SmileDirectClub: a True “Megatrends” IPO with Good Alternative Data Metrics

The US IPO market continues to be very healthy, and we continue to publish our notes here on some of the more interesting companies coming to market. Today’s post focuses on SmileDirectClub (proposed ticker SDC) but also do check out our recent posts on Chewy, Slack, WeWork, Beyond Meat, and Pinterest.

You might already be familiar with Invisalign, (by Align Technology, a company with an almost twenty year history in the public markets), the clear plastic “braces” that have grown in popularity tremendously over the years for treatment of certain cases of malocclusion. From a client’s perspective, the main difference between ALGN and SDC is that SDC’s service does not require in-person visits to an orthodontist, and SDC is lower cost. Looking at ALGN’s most recent 10-K filing, we can see that the company has grown revenue at a 27% CAGR since 2014, and finished 2018 with almost $2 billion in revenues.

There is a more recent crop of entrants in the clear aligners space, the most notable of which is SmileDirect. We read the S-1 and the S-1/A with great interest because SmileDirect is at the intersection of several mega-trends. This is not hype: we really mean this. SmileDirect has both the sales growth and, by now, the sales volume to prove it. Revenue grew 7x from 2016 to 2017, then almost 3x’ed from 2017 to 2018, and is now on track to more than double in 2019. Patients (or, if you prefer the company’s more modern word choice, “members”) are now at over 700k cumulatively. 

By way of comparison, it took ALGN from 2010 to 2014 double from $387 million in revenues to $761 million, while it looks like it will take SDC just one year to double from roughly the same starting point of approximately $400 million in revenues. 

SDC’s explosive growth has been, in our view, powered by true megatrends. These megatrends are:

  • Direct to Consumer (DTC) with subscription and omnichannel characteristics
  • Healthcare delivery innovations
  • Healthcare access and affordability  
  • Beauty

And SmileDirect appears to be winning across the board with a vertical integration of advanced technology, in-house financing, high skill offshoring/regulatory arb, and good marketing.  

The customer journey at SDC begins with either a visit to one of 300+ “SmileShops” (co-located at CVS and Walgreens in the US; also UK, Canada, PR, Australia) for a scan, or with an at-home impressions kit. The company staff in Costa Rica (orthodontists and technicians) then prepares a treatment plan, which the customer approves, with the final approval (prescription) happening through a state-licensed US-based orthodontist. The sequence of aligners is shipped at once from a US facility (one in TN, one being built in TX), with periodic check-ins required. The major benefits, as described in the S-1, are (1) lower cost (list price of under $2,000 vs. $5,000-$8,000); (2) expanded access to treatment through teledentistry (no office visits; the company also states that fewer than 40% of US counties have orthodontists); (3) shorter time frame for treatment (5-10 months vs. 12-24 months, though it is unclear how much of this is due to case specifics), and (4) captive financing (with recently expanded “in network” access with two major US insurers). 

We see the “megatrends” every step of the way: DTC infrastructure enables direct relationships, omnichannel presence increases reach, and, obviously, the product/service is 100% personalized. The combination of DTC and lower cost, high skilled operations expand access by lowering cost (though two state dental boards, in AL and GA, have taken issue with the latter- we see it as a bit of a regulatory arbitrage to have the last “touchpoint” done in the US-, and SDC is currently suing both entities). There is quite a bit more from the management presentation on the total market potential and other aspect on Retail Roadshow (link generally available prior to the actual offering). The management story is very interesting: the CEO David Katzman has a long history of involvement in disruptive services (Quicken Loans being the most famous but also a direct lenses business sold to the leader in that space, and an earlier venture acquired by Home Depot). The subscription element is the growing retainers business post-treatment (a substantial percentage of patients are people who had braces years ago but whose teeth moved back). 

The in-house financing part is also an interesting aspect of the operation: the company offers a “no credit check” financing option at 17% APR ($250 downpayment, which covers the cost of the aligners, and then $85 monthly payments over 24 months). The default rate is under 10%. The most recent data is that 65% of the customers use SmilePay, indicating both the importance of having an affordable and transparent option for discretionary procedures. The CEO on the roadshow said that prior experience with third-party financing was negative (too high drop-offs). The complications around the consumer financing regulation are an additional “moat” for the model. 

We were also interested in the marketing aspect of this remarkable growth story: the company says that it has around five million unique visitors to its website every month, and that it is able to convert about 1% of them to new customers, up from 0.5% in 2016. The company has also been improving its appointment show rates at the SmileShops and the acceptance of the impression kits. The company also lists over 300,000 followers on Instagram and over 500,000 likes on Facebook, as of June 2019. These numbers as of right now are over 360,000 followers on Instagram (20% growth in three months) and 531,000 Likes on Facebook. The company also boost very high review ratings (4.9/5.0), and 57 Net Promoter Score (extraordinarily high, on par with Zappos, per the roadshow linked above). 

Since we incorporate alternative data sets very heavily in our platform (see our recent webinar and white paper on the topic), we were interested in seeing how the data looks. 

We are seeing very good long-term trends for the broad search trends for clear aligners, as a search topic (a broader collection of searches, versus a specific term). This is a valid signal as aligners are a high investment purchase, both in terms of money and in terms of time (or, as the company calls it, a “highly considered purchase” with long lead cycles: the roadshow presentation mentioned that a lot of customers are 7-12 month leads). We can also see the January spikes in search interest, similar to fitness interest and other self-improvement topics. (Interactive chart link

 

The customer journey might start with broad searches but then a lot of the research is done on the companies’ websites. We pulled the Alexa data for SDC, ALGN, as well as the DTC competitors that SDC lists in the S-1: CandidCo, SnapCorrect and SmileLove. We can clearly see that overall industry web traffic has been growing, and that SDC is now bigger than ALGN. We are showing 30-day moving averages (Interactive chart link)

 

Perhaps most interesting to us is the web traffic “market share” that SDC has vs. the incumbent leader ALGN build from the overall chart above (what percentage of the industry traffic goes to the two major players). We can see that SDC is now consistently capturing more traffic vs. ALGN, likely indicative of future real share growth. (Interactive chart link

 

We fully expect that this offering will be very popular given the defensible growth characteristic of the business, and the current investors’ relaxed attitude around governance/related issues. (Not the topic of this piece, but SDC is a JOBS Act IPO, with multi-class shares, classified board, numerous related party transactions including a Tax Receivable Agreement, underwriter conflicts, corporate structure, and quite a bit more). 

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Announcing Sentieo’s Partnership with Workiva


Toda
y, we announced a new partnership with Workiva, provider of the world’s leading connected reporting and compliance platform. While both Sentieo and Workiva are excited to work together, the real value of this partnership will be to our mutual customers. At Sentieo, our vision is to accelerate the decision-making of knowledge professionals with the broadest lens of data, workflow, and effortless collaboration. Partnering with Workiva allows us to bring that vision to the teams who produce the SEC filing documents that are a critical part of the content and data we provide to our customers.

For those of you not familiar with Workiva, they are a public company ($WK) that provides a reporting and compliance platform called Wdesk. They are used by thousands of enterprises across the globe, including by over 75% of the Fortune 500*. The SEC reporting teams within these organizations use Workiva’s platform to produce SEC filings and reports in a compliant, accurate, efficient way. Wdesk connects data with context across spreadsheets, documents, and presentations – ensuring reporting teams can trust their document outputs. 

So where does Sentieo fit with this? Workiva’s CEO, Marty Vanderploeg, puts it well in our joint press release. 

“Our partnership with Sentieo gives our SEC filing customers a powerful research tool at their fingertips, which is essential as pressure grows from investors and regulators to report transparent and accurate data.– Marty Vanderploeg, CEO of Workiva

Each of these SEC reporting teams is faced with constant change in the accounting standards, business dynamics, and reporting requirements that impact the content of their filings. This means there is a need to produce new content and language for filings on a regular basis. A critical step in that process is understanding how peers or competitors are describing or reporting the impacts of these changes.

With all the filings, presentations, and transcripts published every quarter, filing teams spend hundreds of hours doing research. This is where Sentieo’s corporate research platform, specifically our AI-driven document search (including tools such as Table Explorer and Smart Summary™) can have a material impact on the productivity and job satisfaction of SEC reporting teams. By dramatically reducing the time to find the relevant language and data they require, exposing insights they simply would not have found using legacy tools, and provide a more complete perspective of peers language in their filings, Sentieo and Workiva are providing a new solution to SEC reporting teams.

A great example of how Sentieo will be used by SEC reporting teams is shown below. 

Recently, there have been changes made to how organizations must report the financial impact of property leases. Searching using Ctrl-F on an SEC document or using a legacy document search provider won’t deliver the range of language used (through the use of AI and synonyms) or the data associated with the impact of these accounting standards changes (by finding, chaining, and displaying data from tables in filings).


 

The net is that Sentieo saves SEC and external reporting teams hours of time preparing accurate disclosures with faster peer research; Workiva’s partnership with Sentieo will deliver these benefits to many more SEC reporting teams, saving thousands of hours of research time across these future joint customers.

We’re excited to be partnering with Workiva, and look forward to showing how Sentieo can help SEC reporting teams in our upcoming demo webinar. Sign up now to learn more.

*Claim not confirmed by FORTUNE or Fortune Media IP Limited. FORTUNE and FORTUNE 500® are registered trademarks of Fortune Media IP Limited and are used under license. FORTUNE and Fortune Media IP Limited are not affiliated with, and do not endorse products or services of, Sentieo Inc. or Workiva Inc.

Sentieo Is SOC 2 Compliant!

Here at Sentieo, we continually invest in security and availability best practices to safeguard the valuable data stored by asset managers and Fortune 500 competitive intelligence, IR, and strategy professionals in our corporate research platform.

We are pleased to announce that we have successfully completed our SOC 2 audit, conducted by A-LIGN, a leading compliance and cybersecurity firm. The report produced by A-LIGN confirms the effectiveness of the policies, procedures, and process controls Sentieo has in place to ensure data security, availability, and privacy.

 

Why SOC 2 Compliance Matters

As more and more organizations adopt SaaS solutions to support business critical operations, the American Institute of Certified Public Accountants (AICPA) created the System and Organization Controls (SOC) for Service Organizations standards to govern how SaaS and cloud service providers assure that their customers’ information is secure and available when needed.

The SOC 2 audit process is rigorous, thorough, and has become the gold standard for security compliance for SaaS companies.

Achieving SOC 2 certification means that Sentieo’s software meets the standards for data oversight and monitoring, and that we can proactively identify and address any unusual activity.

 

Sentieo Security Controls at Work

Sentieo’s financial research platform was designed from the ground up to be a secure, multi-tenant solution. Some of the security safeguards we’ve put in place to protect customer data include:

  • Data transmitted between Sentieo’s platform and our users is encrypted data in transmission using transport layer security (TLS)
  • All database data is encrypted at rest. User passwords are further encrypted within the database and different methods of Single Sign-On (SSO) are supported.
  • Sentieo’s production systems reside within a secure Virtual Private Cloud (VPC) within Amazon Web Services
    • VPC access is secured through a password-protected Virtual Private Network (VPN)
    • Sentieo requires 2-factor authentication for access to our AWS consoles
  • All customer data is logically isolated, with a unique set of authorization tokens used whenever customer data is being submitted to Sentieo.

Learn more about Sentieo Security and Availability. 

 

Future Security Enhancements

Sentieo is fully committed to the ongoing security and availability of customer data. We continue to grow our team of data security experts and will further validate our commitment to the highest standard of security controls and availability by completing our SOC accreditation.

Stay tuned, too, for new enterprise security deployment offerings that will be rolled out later this year.

If you have additional questions regarding Sentieo’s security or availability processes and controls, please reach out to us at hello@sentieo.com.

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