization in 2022 and 2023 was significantly less than we had observed earlier so then there was trying to do too many things at once scaling initiatives before we were ready and straying from the selling practices. We had been very successful with in earlier years.
Given what we have learned, we have analyzed every commercial program to ensure we focus efforts on those that will generate a positive return on investment. One of the critical areas we have reevaluated is the targeting of GPs in 2022. I heard pivot into the GP channel took focus away from our core customers. The endodontics, while GPs perform many root canal procedures, we have not found an effective way to target high-volume practitioners on a consistent basis.
Additionally, at GP., that is only an occasional user of John, they've significantly dilutes our overall consumable utilization, this less likely to build out their practices around the procedure. However, and then the datas that primarily performance root canals is much more likely to be a consistent user of tremendous technology. We are now 20% penetrated in the market in North America, and we believe we can meaningfully increase our presence in those practices going forward.
As a result, we are purposefully shifting away from the GP strategy in the near term and refocusing exclusively on ended office to reestablish touch points with both existing and potential customers we believe this shift will help drive growth or procedure volumes and subsequent PI.
sales to support our commercial efforts, we have modified our sales compensation plan in the past most compensation for spent incentivizing console placements, which affected doctor relationships and cost utilization to decline. We have remedied this by creating an incentive structure that rewards reps for not only selling consoles but also for billing partnerships for doctors and driving utilization.
In addition, I have spent a lot of time working with the entire commercial team amidst this reset, and I have a good grasp on which programs are vital to driving commercial execution and success going forward. Our senior leadership team has been working very closely with the Board to analyze and reviewed these programs.
As a result, we're focusing the organization on a few commercial programs that we think will be critical for us going forward. One example of such a program is clinical education events. These events resonate well with customers as we help them understand the benefits of incorporating Jelmoli into their practice, providing a multistep plan to increase their referral base and demonstrate how they can improve workflow within their practice. These events have shown a good ROI for us and will be prioritized going forward, driving focus in the commercial team and throughout the entire organization is a key tenet of our strategic reset.
This was part of the rationale behind divesting TDO., our software business for one, the sale of TDO. helps strengthen our balance sheet and pay down a portion of our debt. But from an organizational perspective, the sale of TDO. now allows us to focus solely on growing awareness of adoption of the Gelnique procedure selling consoles.
IPI.s is very different than selling practice management software from now on, we will focus on doing a few things very well we are flattening the organization and simplifying the way we operate. And we are intent on returning to double digit revenue growth in 2025.
Make no mistake, though, I have full confidence in this commercial team and that they will be successful as we work together to build the position of leadership in the market.
The second focus area of our 2024 strategic reset is cash conservation company-wide. We're finding ways to do more with less by creating clarity in priorities and processes across teams. We have discontinued programs that do not show a clear return on our investments.
And as a result, we reduced non-GAAP operating loss by approximately 40% in the first quarter. Most of our expense reductions are in sales and marketing. We also eliminated expenses associated with completed projects such as the design and development of G. four design, the development of clean for procedure instrument and the transition to one procedure instrument in the field. We're focusing our R&D dollars on improving margins within our existing product portfolio.
Additionally, we have eliminated many of the higher fixed and back office costs. We anticipate the current level of operating expenses to become our new normal as we diligently work to find additional efficiencies in the existing business without compromising growth opportunities.
As a result, we will likely experienced moderated growth throughout the remainder of 2024 as we manage our cash proactively and allow sufficient time for the effects of the strategic reset to take hold we expect our non-GAAP operating loss for 2024 to be approximately $28 million, a 40% decrease or improvement over the prior year.
I want to note that we are not just cutting expenses to save cash. Instead, we have analyzed our strategic needs and reallocated resources to areas that will drive growth while trimming unnecessary spending and thereby extending our cash runway.
I also want to reiterate that management and the Board are exploring multiple viable financing options, including in combination with debt equity and nondilutive sources to secure our balance sheet we will provide more details as those discussions progress.
The third focus area of our 2024 strategic reset is margin expansion. As discussed earlier, we increased our non-GAAP gross margin by more than 700 basis points to about 30% this quarter. But we have more work to do in prior years. We have always been working in the background to drive incremental margin improvement. But the primary focus of our engineering teams was to develop and manufacture a reliable console capable of being the new standard of care in original therapy.
Our previous G. three, gentlemen, consoles had some reliability issues that required necessary service calls by our service team. This created frustrations among the installed base and hindered peer-to-peer referrals. In addition to cost them making the service calls within 24 to 48 hours of requests proved to be a significant burden on our overall gross margin profile.
As a result, our team undertook a significant redesign of the console, creating the next-generation G4 gentleman console launched at the end of 2022. Since then, the team has invested a lot of time to drive reliability through both design and manufacturing optimization. And I'm pleased to say that the G4 console is now exceptionally reliable for previous generation G3 consoles.
We had seen an average of two unplanned field service calls per year. In contrast, the service calls for our G4 installed base average is less than [0.5] per year. This is an outstanding reliability profile in addition to a significant improvement in reliability, our G. four consoles are also helping our Germany providers drive better workflow in their offices. Many offices report saving more than one hour of doctor and staff time daily with the G4 console.
Given the significant improvements in reliability, we have also decided to eliminate third party service support in the field, which will further reduce our service costs and improve margins. Instead, a dedicated center and a field service team allows us to better assist our customers and ensure that their needs are being met as quickly and efficiently as possible.
Moving forward, our commercial team will prioritize upgrading existing customers from a G. three G. four so that customers can experience the significant improvements we have made upgrading customers to G4 consoles will result in fewer service calls, improved customer satisfaction and help drive peer-to-peer influence as we move forward.
These are all critical elements of our reset in addition to the improvements to the console, we were also committing a lot of resources to consumable related projects like the development and subsequent conversion of customers to a single clean flow procedure instrument. These projects proved to be expensive but were necessary to position surrender for future margin gains while establishing the satisfaction of our customers.
Now that we have ensured the performance and reliability of our product portfolio, we can focus the team on margin improvement projects. We have cost reduction roadmaps that include strategic sourcing, material cost reductions and value-based engineering projects that put us on a clear pathway to significant margin improvements. These projects are fully staffed and resourced.
From a commercial perspective, we are now incentivizing our sales team to drive utilization as opposed to selling procedure instruments. Coinciding with this change, we're limiting our prior discount programs in favor of building closer relationships with our doctors, helping them drive clinical efficiencies, efficacy and better practice economics with the January procedure.
This decision resulted in procedure instrument ASP increasing from $71.60 in Q4 of 2023 to $75 in Q1 of 2020 for implementing these changes resulted in fewer procedure instruments sold in Q1 of this year. In the future quarters, we expect to proceed or instruments shipments through line with customer utilization currently and for procedure instruments, our contribution margin in the mid-60 percent range by the end of 2025, we expect the clean flow contribution margins to be in the low to mid 70% range.
As a result of our merger focus, we expect to overall Company non-GAAP gross margin to be in the high 30% range as we exit 2024, and we expect this number to move towards the mid to upper 40% range as we exit 2025.
Beyond this forecast horizon, we see clear opportunities to move company gross margins well into the 60% range. The Board chairs my conviction about the opportunities ahead, and we believe the strategic reset I have outlined today is an important first step for moving Synventive towards meaningful growth in the future. We're confident in the technology our team's ability to execute, and it's an endless opportunity to revolutionize root canal therapy and the treatment of tooth decay we are just getting started.
I would now like to introduce to you Chris Gault, Cementos Interim CFO, to review the first quarter's results in more detail. Before stepping into this role in March, Chris had mentioned Endo's Vice President of Finance and Corporate Controller since July 2021. He's a certified public accountant with extensive experience in both public and corporate accounting. And that's brought valuable financial and government discipline just in endo since before our IPO in 2021.

Chris Guo

Thanks and beyond.
And thank you all for joining us today. Please refer to this afternoon's press release and 10-Q filing for more details on specific financial results, including reconciliations between GAAP and non-GAAP financial results.
As previously stated, total revenue of continuing operations for the first quarter of 2024 was $7 million compared to $8.7 million for the first quarter of 2023 The decrease was driven by lower PI. sales volumes and partially offset by the increase in PI. average selling price. Q. one PI. revenue was $4.2 million compared to $5.7 million in the first quarter of 2023.
In the first quarter, general wave console revenue was $1.8 million. The average selling price during the period was approximately $50,000. We sold 37 consoles in Q1 2024 with 29 Gen three trade-ins, increasing our installed base by eight our installed base as of March 31, 2024 was 1,142. Total other product related revenue was $1 million in the quarter.
During Q1 2024 for software revenue was$1.4 million and is reported in the discontinued operations. Gaap gross margin for the first quarter of 2024 was 28% as compared to 23% in the prior year period, primarily due to a higher PI. average selling price and lower unit costs.
Non-gaap gross margin for the first quarter 2024 was 30%. Total operating expenses in the first quarter of 2024 were $12.3 million compared to $17 million in the same period of the prior year. The decrease was primarily driven by a reduction in headcount and lower marketing spend.
Gaap operating loss was $10.2 million in the first quarter of 2024 compared to $15.1 million in the first quarter of 2023. Non-gaap operating loss was $7.5 million in the first quarter of 2024 compared to $12.8 million in the first quarter of 2023. Net loss from both continuing and discontinued operations in the period was $6.8 million, including a $5.7 million gain from the sale of our software business compared to a net loss of $15.4 million in the first quarter of 2023. As of March 31, 2024, our cash, cash equivalents and short-term investments were approximately $33.6 million.
I will now turn the call back to Björn.

Bjarne Bergheim

Thanks, Chris. So that does management and the Board are optimistic about Fernando's forward outlook and are encouraged by the early indications of success in our reset strategy. We are raising our full year 2024 net revenue guidance to $29 million to $31 million. Note that this excludes revenue from TDO. software, which will be reported as discontinued operations.
As we work through this reset, we will continue to focus on driving efficiency and focus throughout the organization around the pillars of commercial execution, cash conservation and margin expansion. We therefore, have a moderate growth outlook in 2024, which is reflected in our revenue guide. We expect to return to double digit growth in 2025 we're excited about the opportunity ahead of us and remain confident that's a gentleman procedure and a gentleman system. He's well positioned to transform endodontics and therapy for 2K.
With that, I will open the call for questions.

Question and Answer Session

Operator

Thank you.
If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, please press star followed by two, please also ensure that your phone is unmuted.
Okay.
Our first question comes from Jon Block from Stifel.
Please go ahead.

Jon Block

Great.
Thanks and good afternoon, Bjorn. I think I've got these numbers. Right. But it seems like the net eight new boxes, I think there were also 29 upgrades in the quarter. I know the thought is sort of a more focused and streamlined approach. And as you mentioned, sort of pulling back from the GPUs, but maybe if you could just talk about this split, should we see this sort of split call a heavy upgrade percentage persist for the balance of 2024, just when we think about the consoles and if so, I was actually pleasantly surprised by the ASP. of almost 50,000 considering the mix to the upgrades. But maybe you can comment on that as well.
Yes.

Bjarne Bergheim

Thanks, John. Good, good questions.
I think you're assuming on exactly the things that are important to zoom in on here, um, you know, we are on we are we we are specifically we like we discussed in our script, the G. four is significantly more reliable than they cost less to service.
They drive significant amount of efficiencies for doctors and staff on. And so it's very, very intentional for us that we're prioritizing de force at this point in time, the world is no the benefit of G4 yet. So for us, it's important to remove older G. threes, replaced them with next-generation G G-Force.
And you know, we one of the things that we did early on, we never went back to our early adopters KOLs and gave them an opportunity to upgrade earlier until now. So at this point in time, we're really pushing the G Force to ensure that we can drive peer-to-peer going forward. So this is very much a plan focus, and we have specifically initiated activities in Q1 to drive these upgrades. But as you're talking, you're talking about the upgrade percentage, we expect to be reduced over time as we move forward with regards to the the AS. piece?
This is. -- Apologize here, John. I think the key for us right now is to the ASPs. We're very happy with the ASPs going up, we intentionally initially, we limited discounts to drive additional demand in Q. one and 2024. And in the future, we expect procedure instrument shipments to align more into customer utilization going forward.

Jon Block

Okay, great. That was great color. Thanks, Bjorn. And then I think that you eat or Joe's exiting the year with the GMs in the high 30s and sort of see the progress already, but just curious on how that build occurs, colleague, 2Q, 3Q, 4Q, obviously the starting points, about 30%.
Do we just think about it somewhat linear you know, 200 bps to 300 bps per quarter to get us to that exit of the high 30s. Should there be any quarter-to-quarter variability that we should think about?

Bjarne Bergheim

There was I guess when we look at gross margins, we what we select. We said in the call, we do expect the gross margin to increase during the year. We expect to exit in that in the upper 30% range. So that is something that will gradually go up as we move throughout the year here for us on margins, John, I think the key for us is at this point in time, we have one PA. We have one console. We have obviously converted to move to clean flow. We have two strong senior executives driving these programs here, we're going to continue to focus on cost reductions for us. It's all about strategic sourcing, material cost reduction through negotiations, value engineering, and we're going to continue to optimize our group, reduce cost set here as we go forward. So yes, so the short answer is, yes, you should expect that gradual sequential improvements as we go forward.

Jon Block

Okay. And last one for me and then I can take the rest offline, but it's just more thinking on the strategic side of things. I believe you have, you know, call a cavity in front of the agency. I think that's where it stands. But per your commentary, there seems like a de-emphasis with the general dentist. And so how do we foot those two things. I mean, as we think about you guys prioritizing certain initiatives, will cavity still be one of them? If so, what will that mean when you then take that? Hopefully future approval and take it to take it to the market.
Actually, thanks for your time, guys.

Bjarne Bergheim

Thanks, John. You know, obviously, we remain super excited about cavity, but at this point in time. We don't want to get ahead of ourselves here. I don't want to get ahead of myself. We're going to continue to focus on endodontics. And so you're not going to hear too much about cavities at this point in time. It is in the agency and we'll obviously continue to watch for that approval that that comes forth for us.
Right now the key is to focus on the key pillars of our strategic process around commercial execution, cash conservation and margin expansion.

Jon Block

Thanks, Björn.

Bjarne Bergheim

Thank you, John.

Operator

Thank you. We have no further questions. So now Hans ClearBridge beyond back Han for closing remarks.

Bjarne Bergheim

Thank you, operator. We appreciate everyone's time today, and we're excited to continue, obviously with this reset strategy here and going forward.
Have a great day.
Concludes today's call. Thank you for joining everyone. You may now disconnect your lines.