Sonendo, Inc. (OTCQX:SONX) Q4 2023 Earnings Conference Call March 11, 2024 4:30 PM ET
Company Participants
Louisa Smith – Gilmartin Group
Bjarne Bergheim – President & Chief Executive Officer
Michael Watts – Chief Financial Officer
Conference Call Participants
Jonathan Block – Stifel
Operator
Good afternoon, and welcome to Sonendo’s Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would 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 and year ended December 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 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 today, March 11, 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 March 11, 2024. 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. I will start the call today by providing a high-level fourth quarter and full year update for 2023. I will then give a business update detailing how we’ve considerably sharpen our focus on specific key organizational priorities. Mike will conclude with a more detailed discussion of our financial performance and outlook for 2024. We will then open the call for questions.
As we enter 2024, our three key priorities for the organization are: one, commercial execution; two, cash conservation; and three, margin expansion. We are progressing in all three areas and are committed to continuing this work. Q4, as an example, reflects positive progress on cash and gross margin. Finally, I’ll highlight two additional steps we’ve taken to strengthen Sonendo’s balance sheet, including the recently announced divestiture of TDO, our practice management software platform and a revised debt agreement to provide greater flexibility for the organization.
As for our fourth quarter and full year results, 2023 full year revenue was $43.9 million representing growth of 5% year-over-year. While revenue of $11.7 million for the fourth quarter was down 4% year-over-year, the results were in line with our previously issued guidance.
Non-GAAP gross margin for the fourth quarter of 2023 was 35%, a significant improvement from 27% in the same period of 2022. Non-GAAP loss from operations was $8 million for the fourth quarter of 2023, a 33% improvement compared to $11.9 million in the fourth quarter of 2022.
We’ve garnered valuable lessons over the last few years, and I would now like to discuss how we are driving key priorities through the organization. As for the priority around commercial execution, we are implementing several changes within Sonendo’s commercial team.
It is all about focus and doing a few things very well. We believe we have the best offering for root canal therapy that drives the best quality of patient care. We need, however, to get more efficient in how we sell and showcase the value proposition for the GentleWave system.
The first thing we’re changing around commercial execution is the way we onboard new customers. We have found that training a customer well according to our new onboarding playbook drives higher utilization right out of the gate. Teaching doctors how they can drive better efficiency and economics in their practice with the GentleWave system it’s hard to unlearn. We have demonstrated that cohorts who have been trained according to our onboarding playbook, continue to utilize at a high rate going forward. These cohorts also become great advocates for the GentleWave procedure.
And now with our GentleWave G4 console and our next-generation CleanFlow Procedure Instrument, our sales team has a strong product offering to drive both upgrade opportunities and new console placements. It is worth noting that the reliability of our G4 console is now on par with some of the most reliable capital equipment platforms found in dentistry and in med tech. This is an accomplishment that we are very proud of.
Coupled with efficiency improvements for the staff and doctors, we see that upgrades to G4 consoles are energizing users across our installed base. Doctors are very excited as they move from our legacy Gen 3 platform to our G4 consoles and driving that focus, in other words, the benefit of our new G4 consoles is key for our sales team.
We’re optimizing productivity by standardizing commercial program playbooks for the entire team. We also recognize that PI utilization is a key value driver for Sonendo’s overall growth. So establishing systems to increase consumable sales among our new and existing installed base remains an area of focus.
We have further overhauled our compensation structure for the commercial team, incentivizing the right activities that we need to be focused on at this time. The quality of our sales pipeline remains strong, and we’re seeing our commercial team energized by the changes we have made and the opportunities ahead.
As for cash conservation in the fourth quarter, we dramatically reduced our spend resulting in a 17% sequential decrease in operating costs. We have continued to make progress on this front into the start of 2024. Several programs have been completed and no longer require the same level of resources. One example is the program associated with the development of the G4 console. Spending has also been reduced by focusing on fewer things and doing more with less. We are prioritizing our efforts on activities and sales and marketing that have a higher return on investment and drive focus within our team.
Our goal is to be more efficient and effective in the way we sell and put us on a quicker path to profitability. In conjunction with lower spending, we were also pleased with our adjusted gross margin of 35% for the fourth quarter. Contributing primarily to this improvement in margins is the complete transition to CleanFlow Procedure Instruments and bringing the production of GentleWave G4 consoles in-house.
By December 31, Sonendo was manufacturing only one type of procedure instrument and one type of console, hence significantly simplifying our operations. We have been working towards this point for some time and I’m pleased to have reached this milestone earlier than our original target of April 2024.
In addition to our CleanFlow conversion and in-house assembly of the G4 console, we’ve also improved the reliability of our console and expect a reduction in the cost to service our installed base going forward.
Moving on to matters of our balance sheet. Last week, we announced the sale of TDO, resulting in gross proceeds of approximately $16 million. TDO was a great acquisition for Sonendo in 2018 and helped us drive significant growth and penetration into endodontic practices. It opened many doors for our sales team, allowing them to educate doctors on the benefits of the GentleWave procedure.
We are pleased that TDO strategic opportunities can still be accomplished with a new partnership we have formed with Valsoft. TDO customers will be in good hands. This divestiture also allows Sonendo to focus all our time and efforts on driving the opportunity we have with our GentleWave platform.
And finally, as it relates to the health of our balance sheet, we have negotiated our debt facility with Perceptive, which includes a revision of revenue covenants that will provide greater flexibility as we execute on our three key company priorities. Ultimately, the sale of TDO and the revised deal with Perceptive will contribute to a stronger capital structure and allow Sonendo to bring our full focus on our core business.
I’ll now turn the call over to Michael Watts for some commentary on our financial results before opening the call for Q&A. But first, I’d like to take this opportunity to thank Mike for his outstanding contributions to Sonendo and his support and commitment to the organization for the last 7 years.
We announced last week that Mike will be leaving Sonendo later this month, and I want to recognize that he’s been an incredible valuable member of the executive team, I’m grateful for both the professional and personal relationship we’ve established, and we wish him and his family the very best in his ongoing endeavors. Mike?
A – Michael Watts
Thanks, Bjarne. As previously stated, Sonendo total revenue for the fourth quarter of 2023 was $11.7 million compared to $12.2 million for the fourth quarter of 2022, a decrease of 4%. The decrease was as a result of few replacements and lower average selling prices of consoles versus the prior year.
Q4 Products segment declined 8% versus the prior year, driven by a decrease in console revenue and offset by PI revenue. Q4 PI revenue was $5.1 million compared to $5 million in the fourth quarter of 2022, an increase of approximately 2%. The PI revenue growth was driven primarily by increased installed base and average selling prices, offset by reduced volume in our legacy installed base.
In the fourth quarter, GentleWave console revenue was $2.9 million, a decrease of 24% when compared to the $3.9 million in the fourth quarter of 2022. The average selling price for the GentleWave console was approximately $50,000 in the fourth quarter of 2023. We placed 58 consoles in Q4 with one G3 trade-in resulting in a net change of installed base at 57.
Our installed base as of December 31, 2023, was $1,134. Total Q4 other product-related revenue was $1 million in the quarter. Total software revenue for the fourth quarter was $2.7 million compared to $2.4 million in the fourth quarter of 2022, an increase of 12%.
GAAP gross margin for the fourth quarter of 2023 was 33% and 35% on a non-GAAP basis, a significant improvement from 27% in the same period of the prior year. Reflecting our continued commitment to improve profitability. The transition to in-house assembly of exclusively the G4 console and conversion to CleanFlow PI along with other operating efficiencies provided sustained margin improvement.
Total operating expenses in the fourth quarter of 2023 were $13.7 million compared to $18.1 million in the same period of the prior year. Decreases were different primarily reductions in SG&A through sales and marketing expenses and R&D spending. Loss from operations was $9.9 million in the fourth quarter of 2023 compared to $14.8 million in the fourth quarter of 2022. Net loss was $10.9 million for the fourth quarter of 2023 compared to a net loss of $15.2 million in the fourth quarter of 2022 when you exclude the employee retention credit we reported in the prior year.
Our cash and cash equivalents and short-term investments as of December 31, 2023, were approximately $46.8 million, while our gross term loan remained at $40 million at year-end. As noted in our press release on March 4, 2024, we restructured our term loan with Perceptive with a one-time principal payment of $15 million in March 2024, along with other changes, including monthly principal payments and revisions to our revenue covenants.
Turning to our full year 2023 results. Sonendo total revenue for 2023 was $43.9 million compared to $41.7 million for 2022, an increase of 5%. 2023 product segment for the full year increased approximately 4% versus the prior year, driven by an increase in PI revenues offset by lower console revenue. Full year PI revenue was $21.6 million compared to $18.9 million in 2022, an increase of 14%. PI revenue growth was driven primarily by increased installed base and higher ASP.
Total PIs sold in the year were approximately $295,000. GentleWave console revenue for the full year was $9.2 million, a decrease of about 14% when compared to the $10.8 million in 2022. Total other product-related revenue was $3.8 million in 2023. Total software revenue for the year was $9.2 million compared to $8.4 million in 2022, an increase of 10%. Gross margin for 2023 was 24% compared to 25% in 2022. In 2023, we recorded a one-time impairment charge of $1.6 million related to long-lived assets and $2.9 million relating to the inventory adjustments and cost of sales impacting overall margins.
Total operating expenses for 2023 were $68.5 million compared to $68.7 million in 2022. During the year, we recorded a $2.1 million impairment charge of long-lived assets and operating expenses. Decreases were driven primarily by reductions in SG&A through sales and marketing expenses and R&D spending. Loss from operations was $57.7 million for 2023 compared to $58.2 million in 2022.
Non-GAAP loss from operations was $45.1 million in 2023 and versus the $49 million in 2022. Non-GAAP loss from operations excludes stock-based compensation expense, depreciation, amortization expense and impairment of long-lived assets. Net loss was $60.9 million for 2023 compared to $57.1 million in 2022. As for our 2024 outlook, we are initiating full year 2024 net revenue guidance in the range of $28 million to $30 million.
First quarter revenue is expected to be approximately $6 million. Note that this excludes revenue from TDO software, which will be reported as discontinued operations moving forward. Lastly, I want to thank Bjarne and the team for my time here at Sonendo. It has been an incredible experience, and I leave knowing the company is very well-positioned for continued success. At this point, I’d like to open up the call for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And our first question is from the line of Jonathan Block of Stifel. Jon, your line is now open. Please go ahead.
Jonathan Block
Yes, hi guys, good afternoon. Maybe I’ll start with the 2024 guidance, which just seems a little low and certainly was below our expectation. So I’ll try to sort of pro forma it for the fourth quarter of 2023. And I think I’ve got these numbers right, Raj, we’re about $11.7 million software was 2.7%. Mike, it seems like we should take out software for the entire year as the discontinued ops. But anyway, call it, pro forma for the sale of software it looks like 4Q was about $9 million. You annualize that, you get $36 million. I know 4Q is a seasonally stronger quarter. But there’s a pretty big delta between the $36 million exercise I just went through in the $29 million midpoint. So Bjarne maybe you can start there and just walk us through that and help bridge that back to the ’24 guide. Thanks.
Bjarne Bergheim
Yes, happy to, Jon. So let me just start off by saying that the goal for us is — and put us on a quicker path to profitability. Just like we talked about in our prepared remarks, another way to think about that is we’re aiming to move more money and investments closer to our customers to focus more on GentleWave adoption. That’s very different than a kind of a more general boil-the-ocean strategy. specifically as it relates to the quarterly guide here, like we talked about like you’re mentioning, none of these numbers obviously include TDO. But if I look back now and kind of think about the last 2 years, we’ve seen, obviously, our sales and marketing expenses have been high and we didn’t quite see the growth that we would like to see. So we’re reducing expenses. We’re focusing on a few things.
Let me just stress this is not just about cutting costs. It’s about getting growth back into the business. And like I just talked about really bringing this back to profitable growth. So while we’re implementing these changes in the business, we will be a little bit more cautious on the revenue projections. But at the same time, really bullish about the commercial opportunities going forward. So you should see growth come back as we continue to move forward here.
And let me just quickly run through the list of some of the things that make me excited about the business on the commercial side. That really gives, I think, upside as we go forward on the guide. First of all, obviously, we talked about great product offering around G4 and clean flow. We have significant opportunities to upgrade customers to G4 as we move forward. The DSO opportunities, like we’ve talked about before, is real, and that’s something that we’re going to continue to work on. We’re going to onboard customers better, driving better utilization, hence, better peer to peer.
We’re going to be focused on specific sales activities that we know lead to results, such as professional education events. We’re doing more profit events now than we’ve done before, and we’re going to do that more effectively and efficiently as we go forward. We have a renewed focus on endodontist. And the other thing I just want to say is that the ADA code maintenance committee at their annual meeting last week in Chicago, the ADA agreed to [indiscernible] we believe will help doctors get increased reimbursement for the GentleWave procedure. That’s another thing that we really can really help drive upside. So those are just some kind of qualitative perspective. And Mike, I don’t know if you want to — anything else that you want to add?
Michael Watts
No, I think you covered everything. We’re seeing utilization remained stable in the forecast. So really, where you see that fluctuation is with console placements. And that’s where I think Bjarne highlighted that we have the opportunity to do some upgrades as we’re, of course, targeting to show as much improvement throughout the year as we can.
Jonathan Block
Okay. Thank you. That was helpful. And I think my other question will to also focus on ’24 a little bit. Just at the gross margin line, on a normalized basis, it’s been pretty much flat for the past 3 quarters, 35%, 36%. How do we think about the GMs in 2024, especially with the higher margin software business going away. Maybe, Mike, if you could just talk us through that a little bit, and then I’ll ask one more.
Michael Watts
Yes. So when we look at gross margin, if we — report the product segment in Q4, as you’re able to go through the numbers, you’ll see that the product segment had gross margins just under 30% for Q4. And we’ll see that continue through Q1, largely in part to lower revenue numbers. But as we move sequentially throughout the year, we’ll see improvements from the in-house production of Gen 4 start to take hold. And then, of course, we’ll be 100% clean flow beyond moving into Q2 and beyond.
We’ve got a little bit of clean flow left in finished goods inventory that will burn through in Q1, maybe a trickle into Q2. But with two products in house assembly, we should be able to optimize that process. And then we’ve also got some other initiatives that we’re working on to improve efficiencies around how we — our service model is.
Jonathan Block
Okay. But sorry, just to push you a little bit. I think previously, you talked about gross margins being in the 40% range for 2024 last quarter. Of course, that was prior to the sale of TDO on a pro forma basis, is that now a gross margin that’s in the mid 30s for the year, the high 30s for the year? Is there sort of an updated number that we should be thinking about GMs for all of 2024.
Michael Watts
So mid-30s is where we’re targeting for the full year. So we should see that improvement. And as we exit the year, start to be in the mid to high 30s.
Bjarne Bergheim
Any key opportunities for us, right, to drive margin here going forward is obviously continuing to drive manufacturing cost of the PIs and the console down. And now it is significantly more reliable G4 unit that will give us less servicing costs. So those are big opportunities for us to continue to drive margins. We still are very — like we have said before, we still — we have the opportunity to drive this towards more normalized med tech margins as we move forward.
Jonathan Block
Okay. And maybe the final one for me, and it’s I think a pretty broad question, maybe all encompassing. But Mike, if I heard you right, you mentioned utilization sort of stable fluctuations on the capital side. But Bjarne over the past like 3 to 6 months, you put in programs to try to stimulate the capital. You’ve announced agreements that should sort of widen the net the DSO opportunity, the trial period on placing capital to stimulate demand. So I just feel these are a little bit at odds how these programs not taken hold that you still doing the trial in the capital? Why have we not seen those sort of yield returns or pay off, where we’re now talking about stable utilization, fluctuation on the capital means down with those programs in the background. Thanks guys.
Bjarne Bergheim
Yes. Thanks, Jon. I think in general, like I alluded to, right, we have spent a lot of money on sales and marketing over the last 2 years, and we need to get more efficient about the way we run this business on the sales and marketing side. One of the things that we alluded to some of that during — in the call here, but we are making a significant number of changes on the commercial side to drive better efficiencies in the organization but also to drive — have a much more efficient engine by which we place capital and by which we also respond to doctors around utilization, not just new onboarding, but how we think about utilization across the existing installed base.
So the things that we are doing and that will — we think will meaningfully change the way we can perform here going forward. A significant amount of streamlining within the organization, significant round of additional focus. It’s all about focusing on sales, focusing on how we onboard doctors according to our playbooks, we’ve seen that if we onboard them well, they will utilize better and the cohorts that have been on boarded well stay steady and do not decline.
We are focusing our sales team on the most — more effective sales activities, including G4 sales profit activities. We also are ensuring that we have sufficient activities in the field to drive the close rates we would like to see — we’re putting in place standardized playbooks across the commercial team. Compensation plans are being put in place to much better align with what’s important for us and professional education activities is that something that we’re going to do more of.
We’re going to put those into the regions. We are going to be much more driving more cost-effective events, and we’re driving more amends [Operator Instructions]]and then we’re continuing to work closely with our KOLs on these different things. So I think if I was to summarize, there’s a lot of things we’re doing to change the commercial team, there’s a lot of — and that, combined with the different commercial opportunities we have, we’re very excited about the opportunities that we have ahead.
Jonathan Block
Thanks, guys. I will take the rest offline. Thanks for the time.
Operator
Thank you. This will conclude today’s Q&A session. So I’d like to hand back to the Sonendo management for any closing remarks.
Bjarne Bergheim
Thank you, operator. We appreciate everyone’s time today. Have a great day.
Operator
Thank you. This concludes today’s call. Thank you all for joining. You may now disconnect your lines.
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