Some analysts call guidance 'conservative,' while another says the latest report not enough to move the shares higher
Shares of SmileDirectClub (SDC) fell in morning trading after the company said it expects its elevated expense levels will continue in the fourth quarter. Following the report, analysts issued a wide range of commentary, with one saying investor focus should now pivot back to SmileDirectClub's "strong" underlying fundamentals and another saying the company's latest report is likely not enough to move the shares higher since its 2019 EBITDA guidance is shy of plan. The company's earnings report is its first since it went public in September.
EARNINGS AND GUIDANCE: On Tuesday after the market close, SmileDirectClub reported a third quarter loss per share of (89c), better than the (98c) loss analysts were expecting. Revenue of $180.2M was also above the $165.44M consensus. Unique aligner shipments of 106,070 were higher than the 72,387 reported last year.
Looking ahead, SmileDirectClub forecast fourth quarter revenue of $196M-$201M against the $207.57M consensus, while adjusted EBITDA is expected to be ($37M)-($30M). Fiscal 2019 revenue was forecast at $750M-$755M with adjusted EBITDA of ($80M)-($73M). Analysts expect FY19 revenue of $746.5M.
In its earnings commentary, SmileDirectClub said its legal expenses doubled in the third quarter of 2019, compared to the second quarter. "We expect this to continue into the fourth quarter, as we maintain our proactive stance to defend our mission in support of consumer access to care." The company added, "Additionally, we continue to invest in human capital across the company in preparation for our long-term growth. This investment is focused on technology, marketing, data analytics, data science, finance, and other corporate functions."
"You can expect us to continue to fight in order to protect the access to care that consumers want and deserve," CEO David Katzman said on the company's earnings conference call.
WHAT'S NOTABLE: In October, short-seller Hindenburg Research said it estimates that the stock has about 85% downside in a damning note outlining practices that it claims are illegal and endanger patients. "Financially, the company is another profitless, cash incinerating 'unicorn' that we believe has significant added financial headwinds to face as a result of regulatory, legal and customer satisfaction liabilities," Hindenburg Founder Nathan Anderson wrote in the report. SmileDirect responded with a statement that hit out at "organized dentistry," saying "there is no factual basis nor scientific or medical justification in these allegations to substantiate the false claims made about our model and the state-licensed doctors in our affiliated network."
SmileDirectClub made its public debut on September 12. Shares opened for trading at $20.55 after the company's IPO priced at $23.00 per share.
'CONSERVATIVE' GUIDANCE: SmileDirectClub shares dropped following the company's Q3 results despite a headline beat as "strong" clear aligner peer performance and bullish management commentary "edged whisper estimates up intraquarter" and its Q4 guidance fell short, Citi analyst Stephanie Demko told investors in a research note. The analyst attributed the Q4 revenue guidance shortfall to conservatism given the magnitude of the Q3 beat, and she noted that management projections do not include expansion into incremental geographies, the nighttime aligner opportunity and other adjacent opportunities. Jefferies analyst Brandon Couillard said the company's Q4 guidance "that came in light, but looks quite conservative." After a "spate of headline noise," investor focus should pivot back to SmileDirectClub's "strong" underlying fundamentals, reaccelerating Q4 growth, and "attractive" valuation, the analyst told investors in a research note of his own.
JPMorgan analyst Robbie Marcus believes SmileDirectClub posted "good" Q3 results and that management took a "very conservative" approach to setting 2019 guidance. As such, he remains bullish on the company's ability to post another beat in Q4 and provide initial 2020 guidance "that sets up another year of beat-and-raise quarters."
BULL/BEAR DEBATE TO CONTINUE: Stifel analyst Jonathan Block said SmileDirectClub bulls will point to the company's Q3 revenue beat and argue that 2019 sales estimates are likely to move higher, while bears will note increased adjusted-EBITDA losses as well as ongoing regulatory overhangs, with few of the questions on either side of the debate likely answered immediately. While the stock likely remains volatile in the near-term, he also believes it is cheap when considering the large long-term opportunity for a $2,000 consumer clear aligner alternative, said Block.
Credit Suisse analyst Erin Wilson Wright lowered her price target for SmileDirectClub to $17, saying that while shares have dropped 52% since its September IPO on technical dynamics, concerns over quarterly volatility and regulatory risks, she views its latest report as likely not enough to move the shares higher with 2019 EBITDA guidance shy of plan.
William Blair analyst John Kreger views SmileDirectClub's Q3 earnings as positive, "although perhaps not positive enough" to change the negative sentiment that has developed around the stock over the last two months given regulatory question marks. He said that the Q4 guidance is slightly worse than expected, and the regulatory outlook around teledentistry "will remain cloudy," particularly as investors wait for more clarity around California Assembly Bill 1519, but added that he remains "bullish on the long-term thesis," and believes SmileDirectClub's risk/reward is attractive at present.
PRICE ACTION: Shares of SmileDirectClub are trading well below their IPO price of $23 and are down nearly 18% this morning to $9.10.