Sector

Healthcare

Background

Kyle Wailes is the current CFO of SmileDirectClub. We cover the company’s DTC roots, how SmileDirectClub differentiates itself relative to metal braces and clear aligner competitors like Invisalign, and what growth opportunities the business plans to pursue moving forward.

Cover

Date

August 18, 2021

Episode Number

22

SmileDirectClub Business Breakdown

Background / Overview

SmileDirectClub, founded in 2014, is a direct-to-consumer (D2C) oral care company specializing in clear aligners as an affordable alternative to traditional metal braces and competitors like Invisalign. Headquartered in Nashville, Tennessee, the company leverages a teledentistry platform to democratize access to orthodontic care by making it more affordable and convenient. The founding story stems from Alex Fenkell and Jordan Katzman, who met at summer camp and later partnered with David Katzman (Jordan’s father and current CEO) to address pain points they experienced with braces. Their core insight was the excessive markup in orthodontics, particularly for clear aligners, which they believed could be disrupted through a D2C model.

The company operates in 13 countries, with nearly 20% of revenue from international markets as of the podcast date. It has served over 1 million patients since inception and employs a vertically integrated model, manufacturing aligners in-house. SmileDirectClub went public in 2019 and has scaled rapidly, though it remains a young business at just over five years old at the time of the podcast.

Ownership / Fundraising / Recent Valuation

SmileDirectClub is a publicly traded company, but specific details on recent valuations or enterprise value (EV) multiples are not provided in the transcript. Historically, Invisalign owned just under 20% of the company but exited its stake following litigation, which SmileDirectClub won, allowing it to repurchase the equity. No further details on private equity sponsors, recent fundraising, or current valuation multiples are disclosed, so these are excluded to avoid speculation.

Key Products / Services / Value Proposition

SmileDirectClub’s primary product is clear aligners designed to straighten teeth over an average treatment period of 4–6 months. The value proposition centers on affordability, convenience, and accessibility compared to traditional orthodontics and competitors like Invisalign. Key differentiators include:

• Affordability: Priced at $1,950 (or $250 down and $89/month for 24 months via SmilePay), significantly lower than the $5,000–$8,000 for metal braces or Invisalign.
• Convenience: A teledentistry platform allows remote interaction with doctors, eliminating the need for frequent in-person visits.
• Accessibility: An omni-channel approach offers three entry points: at-home impression kits, SmileShops (125 permanent locations and pop-up events), and partnerships with general practitioner (GP) dental practices.

The aligners are manufactured in-house, ensuring control over quality and cost. The company treats ~90% of cases presented, with plans to expand into more complex cases, such as mixed dentition in teens.

Segments and Revenue Model

SmileDirectClub operates as a single-segment business focused on clear aligners, with no distinct product lines or economically separable units. Revenue is generated through aligner sales, with three customer acquisition channels:

1. At-Home Impression Kits: Customers order a kit, create a mold of their teeth, and return it for aligner production (~50% of demand post-COVID).
2. SmileShops: Permanent (125 locations) or pop-up locations for 3D intraoral scans (~50% of demand post-COVID).
3. GP Partnerships: Dental practices conduct initial scans, uploading data to SmileDirectClub’s platform (<10% but growing).

The revenue model is straightforward: a fixed price per treatment ($1,950 or financed via SmilePay), with no recurring or aftermarket revenue (e.g., spare parts or maintenance services). The SmilePay program enhances affordability, requiring no credit check and driving market expansion.

Splits and Mix

• Channel Mix: Post-COVID, demand splits ~50/50 between impression kits and SmileShops, with GP partnerships as a smaller but growing contributor. Pre-COVID, SmileShops drove 90% of demand.
• Geo Mix: ~80% of revenue from the U.S. and Canada; ~20% from international markets (13 countries, entered in 2019).
• Customer Mix: 60% female, 40% male; core household income of ~$70,000 (range: $30,000–$120,000+), targeting consumers who cannot afford traditional orthodontics.
• End-Market Mix: ~90% adults, ~10% teens (vs. 75% of global case starts being teens, indicating growth potential).
• Revenue/EBITDA Contribution: No segment-level EBITDA splits provided, but the blended target is 25–30% EBITDA margins. International markets and GP partnerships likely have similar unit economics, with potential for slight improvement in GP channels due to lower marketing costs.

Mix Shifts:

• Channel: Shift from 90% SmileShops pre-COVID to 50/50 SmileShops/impression kits post-COVID, reflecting consumer preference for omni-channel options.
• Geo: International revenue grew to 20% in ~2 years, with plans to add 5–7 countries annually.
• Customer: Focus on expanding teen market (75% of global case starts) and higher-income consumers who can afford Invisalign but opt for SmileDirectClub’s value.

KPIs

• Case Starts: ~500,000 annually in the U.S., incremental to the 4M in-office case starts.
• Conversion Lift: SmileShops increase conversion rates by 15–20% in DMAs where both SmileShops and impression kits are offered.
• Lead Conversion: ~60% of leads convert within months; 15% of Q1 purchases came from leads >24 months old, indicating a long-tail funnel.
• Revenue Growth: 20–30% annualized top-line growth projected over 5 years.
• EBITDA Margin: Targeting 25–30% over 5 years; achieved EBITDA positivity in Q3 2020.

No clear acceleration or deceleration trends are noted, but volatility in quarterly performance is acknowledged due to the company’s youth and execution risks.

Headline Financials

• Revenue Trajectory: Approaching $700M in trailing twelve months (TTM) as of Q1 2021, down slightly from $750M in 2019 due to COVID impacts. Long-term guidance projects 20–30% CAGR, driven by international expansion, teen market penetration, and GP partnerships.
• EBITDA: Achieved profitability in Q3 2020, one quarter ahead of expectations. Targeting 25–30% margins through operating leverage on G&A and gross margin improvements (mid-70s% to 85%).
• FCF: No specific FCF figures provided, but capital intensity is moderate due to vertical integration (manufacturing) and SmileShop leases. Capex and NWC details are absent, but pop-up events and shared salon locations suggest low fixed capital requirements.

Long-Term Financial Trends:

• Revenue growth relies on volume (new case starts) rather than price increases, given the fixed $1,950 price point.
• EBITDA margin expansion hinges on gross margin improvements (automation) and G&A leverage as revenue scales.
• No evidence of large capex cycles or significant NWC swings, suggesting stable cash conversion.

Value Chain Position

SmileDirectClub operates midstream in the orthodontic value chain, focusing on aligner manufacturing and distribution directly to consumers. Key activities include:

• Primary Activities: Design and manufacturing of aligners, customer acquisition (marketing/sales), teledentistry platform operations, and logistics (shipping aligners).
• Supply Chain: Raw materials (plastic for aligners) are not detailed but assumed to be commoditized. Manufacturing is fully in-house, providing cost control and quality assurance.
• GTM Strategy: Omni-channel approach (website-driven traffic, SmileShops, GP partnerships) with heavy marketing spend (40–45% of revenue) to acquire leads. The teledentistry platform enables remote treatment, reducing reliance on physical infrastructure.
• Competitive Advantage: Vertical integration eliminates orthodontic markups, while the teledentistry platform enhances convenience. Strong IP (e.g., SmileShop process) and brand awareness bolster differentiation.

The company captures value by bypassing traditional orthodontic channels, delivering aligners at a lower price while maintaining comparable gross margins to Invisalign (mid-70s% vs. Invisalign’s low-70s%).

Customers and Suppliers

• Customers: Primarily adults (90%) with household incomes of ~$70,000, though the range spans $30,000–$120,000+. Teens (10%) are a growth focus. Customers value affordability and convenience, with 20% of business from referrals.
• Suppliers: No specific supplier details provided. Plastic for aligners is likely sourced from multiple vendors, with no indication of supplier concentration or exclusivity risks.

Pricing

• Contract Structure: Fixed price of $1,950 or $250 down plus $89/month for 24 months (SmilePay). No long-term contracts beyond payment terms.
• Pricing Drivers:
• Mission-Criticality: Straightening teeth is a high-consideration purchase, often tied to life events (e.g., weddings, new jobs).
• Value-Based Pricing: Priced at ~25–40% of Invisalign/metal braces, capturing consumer surplus for price-sensitive customers.
• Demand Elasticity: The $1,950 price point and SmilePay expand the market to lower-income consumers, increasing volume.
• Competitive Positioning: Undercuts Invisalign’s $5,000–$8,000 price, leveraging teledentistry to eliminate markups.

Bottoms-Up Drivers

Revenue Model & Drivers

• Revenue Model: Fixed-price sales of clear aligners, with no aftermarket or recurring revenue. Revenue = Volume (case starts) × Price ($1,950).
• Volume Drivers:
• Market Expansion: ~500,000 U.S. case starts annually, incremental to 4M in-office starts. Global market of 15M case starts, with 75% outside the U.S.
• End-Market Growth: ~90% of people globally have crowding/spacing issues, with only a small fraction treated annually. SmileDirectClub targets 500M people who can afford $89/month.
• Customer Acquisition: 40–45% of revenue spent on marketing (60% online, 40% offline, including 30% TV). Referrals (20%) and organic traffic drive lower CAC.
• Conversion: SmileShops boost conversion by 15–20% in DMAs. Long-tail funnel (15% of purchases from leads >24 months old) indicates persistent demand.
• Growth Levers: International expansion (5–7 new countries/year), teen market (75% of case starts), and GP partnerships (1,500+ practices).
• Price Drivers: Fixed at $1,950, with no indication of price elasticity or increases. SmilePay enhances affordability, driving volume over price.
• Mix:
• Geo: International revenue (20%) growing faster than domestic due to recent market entries.
• Channel: Shift to 50/50 SmileShops/impression kits reflects consumer preference for flexibility.
• Customer: Teen market underpenetrated (10% vs. 75% of case starts), offering high growth potential.
• Organic vs. Inorganic: Growth appears organic, with no mention of M&A.

Cost Structure & Drivers

• Variable Costs:
• COGS: Includes raw materials (plastic) and manufacturing labor. Current gross margin of mid-70s% expected to reach 85% through automation.
• Marketing/Sales: 40–45% of revenue, covering online (60%) and offline (40%) channels. High variable cost due to lead acquisition.
• Fixed Costs:
• G&A: ~15% of revenue, built to support a larger business. Expected to decline as a % of revenue with scale, driving operating leverage.
• SmileShops: Leases for 125 permanent locations and pop-up events. Shared salon model and pop-ups reduce fixed cost intensity.
• Manufacturing: In-house facilities, but no details on capex or depreciation.
• Cost Analysis:
• % of Revenue: Marketing/sales (40–45%), G&A (15%), COGS (~25–30%). Targeting 85% gross margin implies COGS dropping to ~15%.
• % of Total Costs: Marketing/sales (55–60%), COGS (30–35%), G&A (~15–20%).
• Operating Leverage: G&A leverage is the primary driver of EBITDA margin expansion (25–30% target). Fixed costs (G&A, SmileShop leases) scale with revenue, while variable costs (marketing, COGS) remain high.
• EBITDA Margin:
• Current: Positive since Q3 2020, but exact margin undisclosed.
• Target: 25–30% driven by gross margin improvement (automation) and G&A leverage.
• Incremental Margin: High due to fixed G&A base, but tempered by heavy marketing spend.

FCF Drivers

• Net Income: Not disclosed, but EBITDA positivity suggests positive net income potential.
• Capex: Not quantified, but vertical integration and SmileShop leases imply moderate capital intensity. Pop-up events and shared salons reduce capex needs.
• NWC: No details provided, but D2C model (prepaid SmilePay or single-pay) suggests low receivables. Inventory (aligners) and payables (raw materials) likely balanced, with a short cash conversion cycle.
• FCF: Not disclosed, but stable revenue, moderate capex, and low NWC needs suggest positive FCF potential as EBITDA margins expand.

Capital Deployment

• M&A: No acquisitions mentioned; growth appears organic.
• Organic Growth: Investments in international expansion, teen market, GP partnerships, and R&D (e.g., teen compliance solutions, AI for treatment planning).
• Buybacks: Repurchased Invisalign’s ~20% stake, benefiting shareholders. No ongoing buyback program noted.
• Capital Allocation: Prioritizes growth initiatives (international, teen, GP) over dividends or aggressive buybacks, aligning with a young, high-growth business.

Market, Competitive Landscape, Strategy

Market Size and Growth

• Global Market: 15M annual case starts (4M in the U.S.), with ~1/3 via clear aligners and 2/3 via metal braces. SmileDirectClub adds ~500,000 U.S. case starts, expanding the market.
• TAM: ~90% of people globally have crowding/spacing issues, with 500M able to afford $89/month. Implies a ~$1T market opportunity (500M × $1,950).
• Growth:
• Volume: Driven by low penetration rates (<1% of 500M treated annually) and demographic expansion (teens, international).
• Price: Stable at $1,950, with no inflationary pressure noted.
• Industry Growth Stack: Population growth, rising disposable incomes, and increased awareness of oral health drive demand. SmileDirectClub’s affordability amplifies adoption.

Market Structure

• Competitors: Fragmented, with Invisalign dominating in-office clear aligners and SmileDirectClub leading teledentistry. Smaller players struggle to scale due to manufacturing complexity and IP barriers.
• MES (Minimum Efficient Scale): High due to vertical integration and manufacturing complexity (millions of unique aligners/month). Limits competitors to those with significant capital and expertise.
• Industry Traits: Regulatory scrutiny (e.g., intraoral scanner laws) and litigation (e.g., ADA/AAO challenges) pose risks. Macro factors (disposable income, consumer confidence) influence demand.

Competitive Positioning

• Matrix Positioning: Low-price, high-convenience provider targeting price-sensitive consumers (vs. Invisalign’s premium, in-office model).
• Risk of Disintermediation: Low, as teledentistry and vertical integration create barriers. Invisalign’s in-office model limits its ability to counter-position.
• Market Share: ~10% of U.S. case starts (500,000/4.5M), with potential to grow as teens and international markets are penetrated.
• Relative Growth: Outpacing market growth due to market expansion (new demographics) and share gains from metal braces.

Competitive Forces (Hamilton’s 7 Powers)

1. Economies of Scale: Moderate. Vertical integration and G&A leverage provide cost advantages, but high marketing spend limits scale benefits. MES is high, deterring new entrants.
2. Network Effects: Weak. Referrals (20% of business) create some flywheel, but no platform-level network effects.
3. Branding: Strong. SmileDirectClub’s brand is synonymous with affordable teledentistry, driving organic traffic and referrals.
4. Counter-Positioning: Strong. Teledentistry and D2C model disrupt Invisalign’s in-office markup model, with incumbents slow to respond due to inertia.
5. Cornered Resource: Moderate. Proprietary IP (e.g., SmileShop process) and teledentistry platform are unique, but aligner technology is replicable.
6. Process Power: Strong. Vertically integrated manufacturing and AI-driven treatment planning optimize costs and quality, creating a cost advantage.
7. Switching Costs: Weak. Treatment is a one-time purchase with no lock-in post-treatment.

Porter’s Five Forces:

• New Entrants: Low threat. High MES, IP barriers, and regulatory hurdles deter entry.
• Substitutes: Moderate threat. Metal braces remain prevalent (2/3 of case starts), but clear aligners are gaining share due to aesthetics and convenience.
• Supplier Power: Low. Commoditized raw materials (plastic) and multiple suppliers reduce dependency.
• Buyer Power: Moderate. Price-sensitive consumers drive volume, but fixed pricing limits negotiation. High consideration purchase reduces churn.
• Industry Rivalry: High. Fierce competition with Invisalign, though differentiated models (teledentistry vs. in-office) reduce direct price competition.

Strategic Logic

• Capex Bets: Moderate, focused on manufacturing automation and SmileShop expansion. Pop-up model minimizes capital intensity.
• Economies of Scale: Achieved through vertical integration and G&A leverage, but high marketing spend caps benefits. MES is high, supporting market leadership.
• Expansion of Scope:
• Vertical Integration: Full control of manufacturing and teledentistry enhances cost efficiency and quality.
• Horizontal Integration: Expansion into teen market and GP partnerships broadens addressable market.
• New Geos: International growth (75% of TAM) prioritized, with 5–7 new countries annually.
• BCG Matrix: Clear aligners are a “star” (high growth, high share in teledentistry). No “cash cows” or “dogs” due to single-segment focus.

Unique Business Model Dynamics

SmileDirectClub’s business model is unique due to its teledentistry-driven D2C approach, which disrupts the traditional orthodontic value chain. Key dynamics include:

1. Teledentistry Platform: By enabling remote doctor interactions, SmileDirectClub eliminates the 3x markup of in-office orthodontics, delivering aligners at $1,950 vs. $5,000–$8,000 for Invisalign. This aligns with consumer demand for convenience and affordability, expanding the market to lower-income households ($30,000–$70,000).
2. Omni-Channel Acquisition: The combination of at-home impression kits, SmileShops, and GP partnerships creates flexibility, with SmileShops boosting conversion by 15–20%. The shift to a 50/50 kit/Shop mix post-COVID highlights consumer preference for choice, a dynamic not seen in Invisalign’s in-office model.
3. Vertical Integration: In-house manufacturing of millions of unique aligners/month ensures cost control and quality, with gross margins expected to reach 85% through automation. This contrasts with Invisalign’s wholesale model, which relies on orthodontist markups.
4. High Marketing Spend: 40–45% of revenue on marketing (60% online, 40% offline) drives lead acquisition, with a long-tail funnel (15% of purchases from leads >24 months old). This reflects the high-consideration nature of the purchase, requiring persistent CRM engagement.
5. SmilePay Financing: The $250 down, $89/month model (no credit check) democratizes access, targeting a core demographic ($70,000 household income) that cannot afford traditional orthodontics. This expands the market beyond the 4M in-office case starts.
6. Agility and A/B Testing: The company’s ability to pivot (e.g., SmileShop rollout, post-COVID shift to impression kits) reflects a culture of experimentation, enabling rapid adaptation to consumer behavior and market conditions.

Interviewee Highlights:

• Kyle Wailes on Market Expansion: The claim of a $1T TAM (500M people × $1,950) underscores the massive untapped potential, with only a small fraction of the 90% of people with crowding/spacing issues treated annually.
• Teen Market Opportunity: Teens represent 75% of global case starts but only 10% of SmileDirectClub’s business, highlighting a critical growth lever. Innovations targeting compliance (e.g., wear alarms) could unlock this segment.
• GP Partnerships: The reseller-like model with 1,500+ dental practices not only drives case starts but also boosts practice revenue, creating a win-win dynamic. This channel’s scalability (launched in 2020) is a unique growth driver.
• Regulatory Pushback: Wailes’ acknowledgment of ADA/AAO challenges and state laws (e.g., intraoral scanner regulations) highlights the disruptive nature of the model, with ongoing legal battles shaping market access.

Critical Analysis:

While the model is disruptive, its heavy reliance on marketing spend (40–45% of revenue) raises concerns about profitability sustainability, especially if competition intensifies or lead costs rise. The lack of recurring revenue or aftermarket services limits long-term customer stickiness, unlike industries with “power by the hour” models. Regulatory risks (e.g., state laws) and litigation from orthodontic associations could hinder growth, particularly in new markets. The teen market’s underpenetration is a double-edged sword: a massive opportunity but challenging due to parental/orthodontist inertia and compliance concerns.

Valuation and Market Overview

• Market Size: $1T TAM based on 500M addressable consumers globally, though current penetration is <1%. U.S. market is ~$8–10B (4.5M case starts × $2,000–$2,500 average price).
• Valuation: No specific EV or multiples provided. As a public company, valuation would depend on revenue growth (20–30% CAGR), EBITDA margin expansion (25–30%), and market sentiment toward D2C disruptors.
• Critical Perspective: The $1T TAM estimate assumes universal adoption at $1,950, which may overstate near-term potential given regulatory, cultural, and competitive barriers. High marketing spend and regulatory risks could compress multiples compared to Invisalign, which benefits from entrenched orthodontist relationships.

Conclusion

SmileDirectClub’s business model is a compelling case study in disruption, leveraging teledentistry, vertical integration, and omni-channel acquisition to deliver affordable clear aligners. Its ability to expand the market (500,000 incremental U.S. case starts), target underserved demographics ($70,000 household income), and scale internationally (20% of revenue) positions it for growth. However, high marketing costs, regulatory risks, and reliance on one-time purchases pose challenges to profitability and sustainability. The teen market and GP partnerships are critical growth levers, but execution risks remain for a young company in a competitive, regulated industry.