SmileDirectClub Inc (SDC) 2023 Q1 法說會逐字稿

Greetings, and welcome to the SmileDirectClub's First Quarter 2023 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jonathan Fleetwood, Director of Investor Relations. Thank you, sir. You may begin.

Thank you, operator. Good morning. Before we begin, let me remind you that this conference call includes forward-looking statements. For additional information on SmileDirectClub, please refer to the company's SEC filings including the risk factors described therein. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today. I refer you to our Q1 2023 earnings presentation for a description of certain forward-looking statements. We undertake no obligation to update such information, except as required by applicable law.

In this conference call, we will also have a discussion of certain non-GAAP financial measures, including adjusted EBITDA and free cash flow. Information required by Regulation G of the Exchange Act with respect to such non-GAAP financial measures is included in the presentation slides for this call, which can be obtained on our website. We also refer you to this presentation for a reconciliation of certain non-GAAP financial measures to the appropriate GAAP measures. I'm joined on the call today by Chief Executive Officer and Chairman, David Katzman; and Chief Financial Officer, Troy Crawford.

Let me now turn the call over to David.

Thanks, Jonathan, and good morning, everyone. Thank you for joining us today. I want to begin my comments by thanking the entire SDC team for continuing to deliver on both of our 2 key strategic initiatives through the enhancements and upcoming U.S. launch of our mobile scanning SmileMaker platform and the launch of our premium service CarePlus in 4 pilot markets, all while meeting our financial goals for the first quarter of 2023.

Our focus on producing innovative, technology-driven solutions while maintaining disciplined cost controls allowed us to deliver sequential revenue improvement over Q4 of $33 million or a 38% quarter-over-quarter increase and adjusted EBITDA improvement of $21 million. The revenue increase was driven by an initial aligner shipment volume increase of 44%, which combined with our cost management not only improved the bottom line, but also delivered an improved free cash flow sequential performance of $23 million.

Let me start by providing an update regarding the status of our 2 key transformative innovations that will drive meaningful growth. The first innovation is our SmileMaker platform. As a reminder, SmileMaker or SMP features our mobile 3D scanning technology that allows customers to begin their teeth straitening journey from their own mobile device.

We successfully launched SMP in Australia at the end of November and are excited to announce our plans are on target for our U.S. launch in the next 2 weeks. We have made numerous improvements to our SmileMaker platform based on the learnings from our Australia launch, both in technology updates as well as customer journey enhancements, which allowed us to develop a stronger solution and go-to-market strategy for the U.S.

SmileMaker is our internally developed innovative AI technology that allows customers to digitally capture 2D images of their existing smile on a mobile device and submit the images to our enhanced AI engine to develop an automated 3D draft treatment plan that allows customers to buy their aligners immediately after seeing the potential new smile.

From a business perspective, this greatly shortens the time line from initial customer engagement to making a buying decision from days or even weeks to mere minutes, while providing our customers with a great digital experience. As I mentioned, the U.S. launch remains on track to launch in the next couple of weeks. Since the U.S. is a completely different market in terms of advertising channels, consumer preferences as well as our back-end payment processor with SmilePay, our plans are to have a soft launch introducing SmileMaker within select marketing platforms and gather learnings before full rollout.

Our second growth initiative is our CarePlus offering. This elevated service model allows both dentists and orthodontists and specifically the underpenetrated general practitioners market to utilize SDC aligners and our robust telehealth platform to meet the demands of the more traditional orthodontic customer, higher income households and parent of teens who desire added access to in-person dental professionals, but also want the convenience of telehealth for follow-up care. We believe that this offer will position SDC to capture a larger piece of the higher income consumer and teen market as well as provide a premium option for our existing customers who want the option of both virtual and in-person care.

From our initial research which has been confirmed with the launch of our pilot markets, both customers and dental practices value the unique turnkey orthodontics as a service nature of our hybrid CarePlus solution. From a practitioner's perspective, this solution requires minimal incremental investment for equipment and product training without any upfront fees paid to SmileDirectClub.

For consumers, they value the opportunity to purchase a premium service offering at an affordable price with a higher level of direct access for in-person dental professional visits. From a go-to-market strategy, we also discovered that many of our partner network practices appreciated having SmileDirectClub team members on site to support the introduction and the sale of the CarePlus offering.

We have introduced SmileDirectClub sales specialists in targeted partner network practices to better educate customers on the differences between our 2 service offerings, CarePlus and our traditional virtual care offering. Based on these insights, we developed a dual journey offering that educates and allows customers with bookings at CarePlus partner network practices the option to choose between CarePlus and virtual care regardless of the initial appointment type book within the practice.

We launched this premium service CarePlus offering at a price of $3,900 for our pilot phase through participating partner network doctors in Denver, Orlando, Sacramento and San Diego and plan to expand to more markets in the upcoming months. We continue to make progress with finding the right number of locations within our partner network program, the exclusive channel through which our customers will be able to receive our CarePlus offering.

We ended the quarter with 1,095 active locations. It's important to highlight that we do not need to have coverage of every general practice in our network, but want to ensure that we have a foundational presence in all key markets that allows a customer a short commute for an in-person visit. A key part of the value proposition for the doctor's practice is the ability to leverage the sales and marketing firepower of SDC to drive customers to any of our partner network offices for our CarePlus offering.

Early partner feedback has indicated SDC CarePlus leads are driving new foot traffic to their practice, providing an opportunity for the practice to turn these customers into patients of their own for further dental care. Additionally, some partners are benefiting from increased untapped revenue opportunities by selling the CarePlus solution to their existing patient base, further monetizing share time with their patients. Underlying the advancement of these strategic priorities is our commitment to rigorous financial discipline.

Our first quarter bottom line results highlight our commitment to growing our business while keeping a focus on our cost controls. We took actions in January to reduce costs by approximately $120 million to drive positive adjusted EBITDA by Q3 and positive free cash flow by Q4.

With the results of Q1, we are on target to achieve our objectives. In addition to our January cost actions, we recently announced in our March 8-K filing, our discussions with some of our existing convertible bondholders. For reference, we issued approximately $750 million in convertible debt in Q1 of '21, which is scheduled to mature in February of '26.

However, based on market conditions, we are exploring an opportunity to reduce some of this outstanding debt while also adding liquidity to our business. We are pleased to inform our investors that those negotiations have progressed with certain of the convertible debt holders with respect to a potential transaction.

We anticipate being able to share more with our investors in the very near term. Any financing transaction the company would enter into will be focused on improving our capital structure by bringing in additional funding and lowering our overall debt. We continue to face a difficult and unpredictable macroeconomic environment. However, it's important to note that our dedication to maintaining financial discipline through our cost controls and cash deployment regardless of top line results as we manage our business throughout 2023. We have the solutions, technology platform, team members and financial discipline to achieve our operational and financial targets.

And now I'll turn the call over to Troy, who will provide more detail on our Q1 results. Troy?

Thank you, David. I will cover our financial results for the quarter. Please be sure to review our supplemental materials posted to our investor website, which provides additional details on everything I will cover. Revenue for the first quarter was $120 million, which is an increase of 38% sequentially and a decrease of 21% on a year-over-year basis. We are pleased with our sequential growth that exceeded our typical seasonal trend from the fourth quarter to the first quarter.

Aligner revenue was driven by our shipment of over 59,500 initial aligners in the quarter, up 44% sequentially at an ASP of $19.49. The year-over-year revenue decline was primarily driven by continued challenging macroeconomic conditions driven by high inflation, which has been particularly difficult for our current core customer. Providing some details on the other revenue items, implicit price concessions were 11% of gross aligner revenue, down from 14% in the fourth quarter. The percentage recognized in the current quarter is in line with our historical performance, with the fourth quarter impacted by lower overall sales.

Fluctuations in the quarterly IPC percentage are impacted by the overall level of revenue recorded in the period, which can drive deleveraging as well as rebalancing of the reserves. As we have mentioned on prior calls, we maintained separate reserves for IPC and cancellations. And we analyzed and regularly rebalanced those reserves based on current information. While our results reflect the impact of the continued macro headwinds affecting our core customers, our restructuring plans drove meaningful improvements in our cost structure and free cash flow.

For the last 3 consecutive quarters, we have improved year-over-year EBITDA. In the current quarter, we improved adjusted EBITDA by $8 million and improved free cash flow by $36 million despite a $32 million year-over-year decline in revenue from the first quarter of 2022 compared to the current quarter. Reserves and other adjustments, which include impression kit revenue, refunds and sales tax, came in at 9% of gross aligner revenue compared to 10% in the fourth quarter. Financing revenue, which is interest associated with our SmilePay program, came in at approximately $7 million, which is consistent with Q4 of 2022 and down approximately $2 million year-over-year due to the lower accounts receivable balance.

Other revenue and adjustments, which includes net revenue related to retainers, whitening and other ancillary products came in at $18 million, an increase of $2 million over fourth quarter 2022 revenue and a decrease of $5 million compared to Q1 2022. As a reminder, in the comparable first quarter last year, we began the rollout of our innovative new retail products, including our whitening strips, which drove an initial increase in revenue.

Now turning to SmilePay. In Q1, the share of initial aligner purchases financed through our SmilePay program came in at 65.5%, which is above historical levels of approximately 60% and is reflective of the impact of the difficult macro environment on our core customer. Our SmilePay program is an important component to drive affordability with our customer base. And overall, the program has continued to perform well, with our delinquency rates in Q1 returning to more historical levels, particularly when compared to Q4, which on a lower sales base deleveraged. The fact that we keep a credit card on file and have a low monthly payment, gives us the confidence that SmilePay will continue to perform well.

Turning to results on the cost side of the business. Gross margin for the quarter was 72.5%, which was up from 61% in the fourth quarter. As a reminder, the lower gross margin rate in Q4 2022 was driven by the deleveraging of fixed costs on lower sales volumes and higher impression kit volume, which carries a higher cost relative to sales as well as lower retail margins and higher holiday shipping cost.

As expected, in the current quarter, the efficiencies from our cost control initiatives drove improvement in margins as the top line grew and we benefited from the operating leverage. Marketing and selling expenses came in at $72 million or 60% of net revenue in the quarter compared to $97 million or 64% of net revenue in the first quarter of 2022. While our marketing and selling expense increased $8 million from the fourth quarter of 2022 to take advantage of seasonal factors, we continue to drive additional efficiencies in our first quarter 2023 spend with an improvement of 1,400 basis points when compared to the fourth quarter.

With a targeted focus on efficiency and quality leads, we are continuing to calibrate spend across a diversified platform base to optimize continuously throughout the period to achieve the right balance of high funnel leads and bottom funnel aligner sales. On SmileShops, we had 108 permanent locations as of quarter end and held 62 pop-up events over the course of the quarter for a total of 170 location sites. The fluctuation in shop count is a result of detailed analysis we have undertaken to analyze the profitability of each store location, our ability to drive marketing efficiency as well as convenience for our customer base.

We expect to expand our SmileShop footprint as we optimize locations to support growth initiatives with our broader CarePlus rollout. Our end goal is to increase customer access to our solutions through the scaling of our partner network channel, expansion of our SmileShop footprint and the upcoming launch of our SmileMaker platform and app.

We will continue to monitor our strategies to expand our reach that supports incremental demand without cannibalizing sales from existing channels. We now have 1,095 North America partner network locations that are active or pending training. The Partner Network team has been focused on optimizing productivity and preparing for our broader CarePlus solution launch based on the learnings from our test launch in 4 markets beginning in February. Our partner network footprint will both scale our operations for our current virtual care business but will also serve as a key channel as we fully roll out our CarePlus premium service offering to all U.S. markets.

General and administrative expenses were $65 million in the quarter compared to $71 million in the first quarter of 2022. The decrease from the prior year quarter was driven by the cost savings initiatives we have put in place as well as a continued focus on cost control. The increase in G&A compared to the fourth quarter of 2022 is primarily related to lower incentive compensation expense recorded in the fourth quarter as a result of adjustments based on full year operating results. The G&A cost control initiatives we announced at the beginning of the year have been implemented. And we will see lower G&A costs throughout the rest of the year as we continue to focus on rightsizing our overall operating expenses based on core revenue expectations.

Other expenses include interest expense of $7.7 million, of which $6.3 million is related to the secured debt facility issued in April 2022 and $1.4 million is related to deferred loan costs associated with the convertible we issued in 2021. Additionally, onetime costs related to lease abandonment, impairment and other store and restructuring costs were $8.7 million, consisting primarily of costs related to our January restructuring actions, including costs associated with severance as well as store and facility closure costs.

In other expense, we recognized gains of $1.5 million primarily due to unrealized foreign currency translation adjustments recorded in the quarter. All of the above produced adjusted EBITDA of negative $27 million in the first quarter, which is an $8 million improvement over the first quarter of 2022 despite a $32 million decrease in revenue. This quarter represents our third consecutive quarter of reporting improving year-over-year adjusted EBITDA results. And we are on track for continued improvement with our efficiency and cost control initiatives put in place at the beginning of the year.

Our first quarter net loss was $66 million compared to Q1 2022 net loss of $73 million. Breaking out adjusted EBITDA regionally for the first quarter, U.S. and Canada came in at negative $15 million and Rest of World adjusted EBITDA was negative $12 million. Moving to the balance sheet. We ended the first quarter with $86 million in cash and cash equivalents, $184 million in net accounts receivable and $136 million drawn on our $255 million debt facility with HPS. Cash from operations for the first quarter was negative $33 million, while cash spent on investing for the quarter was negative $8 million.

Free cash flow for the first quarter, defined as cash from operations less cash from investing, was negative $41 million, which is a $36 million improvement over the first quarter of 2022. Cost changes we have put in place continue to drive us on a path to positive adjusted EBITDA by the third quarter of 2023 and toward positive free cash flow by the fourth quarter.

We recognized that in this difficult sales environment, we needed to realign our cost structure to attain EBITDA profitability on our core business and any upside that we see from our initiative launches will be additive to results at a very high efficiency level.

As noted in our press release, we have reaffirmed our 2023 guidance as well as the underlying assumptions that we provided on February 28, 2023. It's important to note that this outlook does not factor any contributions from our SmileMaker platform rollout in the U.S. or the launch of our CarePlus program. As David mentioned earlier, we've been negotiating with certain of our holders of our convertible notes and those have progressed with respect to a potential transaction. We anticipate being able to share more with our investors in the very near term.

Any financing transaction the company would enter into will be focused on improving our capital structure by bringing in additional funding and lowering our overall debt. With our upcoming SmileMaker platform launch in the U.S. and our CarePlus solution now lies in limited geographies, our investments and innovations are becoming a reality in the market.

We have gained value effects from our test market launches, which will enhance our go-to-market strategies as we roll out these solutions to the broader market. We are well positioned to participate across an increasing number of channels in the clear aligner category to meet customers wherever they wish to begin that SEC journey. From their -- own home to one of our SmileShop retail locations from an in-person visit at one of our partner network providers and now from the technologies enabled from their own mobile device.

In addition, we are on track to meet our positive EBITDA and free cash flow goals in the back half of the year to stabilize our balance sheet, enable us to execute on our new initiatives.

With that, I would now like to turn the call back over to David for some closing remarks.

Thanks, Troy. We look forward to our upcoming U.S. launch of our SmileMaker platform over the next few weeks and the expanded rollout of our CarePlus offering to additional U.S. markets. We will continue to update the market with additional insights regarding these initiatives, along with any of our other exciting innovations and achievements or key milestones.

Thank you to everyone for joining today. And with that, I'll turn the call back over to the operator for Q&A.

(Operator Instructions) Our first question comes from Jon Block with Stifel.

David, maybe the first one for you. Just the 1Q '23 results are sort of 28%, 29% of full year revenue at the midpoint. And the quarterly growth was solid. So it would sort of suggest some momentum in the business return. But that seems a bit at odds with the full year revenues, right? So maybe if you could just talk to, is it some just conservatism? Is it just early in the year? Is it choppy out there? I guess what I'm trying to get at is, can you talk about the environment, which had been challenging per your prior comments with inflation, et cetera. But are you seeing that starting to thaw in any way? And then I'll ask my follow-up.

Yes, Jon. No, it's still a tough market out there. The macro, our customers, especially that $65,000 a year income consumer. It was a good quarter, especially over Q4 and some of the cost savings initiatives that we did versus Q1 of 2022. But I think we're right on track for hitting our guidance of $400 million to $450 million. This is where we thought we would be based on what we're seeing in the economy. So we're not seeing any thawing out of our consumers, especially in discretionary spend. Good quarter and we'll keep marching on the core business to hit that guidance of $400 million to $450 million on the top line.

That's helpful. And then I guess as sort of a follow-up to that and then try my second question. The follow-up would just be off the 1Q results, Troy, anything cadence-wise, I think your cases are usually down 1Q to 2Q, the guide would seem to imply that. But maybe you could just talk to the cadence? And then the follow-up is just the EBITDA, the positive EBITDA aspirations in the back part of the year, how do you get there?

And Troy, I know you alluded to lower G&A for the rest of the year, but the GA guide sort of suggests it doesn't go much higher. So I guess what I'm getting at is what's been the problem for the past handful of years, right, which is can you drive that CAC much lower while maintaining the top line because in the past, we've just sort of seen that high correlation between the CAC and the volume number on the aligners?

Yes. When thinking through kind of Q2 and the cadence, I think what we can expect, you're right. Q1 is the seasonally high quarter. And we were pleased with what came through in the quarter, particularly on top of what we saw from an overall volume standpoint in Q4. I think what you can see in Q2 would be a similar decline to what we've seen from Q1 to Q2 traditionally is what we would expect there. And I'd say for the full year, our $400 million to $450 million guidance, that's a decent size range there that I think we could be at the top or bottom end of that just kind of depending on how the overall macroeconomic conditions play out through the rest of the year.

When I think about the overall bottom line piece, Q1, we didn't have all of our cost savings initiatives implemented at that time. So we will see G&A come down. But we're also planning for selling and marketing efficiency as well in Q2 as well as the back half of the year. And we are driving more efficiency through marketing. And that's really been a huge initiative for us that we started last year and really has continued all the way through this year as well. But being, very cost conscious financial discipline is going to be a key for us through the back half of the year. We do have some revenue opportunities as well. We've looked at pricing for both kinds of touch ups as well as overall cost of an aligner treatment plan in retainers as well.

We're looking really all across the business. Inflation is impacting us and some of that's going to ultimately flow through our revenue as well as we look at our overall cost structure. So I think we have a lot of things going our way kind of in the back half of the year that will help to drive improving EBITDA and free cash flow.

And we've been on that trend. So this was our third consecutive quarter of improving EBITDA. We just barely missed the fourth quarter from last year from Q2. So we've been on quite a trend on cost control and revenue enhancements, margin enhancements, things like that to get to a point just on our core business alone to getting to that positive EBITDA level. And then obviously, we've got the initiatives that we're looking forward to as well as those launch, those will be additive to both revenue and bottom line.

Our next question comes from Brandon Couillard with Jefferies.

This is Matt on for Brandon. David, maybe one for you. Can you give a bit more color on what the team is doing ahead of the SmileMaker launch here in the U.S., curious some of the learnings from Australia? I think you mentioned both tech and consumer learnings that you're looking to tweak here. I'd be curious to get a little more color on that. And then updated thoughts on how you'll target the millions of existing leads you have within the U.S. funnel today once the products lies.

Yes. So being such a new innovative product and SmileMaker with the 3D AI technology. It's been every week. We're looking at enhancements and tweaks and making really good progress in Australia. We're still not done. But we're at a point now that we feel that we can launch in the U.S. And we'll be launching it within the next 2 weeks and we'll continue to tweak in the U.S. The U.S. is well -- obviously, each market stands on its own. Some of the marketing channels are different.

Our payment processing back end is different. So we have to make sure that those are rock solid. But we're very excited about what we're seeing. Both -- it really does 2 things. It's designed to enhance conversion because you don't have this long flow through the system like you do with kits and scans, which kits can take up to 2 weeks before you get it back.

You get a treatment plan, get your photos uploaded, a SmileShop visit, you have to book it usually the average person is 3 to 5 days and make sure that they can show on that day and are not reschedule. So what SmileMaker does is it allows that customer while they're in the moment, while they either heard from a friend or seen an ad on TV or Facebook to go immediately download the app, scan their teeth.

And all the metrics around that app have been significantly improved. The number of starts has been improved. The number of completions, people being able to get through the scan because there's over -- there's 9 poses that they have to go through between the straight and/or upper, the lower, et cetera. So all those things the team is constantly working on to improve the metrics. So that we can get more people through the funnel on the other end and get what we call a custom smile plan lead, which then right at that moment, 2 to 3 minutes into -- after downloading the app, they can buy their aligners.

And so that's improving conversion. But the other one that we found is really helping the success of SmileMaker is the amount of people that are visiting the site or going to the App Store based on the advertising of this innovative technology. So in the U.S. market with our normal kit and scan and our marketing which has been very, very successful, we have 60% aided awareness. This new technology in the creative in our TV spots, which you'll soon see in the U.S. and in Facebook and all the different channels, is bringing more visitors per dollar spent.

So either way you cut it, either you improve your conversion or you stretch your marketing dollars more. Both of those are going to improve the CAC, which is what we're after. And we're seeing it. And we expect to see it after some tweaking in the U.S. We are doing a soft launch. So when we launch in 2 weeks, you can go to the App Store. And you'll see the product and you can use it. We're not going to be marketing it on TV right away. We're not going to be marketing it in different digital channels right away until we get some of the tweaks and enhancements that we need. And then as we see the same success as we saw in Australia, we'll -- we have different phases to introduce different marketing channels. And eventually, it will be 100%. Everywhere you see SmileDirect, you'll see SmileMaker.

That's really helpful. And then referrals as a percent of aligner orders ticked down a little bit here to 19% in the quarter, percent been below 20% in a bit, anything specific to spike out in 1Q for the step down in referrals?

No, we're really not seeing it. I mean, it was, I think, very slight. We've been up as high as what 22%, 23% and now we're at 19%. There's nothing from a customer care standpoint or any dissatisfaction with the brand or the service. I'm not overly concerned about it. Another thing that SmileMaker has done is because of the cool technology, we're getting more people to share the app, which is really nice because that helps drive down your CAC, it's free advertising. So there's a function within -- once you get your customer smile plan to be able to share that out with others and we're seeing people use that. And we didn't have that kind of ability for customers to share directly interacting with an app.

Our next question comes from Dylan Carden with William Blair.

I know we don't talk about it a lot. But I was just kind of curious. It's a significant portion of the business. The decline in sort of ancillary revenues, is that expected to follow closely to aligners or one would think that you're pushing doors and pushing product to that channel that you'd seen maybe more stability?

I'd say, overall, the ancillary revenue changes are really driven more by the retail business. And we did have some product launches last year that drove a little bit of higher. So we had launched our whitening strips, our new whitening strips last year. And I think that's really what impacted it. But certainly, I mean, what we've seen from an overall retail environment and the macroeconomic environment has impacted the retailers that we work with. And so they pulled back some clearly. I think we have some real innovative products that we've got out there that I think can still drive some volume growth. But I think it's going to follow the macroeconomic trend. And we did see -- we have seen some pullback, certainly in Q4 and Q1 from some of the retailers.

And then on the SmileShops down to 81 in the United States, kind of more significant reduction over time, broadly. I know you've closed some markets. But what's the kind of end goal here? I mean do they serve a purpose in the sort of new vision of the business? Will they kind of continue to wind down as you grow practices? And then, any way to kind of get at a measure of organic growth in the business, kind of netting out perhaps some closures?

Well, I think what we've really done is analyzes that portfolio very closely. You're right, over time, certainly before COVID we were more of a shop location in-person scan type business. But that shifted back once COVID started. We're about 50-50 between kits and scans. So it's pretty well-distributed. I'd say really the focus we've been utilizing is really looking at those stores from a profitability standpoint and then looking at them from a proximity to our customer base standpoint and then trying to drive marketing efficiency through some of those stores as well because we do get higher conversion rates from scans.

But it's really a process of us analyzing those store locations. We'll actually see some additional stores that we're going to add back here in the near future. But again, what we've done is kind of rationalized that overall footprint from a profitability and location standpoint. But it is a huge opportunity for us to increase marketing efficiency as well because we can market in some of those areas where we have a SmileShop and drive volume there versus a kit market by itself. So it will fluctuate around a little bit. But it's really a focus for us on profitability and just making sure from a financial discipline standpoint, we're looking at that store base is how it can be additive to the overall business.

So it is an important part of what we're doing going forward. I think we've looked at could we have shops inside of our partner network locations and there is an opportunity there. But I think it's going to be a mix. And I think we're still working through that from an overall profitability standpoint to just make sure we have that right mix where we're in front of the right customers and making it convenient for them to start with us and then kind of maintain that.

(Operator Instructions) Our next question comes from Robbie Marcus with JPMorgan.

Great. Maybe to start, you talked about the expected ramp in guidance over the rest of the year. I wanted to dig into what kind of economic environment you're assuming there. Right now unemployment is at or near record lows, but inflation is high. What's assumed in the guidance range? And how are you planning for and preparing for a possible recession in the future?

I'd say overall, when we think about the back half of the year and what we expect from a macroeconomic perspective, we don't really plan for anything to improve dramatically in the back half. And I think we -- again, we gave a relatively -- what I would say, a relatively moderate range of $400 million to $450 million. And I think the way we think about it is the bottom end of that range was a little bit of a worsening of the environment and the high end of the range would be a little bit better environment.

So I'd say we're kind of middle of the road as far as what we expect in the back half of the year. Clearly, we're not seeing any benefit from the employment rate necessarily really all this from our standpoint. We really feel like is a lessening of the discretionary income available in that -- in our key demographics.

What we've pushed towards are these new initiatives, CarePlus having that launched in 4 markets and then expanding that throughout the rest of the year to enter into that higher income consumer as well as the teens, which were underpenetrated in that area. And there's a ton of opportunity in that teen market.

So having the CarePlus solution available in the marketplace is really important for us to kind of expand what -- expand the customer base that we're selling to. Obviously, we're never going to move away from that key demographic that we're focused on.

But having multiple offers that can provide a little more revenue with a little bit of a different model, I think, is an important thing we're looking at. And then overall, from an increasing EBITDA perspective from the back half of the year and how we think about it going into '24, the way we're planning for the overall macroeconomic condition. And if it gets better or worse is really through cost control and rightsizing our expenses to be profitable at these lower revenue levels.

And then as we gain traction with the SmileMaker app and some of these higher income and teen initiatives with CarePlus, those should be very additives because they don't really add a lot of cost to the overall business. So to the extent we can leverage revenue and lower our G&A and other kind of fixed costs, that's really how we think about the future is being able to weather these storms of bad macroeconomic conditions. And then when growth returns at some point in the future and hopefully sooner than later, we should have a business model that would be highly profitable from an efficiency standpoint.

Maybe just a follow-up on that. As you try and target these higher-income patients, is there any rebranding you need to do with SmileDirect? And how do you plan to take the product and drive it effectively into these higher-income patients when there is such an established brand out there already with name brand recognition in the doctors' office?

Yes. That's a good question, Robbie. So if anyone on the call or anyone has access to get into the 4 markets, Denver, Sacramento, San Diego, Orlando, you'll see the branding. And a lot of that was done through research. We had entertained a name change, no different than some of the car companies that have a higher brand. And so they won't use the base brand like Toyota or others. But what the research showed was that it wasn't about the brand.

It was more about the virtual or telehealth aspect of it, that these hiring consumers really wanted the in-person experience, at least, especially the start and then a couple of steps along the way. They like the telehealth for the convenience play. But they didn't want to have a pure telehealth play. Fortunately, for us, because we spend a lot of money on branding, we have that 60% awareness. It wasn't about not transacting because they felt the brand was beneath them or only targeted towards the lower consumer.

So I think the team did a great job with CarePlus and how we've woven that into the SmileDirectClub initial branding. You can see that on -- like I said, in those 4 markets, the website looks different. The landers for CarePlus are different. The one thing I talked about in my prepared remarks that I want to point out and that's why you have a pilot and it's iterative and we're learning as we're going. We're all paying attention and focused on what's happening in these partner network locations that are offering CarePlus.

We have I think we're in 14 locations between the 4 markets. And within those, we have -- as Troy talked about, some of our SmileShops, just the standard virtual care SDC offering is inside those partner networks that are now offering CarePlus. Our initial hypothesis was that the customer was going to see the marketing or come to the site, see CarePlus and then book an appointment as a CarePlus customer. And they would get the CarePlus journey when they went into the office. They would during that visit they get to meet the dentist, who will be overseeing treatment.

They meet some people, the staff from the office. But what we found is that our sales specialists or Smile guides started offering what we call a dual journey. And so even if that person is coming in as an SDC virtual care, they have no interest in CarePlus. We're presenting it to them as 2 offerings. SDC now has Care and CarePlus. We talk about the differences and we talk about the monthly payment differences. It's only -- it's a $26 a month difference if you choose at one $89, one is $115, a little more down payment of $500 instead of $250.

But what we're finding is this upsell opportunity, which we had not initially planned for. So customers with every single customer who walks in that door, we're offering both options. We're seeing a tick rate. It's early, it's early on and it's not big numbers, but it's looking promising. And if we can then roll that out to the $80 or $100 and it probably gives us an opportunity to open up more shops because of the higher AOV, it only takes 10%. If we have 10% of our customers that we offer that to take advantage of CarePlus, that's 25% increase in revenue because of the $3,900 price point. Same CAC, I mean, it's not -- it's a lower CAC, same marketing dollars.

Now you sold a $3,900 product. And there is some added expense with that. But about -- as we said on previous calls, about 30% to 35% of that extra $2,000 flows through to EBITDA. It's about $700. So that's meaningful, so more to come on that. And if we end up through our testing, rolling that out to all of our SmileShops and moving more of our SmileShops inside partner network offices, we'll keep you posted on that. But that is something we're looking at as a potential possibility because of CarePlus.

Our next question comes from Michael Ryskin with Bank of America.

This is [Peter] on for Mike. Could you just elaborate on, I guess, the latest you're seeing on the competitive front, perhaps touching on thoughts on maybe any share gains or losses there?

Yes. I don't see much going on in the market. I know there's some competitive products that might be eating a little bit into Invisalign's market share at the ortho office. We're more direct to the consumer and now through CarePlus, more GP focused, not ortho-focused. So I think it's still the same set of competitors. On the DTC side, it's really Byte, which is owned by Dentsply. And as far as our specific offering CarePlus through the partner network, I don't see anybody doing that, which is lower share time, higher-priced product, utilizing the GP in the journey.

But as much as we can, using our telehealth platform, so we reduced that share time for the GP. And it's been very favorably received. And most of these GPs that we're signing up don't have -- don't offer any kind of teeth straightening. So there's a big market out there because the vast majority don't -- well over 50% don't offer any kind of teeth straightening. And part of it was that they didn't want to take up the share time, they didn't want the training. They didn't want the upfront fees, where you've got to pay lab fees. And so I think we've solved that concern. And just -- I think the competitive set looks very similar to what it has over the last year since Canada dropped out of the DTC market.

And then just curious if you could provide any further update on the financing front and available sources of cash. You kind of mentioned the filing regarding the convert from March. Any further update there or elsewhere you can provide?

No, I would say that as we put in our prepared remarks and in our earnings release and from our 8-K filing back at -- I think it was end of March and early April, we're in negotiations with certain of the holders of the convertible notes. These are notes that were issued in 2021. We announced that those negotiations have progressed with respect to a potential transaction. And we anticipate being able to share more about those negotiations in the very near term.

We have reached the end of our question-and-answer session. This concludes today's conference. Thank you for your participation. You may disconnect your lines now.