SmileDirectClub, Inc.
Q1 2021 Earnings Call Transcript

Published: 10 May 2021

[Operator:]

Greetings. Welcome to the SmileDirectClub First Quarter 2021 Earnings Call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Alison Sternberg. Ms. Sternberg, you may begin.

[Alison Sternberg:]

Thank you, operator. Good afternoon. 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 2021 earnings presentation for a description of certain forward-looking statements. We undertake no obligation to update such information, except as required by applicable law.

[David Katzman:]

Thanks, Alison, and good afternoon, everyone. Thank you for joining us today. I'm pleased to report that Q1 results came in ahead of expectations and similar to recent quarters, are consistent with the cadence of our controlled growth plan. As a reminder, our controlled growth plan was enacted after Q4 of 2019 and positions the integrity of our Club Member experience as the centerpiece of the plan. Over the past five quarters, we have continued to lay the infrastructure to execute against this long-term strategy, which positions us to generate average revenue growth of 20% to 30% per year for the next five years and adjusted EBITDA margins of 25% to 30% by the end of that time period. Before digging into the quarter, I do want to take a moment to remind everyone why it is, we do what we do. Above all else, our mission is to democratize access to a smile each and every person loves by making it affordable and convenient for everyone. We deliver on this mission by providing a doctor-directed digital end-to-end experience in teledentistry with 24/7 access to orthodontic care and the back end of our lifetime smile guarantee. We have always, first and foremost, been a telehealth business. And we're excited to see the growing level of understanding and acceptance of telehealth, especially for dentistry. We believe there will only be increased consumer and clinical adoption of the telehealth model from here. And we continue to invest in our proprietary platform and features to innovate against unmet consumer needs and pain points. For today's call, I'd like to first call out the high-level results in the quarter, followed by an overview of some recent key developments before turning to how we're continuing to execute against our long-term revenue growth and margin targets. I will then turn it over to Kyle to walk through our growth initiatives Q1 financial results and outlook in more detail.

[Kyle Wailes:]

Thank you, David. Our results in the first quarter marked continued progress against our plan of controlled growth with profitability. In every quarter since the enacting of this plan, we have seen positive momentum against all of the key growth drivers and cost levers that we have outlined, and our first quarter was no exception. We are managing the business to this plan which has the customer experience of its centerpiece, and which positions us to generate the following

[Operator:]

Our first question is from Jon Block with Stifel. Please proceed with your question.

[Jon Block:]

Kyle, I guess the first question is for you, is just when we think about the 5% to 7% sequential revenue growth intact, as you said, should we apply that to, call it, the depressed 2Q 21 base? Or is it a little bit higher in the near-term in case you recapture some of the noise from the cybersecurity issues? I'm just trying to figure out if it's more higher than the 5% to 7% over the next couple of quarters, again, because of the depressed base? Or do we run the 5% to 7% off of this 2Q number? And then I've just got a follow-up.

[Kyle Wailes:]

Yes. Sounds good. Thanks, Jon. So David, I'll kick that off and then jump in as well. So look, our long term hasn't changed. 5% to 7% sequential growth is still the long-term target, and that's driven by a 20% to 30% annualized growth rate on a year-over-year basis. I think to answer that, Jon, you've really got to look at leads. And so what happens is leads who didn't convert within Q2, they're not necessarily lost forever, right? We have millions of leads in our pool who have not converted from prior periods. And this group that ultimately didn't convert in the second quarter is going to go into that pool. So we're going to continue to retarget them and try to get them to convert over time. But it's very difficult to predict when and if they will because what happens is if we don't give a treatment plan on day 1, which we typically do, the likelihood to ultimately convert drops off significantly. And as time goes on, that pool gets incredibly lower than if we were to give them a plan on day 1. So it's difficult to know if they do convert. In addition to that, there's also a flywheel effect that happens from referrals, right? So orders that would come in within the second quarter would have impacted the third quarter and also the fourth quarter. Just as a reminder, the referrals are typically about 20% of our overall orders within a typical quarter. So a pretty meaningful portion as well. In lieu of that, we would have to spend into that from a marketing perspective to recapture some of those referrals as well. And that's not something that we're planning on doing. So I think if you look at history, look at Q4 as an example, our volume growth in Q4 was over 9%, right? Our target is 5% to 7%. In Q1, our volume growth was 4.5%, so pretty close to that 5% to 7% that we want to be within. And so we certainly have the potential to be above that 5% to 7%, but it's very difficult to predict if and when that would happen. So as I think about the rest of the year beyond Q2 and looking at Q3 and Q4, for now, I would expect the growth to be 5% to 7% off of that Q2 just based on how we're planning our spending our marketing dollars because we're not going to continue to spend above and beyond where we want it to be in terms of marketing dollars. But we do have the ability to be slightly higher if some of these leads do come in as demonstrated in prior quarters. But most importantly, we're not going to jeopardize the customer experience, which we've worked so hard on over the past several quarters, to chase growth. And that's something that we're going to keep a very close eye on.

[Jon Block:]

And the second one is sort of 2 part. One, very helpful information on the breakout between U.S. and international EBITDA. I guess, Kyle or David, where would you expect to turn the corner internationally on EBITDA? And David, if you don't mind, I know I'm going to get this question tomorrow. So you gave a lot of helpful statistics on the consumer experience and what's improving but yet the referral rates for the NPS scores, I don't think are improving or actually they're worsening. I think referral move backwards from 23% to 21%. I think the NPS score has actually been down every quarter since the IPO. So can you just sort of reconcile, if you will, some of the improvements that you specifically cited versus an NPS? Maybe it's a lagging indicator that would be very helpful.

[David Katzman:]

Yes, I'll take the latter part of that question first, Kyle, and you can answer the other part. So yes, NPS is a lagging indicator. And we measure it in two different places, Jon. We measure it 21 days in, after they get their aligners and they've changed out their trays at least once. So it's 21 days, and we measure it. And then we measure it at the end of treatment, 4 to 6 months later. All the metrics that we talked about today on the call, consumer sentiment, which is at an all-time high, negative sentiment, which is down 45%, it's at an all-time low. Some of these other statistics and credibility that we talked about were within a few percentage points of the line on trusted brand, on orthodontists and doctors that I trust in the network. All these things are huge improvement over last year, which we were up 20 to 25 percentage points in one year's time. It was a big concerted effort over the last year since we announced that Q4 -- after Q4 2019, the strategy around providing the best possible experience for our customers, totally paying off. The referral rates are -- a lot of that is a function of how much we spend on marketing, but 21% or 23%, we don't see a noticeable difference there. The NPS scores as an early indicator on the 21-day is up significantly. We're not reporting on that number right now. We do it as a blended overall, that 43%, 42%. But if things hold at the end of treatment and all these other consumer sentiment, higher numbers hold, you're going to start to see that overall NPS scores start to shoot up. It's still very high for health care if you look at categories. We're not satisfied. We want to see that get into the 60s, but we are very pleased with all the benefits, and which ultimately is going to do is going to lower CAC, right? If our NPS starts to go up and that referral rate starts to go up, and we stay on track here as a credible source for straightened teeth, we're going to start to see our CAC go down and our EBITDA and all the things that we're talking about here come to fruition.

[Kyle Wailes:]

Yes. And just on the second part there, Jon -- yes. So just on the second part there in terms of international EBITDA, no, it's obviously very difficult to predict in total. And that's just because it certainly is a function of growth, right? So look, as we think about international growth, I would expect growth from an international market to continue to grow faster as a percentage in the U.S. and Canada just given overall, the market outside of U.S. and Canada is about 75% of the total market opportunity. It represents about 40% to 50% of case starts globally, but it's only about 17% of our business, as we mentioned, as of the first quarter. So given that growth overall within that 5% to 7% target is completely fungible, we think it's the right time now to continue to focus and grow our international footprint, which in the long term, is really going to overall support the longer-term targets that we've outlined. And with that, we continue to overinvest to build added awareness and to build a brand in these new markets, which long term is really going to drive that growth. So as we go into these markets, we generally operate them for approximately 24 months, where they run out of loss and turn profitable after that. So if you look at our most mature markets, like the U.K. which we launched around this time a couple of years back, those markets are starting to turn profitable, offset by newer markets, where we're investing heavily in brand and just launching in. So that's how I would think about sort of international EBITDA contribution for the foreseeable future.

[Operator:]

Our next question is from Dylan Carden with William Blair. Please proceed with your question.

[Dylan Carden:]

Just curious if you can speak to whether or not you're actually referring patients to the doctor channel and then maybe if you can just speak to growth in that channel. I know it's nascent, but maybe sort of on a same chair sequential basis. And then kind of zooming out more broadly, just where -- I can imagine that the sort of SmileShop reduction is a drag on the business. Maybe where you're kind of capturing some of that business across the rest of the model?

[David Katzman:]

Yes. I'll take some of that, Kyle, and then you can finish off on the Smileshop network. So there's multiple legs to the stool here on what we call our partner network. There's office direct. The office direct is the partner that takes on and offers SmileDirectClub to their patients within their office. So it's a new offering. It's at the same price point, $1,950. They have the SmilePay. They basically do a scan, they do an exam of the patient's oral hygiene. And then once that -- we close that sale, that patient goes into our telehealth platform. And our telehealth state licensed orthodontists and dentists take care of that customer. Patients always free to go back to the dentist, the dentist they started with. But part of what we're offering to that dentist and that office direct model is the savings of share time because through our telehealth platform, we can ship all their aligners at once. We have 24/7 access to our dental team, and we can take care of that customer. The other thing that we are doing to help out these GPs and orthos is that we are taking our customers that come to our site. And then we're scheduling them into those partner networks. So that's increased traffic for them. Those are new hygiene patients, new patients that are looking for dental homes. There's all kinds of studies that we're putting together as to how they convert those patients into new patients for themselves, which, as you know, a lot of these practices grow organically, low single digits through marriages or children. But they're not out there marketing and blitzing for new patient acquisitions. So SmileDirectClub offers that to them and they're very excited about that. We also -- a third leg of that is we are actually opening some SmileShops, where we operate the operatories right inside that partner networks office with our smile guys. Now with that -- why they said about that is, a, they have some added space. They may have 7 -- 5, 6, 7 and not all full. So we'll take a couple of the bays. And then once again, as these customers come in to get scanned, we then send them over for a clean or introduce them to the dental home as a new patient. So very excited about all of it. It is new, but we think it's going to be a meaningful part of our revenue coming into the back half of the year here and into 2022. Our team is doing an excellent job of building out the outside sales team, the inside sales team. The leads are coming in. To -- as far as I know, we haven't had a hard know yet. We've got large DSOs. We've got individual GP practices, smaller DSOs. But I think the GP looks at it as a way to participate in streaming without a lot of chair time, leave the chair time for what they do best and let us take care of treating those customers through our telehealth platform.

[Kyle Wailes:]

Great. Yes. And then just on shops as well, just to your last question. So overall, I would say it's been a net positive. And you can see that in the -- certainly within the P&L metrics that we've outlined. But if you look at just sheer numbers, including pop-up events, we had 282 location sites within the quarter. That's up from 218 within Q4. So we are continuing to see nice growth there. The growth that we're seeing is largely coming from pop-up events, right? And what those events do are enable us to pull out demand from locations that we don't have a permanent location in. And so if you think about it from a demand perspective, we're completely agnostic, obviously, in terms of how consumers start their journey, which is why the omnichannel presence is so important. So we offer impression kits shops, be it permanent or pop-ups and also the partner network as well. And if you look at how business is coming to us from those different paths, we had 58% of the business in Q1 that was coming from kits. That's down from approximately 60% in Q3 and Q4. If you look at more recent months like March, that was closer to 54%. So we are seeing shops continue to trend back to 50-50. And we certainly still expect over time that shops will be a more dominant player if you're comparing that to overall impression kits versus shops. But we also expect the partner network as well to continue to ramp up over time. So I think the most important takeaway is really just the omnichannel approach that we take and the flexibility of that model to, one, pull out demand, but two, do it in a cost-effective way, that's in line with the longer-term targets that we've outlined.

[Dylan Carden:]

Understood. If I could just sneak one, maybe a smaller one in. The straighter smile for life, kind of a compelling idea here, just sort of from both sides of the P&L, how you're thinking about cost of that, if there's sort of higher accruals? And then what that might be able to do for demand, customer satisfaction would be helpful.

[David Katzman:]

Yes. So from a customer side -- and Kyle, you can speak to the numbers on what's being recorded. But from a customer's -- we just launched this lifetime smile guarantee. And we're pretty much doing it anyway from a customer satisfaction standpoint. If a customer got out of sync and wasn't wearing the retainers as often as they should have and they called us 3 or 4 months after treatment, we were going ahead and offering what we call a touch up, which is come back and get scanned or we'll send you out a kit. And we see a little bit of shifting or maybe their gaps started to open up. We would set them up with a new treatment. Usually, they're 2 to 3 months in duration, very short, send out new aligners. And so -- and we said, hey, we're going to do this for our numbers anyways. And what typically happens is the reason that they get out of compliance is they don't wear their retainers, either don't order a retainer or they don't wear the retainers while they sleep at night. And so to get that compliance, what we're saying is, as long as you buy 2 retainers a year from us, every 6 months, they're made -- so they wear them every night, they're going to wear out in about 6 months. And so as long as you -- they're $99. It's not a huge expense. But for $99, you're going to maintain that smile. And if for any reason, your teeth shift, you're not happy with them, we're going to give you at least 1 free touch up annually. So therefore, you don't have to worry about it. Let me tell you, a big chunk of our customers, I don't know the exact number, but it's in probably 30% to 40% range of our customers had worn some type of appliance to straighten their teeth prior to coming to us, whether they were teenagers wearning braces, they forgot to wear their retainers. A lot of them are adult patients that after treatment, the orthodontist or dentist didn't push hard enough the need for wearning a retainer and then very quickly, all of a sudden, their teeth shift. So I think our customers, we have good attachment rates on our retainers, and I think it's going to make it more so. And we love for them all to stay in compliance, wear the retainers every 6 months. And if for any reason, they're unhappy, we're going to go ahead and take care of it for life.

[Kyle Wailes:]

Yes. And then just on the P&L side, as of today, and we're still pretty early in the rollout of this, not expecting any material impact from a P&L perspective. The overall, as David pointed out, purchasing 2 retainers per year approximately is going to offset cost of goods sold if sort of every member ultimately were to get that touch up per year, which we don't think will happen. So it should be a small incremental positive. But as of now, we're certainly not modeling anything material from an upside perspective as we sit here today. I think what it will do certainly is help on the front end with conversion and the fact that we're standing by and guaranteeing the smile for life also with club member satisfaction as well by giving this offering but also improving the rate at which people are compliant to do their check-ins and stay in touch with their doctor throughout treatment as well, which we think will help with overall net promoter score and club member satisfaction.

[Operator:]

Our next question is from Glen Santangelo with Guggenheim. Please proceed with your question.

[Glen Santangelo:]

David, I just had 2 quick questions for you. I'm kind of curious on the cybersecurity issue to dig in a little bit more. I mean I'm guessing you're much more of an expert today than you were a couple of months ago. And I'm kind of curious, looking back, do you think the company could have did anything differently? For example, do you wish you invested more heavily in IT security? And how do investors get comfortable that something like this won't happen again and that it was just a onetime sort of issue where SDC had bad luck?

[David Katzman:]

Yes. It's a good question. Look, we're always aware of it. We have our insurance policy for it. And we've been building out our what we call our engineering security team. We spent millions of dollars on it. We're a HIPAA company. We're in health care. So we have to take this very seriously. I don't know if anybody can do anything. Big news over the last couple of days has been what's happened here out on the East Coast with the fuel pipeline. I'm sure you've heard about that recently. I think it happened 2 days ago. So every company is susceptible. We have team members in our IT team who worked for major Fortune 500 companies that's happened to multiple times, not just once. We take these things very seriously. I think our team did a really good job isolating it when it first happened. This is one of the larger ransomware networks outside the United States that hit these public companies. They shut it down pretty quickly, and they came to us. They said guys, for us to secure the network to secure data, we're going to have to shut everything down. And we have hundreds and hundreds of servers and clean them out of here and then we'll rebuild those servers. We gave them obviously the green light. We -- every single server was shut down at touch manufacturing, impression kit intake, order shipments out. It did not affect our website. So that was -- because that wasn't tied back into our internal networks. So we were able to keep the website going. Customers could still come online. But what it did was it delayed for several weeks treatment planning, impression intake that let customers know whether they have to do another impression, when their impression kits were accepted. Those kinds of things, manufacturing, nothing went out the door, pretty much shut down our manufacturing for over a week. I think the overall -- I've gotten the download. And we presented the download to our audit committee. And we're taking this very seriously and anticipating another that could happen, even though they spent a lot of time and they got nothing. They got no ransom. They didn't lock up our systems. But what we are going to do next time is -- you can't prevent every single incident. There'll be something else that will come up down the road possibly. We're obviously learning from what just happened is the rebuild of the system. That's what we're building now and going to automate. It took a long time, too long, to rebuild those systems from scratch once they were down and to reboot them. It was all manual. And so we're automating that process through scripting. So if something like this happened again, we shut down all of our systems. We get the threat out of our system. And then within a matter of a day, instead of a week or longer, we can get those systems up and running through automation, rather than a manual rebuild. So that was probably the biggest learning that we got from this. We've hired outside consultants. Cisco is a big partner in this from what they're telling us that we did a really unbelievable job. Some of these companies are down for weeks. And so we're very pleased with the reports that we got from our outside consultants in this.

[Glen Santangelo:]

And maybe I'd just ask you a follow-up, David. Given the investments that you made in manufacturing, automation and operations, and you gave some statistics in your prepared remarks and also some statistics around the improvement in the member experience, what are you looking for before maybe moving from this controlled growth strategy to one where you really try to maximize top line growth? Because it seems like a lot of the pieces are kind of coming together. But earlier in your prepared remarks, you talked about that 20% to 30% 5-year sort of controlled growth strategy. At some point, will we inflect in a more aggressive direction or no?

[David Katzman:]

Yes. I mean right now, I would say the answer is we're sticking -- we feel really good about running this business at this controlled growth. We saw what it was like when we were growing 50% to 70% in Q4. And so there's so many more components going to this than just automation of manufacturing, which is really going well. The number of fit issues are down. The comfort sense that is embedded in this new design is really helping. But there's just -- like I talked about on the earnings call, in my prepared remarks, that we've hired Alvin Stokes. There's a whole contact center side of this, too, and making sure that you're there, where customers want to engage with you 24/7, getting back to customers on time, having the information that's needed. We're doing a whole transition with salesforce right now in the back end. We're a fairly young company. We grew very fast. And so we're building all this stuff. Now what I tell you, at some point, as all these things start coming to fruition, better treatment planning software that we're working on in Costa Rica, all the back end for customer care and the contact center, all these lots of innovation with a huge R&D and innovation team that's working on stuff right now. As all this comes together -- and typically, the good news is, as you start to implement the stuff like Gen2, not only is there a great customer benefit from the services they get, but then there's also a P&L benefit because it costs less. The processes are more automated, customer experience is better. So at some point, as we bring it all together, we don't compromise the customer experience. We may give guidance that we're going to start to inch that up. I don't see it in the foreseeable future, but it's certainly possible as long as we can get the kind of service that we want to give our customers because that referral rate, that NPS score is super important in the consideration of our P&L model and our CAC. And so if we compromise that, we're going to be back to where we were in Q4 of 2019. Kyle, do you want to add anything to that?

[Kyle Wailes:]

No. I think you said it very well. It's all about club member experience. And we have our internal metrics as to what might those metrics look like, and we've said this in the past, where if our Net Promoter Score was closer to 65, then that's something that we'll evaluate and say, do we have the legs of the stool to ultimately grow faster than what we've outlined, but certainly not within the foreseeable future but not off the table forever.

[David Katzman:]

Yes. Approaching $1 billion -- and also approaching $1 billion revenue company very shortly here, growing 20% to 30% on a very complex business. I'm proud of that. I think we're doing a good job. And like we said, it's not like there's someone chasing. There's somewhere right over our shoulder here that we got -- we're in a race against. So there's lots of customers out there that want our services. I want to give it to them the best possible like that we can. And if that means going a little bit slower, then a little slower. Thanks, Glen.

[Operator:]

Our next question is from Kevin Caliendo with UBS. Please proceed with your question.

[Kevin Caliendo:]

So I want to ask about the ASP. $1,860 was much higher than we had originally modeled. I was wondering what drove that in this quarter, if there was anything in particular to call out. And is this a new run rate we should be thinking about? Any color around ASPs would be really helpful.

[Kyle Wailes:]

Yes. I can take that one, Kevin. So yes, great quarter for ASPs overall. It was really the impact of a few different things. So one, it was the first full quarter of the pricing change that we rolled out within Q4. So we rolled out within Q4, but it wasn't across all markets, and it wasn't at full within the U.S. market in particular. So that was a big driver within there. We've had a continual focus really starting within Q3 of last year to continue limiting discounts. And I'm sure if you are going through the process, you'll see it through our CRM streams, we're making a very active effort to continue to limit discounting. And we saw that continue to have an impact on ASP as well within the quarter. And then just lastly, our OUS pricing. So think about sort of outside of U.S. and Canada. In certain markets, we are priced higher than the U.S. market in particular. And we also saw a small benefit from currency conversion associated with that back in the U.S. dollars from OUS dollars. So really, the 3 of those together in terms of just overall mix and where I would expect it to be, I would expect it to be fairly flat to about $1,860 as we think about the near-term quarters here.

[Kevin Caliendo:]

Okay. That's helpful. And just looking at the U.S. market, I mean, obviously, in the second quarter, you're going to have an incredibly easy comp everywhere. But if we were to look back to, say, 2019 and then sort of look at your case volumes in the U.S., where do we sit? And where would you -- when would you expect there to be sort of meaningful case growth relative to 2019? I mean I understand your business went through a huge tumult during COVID and everything. But as we use that baseline, how should we think about that kind of growth?

[Kyle Wailes:]

Yes. I would think about it very consistent with what we've been saying and outlining since Q4 of 2019. So it's all about the controlled and profitable growth strategy, and it focuses on the club member experience at the center of that. And so that strategy is really more about a sequential target. And again, that target is more on revenue from a 5% to 7% perspective. It's not necessarily on volume. But with flat pricing, obviously, that gets back to volume being within that 5% to 7%. So that's how I would think about it. Sequentially, quarter-over-quarter, we expect to be within that 5% to 7% target, less so on how that compares to 2019 or even the early parts of 2020, where we were spending over 70% of revenue on sales and marketing. We just spent 49%. So much more cost effective but also significantly ramping up in newer markets, which is driving that above the longer-term target of 40% to 45%. So it's really about executing within that strategy of controlled and profitable growth.

[Kevin Caliendo:]

All I guess just one quick follow-up. I mean if I think about the growth, if your ASP is at $1,860 roughly, if that's going to be relatively flat for the year. Over 2020, that's sort of half the 5% to 7%. It's 3.5% sort of growth. So I'm just trying to -- international, you see what I'm trying to get at. I mean really one of the big overhangs has been the U.S. market and trying to figure out how the U.S. market is growing. And I wish you could just provide us a little bit more detail around the expectations for the U.S. growth. Even if you break that out, sequentially or not, how much of that would be U.S. versus international?

[Kyle Wailes:]

Yes. I think more importantly, the growth is all fungible, right? So to us, whether it's coming from the U.S. or sort of rest of world markets, we're targeting a 5% to 7%. And we have the levers to be able to drive within there based on the overall efficiency of sales and marketing and where we're seeing that growth coming from. I would say all else being equal, in the near term, we would prefer more of that growth to come from rest of the world because of the nuances of those markets. So if you look at the U.S. We've got a great head start here in the U.S. We've overinvested to gain market share as we talked about in just a few short years. We are the low-cost provider. We've got the best unit economics with that. And as we look at the competitive landscape, we don't feel like anyone is chasing us within that teledentistry space. And so we think now is the right time as we look at the international markets, which are highly fragmented, and see a lot of those similar dynamics. But we don't have the brand awareness that we have here in the U.S. And so we're spending heavily to gain that footprint, which we think long term is really going to support that growth. And so we're going to continue to invest in that. I would expect the international markets to grow faster than the U.S. markets, as you look at sort of the 5% to 7% sequential targets. But if for some reason, it's taking longer and conversion curves take longer for people or club members to ultimately convert, then we do have that lever to look back at the core U.S. market and spend more here as well. So I would think about it as fungible with the preference for rest of world, assuming they convert like we expected to.

[Operator:]

Our next question is from Robbie Marcus with JPMorgan. Please proceed with your question.

[Robbie Marcus:]

Two for me. Maybe first, Kyle, back to the first question on 5% to 7% sequential growth And does that -- is that now off the lower second quarter? So I just want to make sure versus the prior guidance of 5% to 7% sequentially and now off of the lower base in the second quarter, it's essentially taking 2021 revenues down by something like, what, $10 million, $15 million versus prior expectations. So just want to make sure that's the right way to think about it in the resulting second half growth.

[Kyle Wailes:]

Yes. So I think I'll just sort of reiterate what I had said before in my sort of summary section of closing that out. We're -- as we think about spending marketing dollars in the back half of the year, we're spending those dollars to execute against the 5% to 7% sequential growth. So that's off of the $195 million to $200 million that we expect to close out Q2 with. But there is potential upside to that. And you saw that as an example in Q4. We were 9% sequential on a quarter-over-quarter basis as leads came in better than we expected to. And so there is the potential where the leads that did not convert within the second quarter could mature as you look at Q3 and as you look at Q4. And we have the ability to be slightly ahead of that. It's obviously very difficult to predict if and when that will happen, just based on the nature of those conversion curves, but that ability is there. If they come in within that time period, as I said, just sort of closing that out, the most important thing we won't do is jeopardize sort of what we're seeing with the club member experience. And that includes our internal metrics on things like how long it's taking us to ship aligners but also consumer sentiment metrics as well and something that we track very closely online. So we'll keep a close eye on those in the event that these leads are coming in sort of better than expected. But in lieu of that, I would expect us to be at that 5% to 7% based on where we closed out Q2. David, any -- sorry, go ahead. I was going to say, David, anything you'd add to that?

[David Katzman:]

Yes. No. I think we said earlier, there's also that, call it, the $15 million that we've identified that was affected based on this long cycle because of cyberattack, Those are sources of referrals as well. And even those that didn't cancel may not be that happy with us right now because it took a little bit longer than what we had told customers. When they leave that at scan shop, a small shop, we're telling them within 72 hours, you're going to have your treatment plan. We're going to get your liners ordered. And then the phone starts ringing. It's been 5 days. It's been 7 days. It's been 10 days. So forget about the ones that canceled and then convert. You still have some customers out there that may give us some lower marks for that short period of time. We're back on track right now completely. As far as time frames for treatment planning. We're still a little bit behind on impression kits, but manufacturing is up to snuff. So I think there's that effect of, Robbie, if you say, well, guys, you should be able to make that up. The way to make it up, if you're not going to make it up as part of your mix is referrals in that right now, overall sales and marketing part of that mix is referrals. And you got to spend more in marketing. And right now, I don't think we want to do that. I think I want to keep marketing spend where it is and see what happens. I think it may not be second quarter. It's probably not going to be. But maybe we'll pick it up in third and fourth, and we'll give you guidance at the end of the quarter and see how those customers are coming along.

[Robbie Marcus:]

And then maybe just to follow up on the last question. I saw in the Q that you filed today that 83.3% of revenues came from North America. It does look like that's lagging a bit more than we were thinking here. So maybe just to follow up and see any trends you can talk about in North America coming out of first quarter into second quarter here and how we should think about the progression of North America versus the better incremental growth you're seeing outside the U.S. would be really helpful.

[Kyle Wailes:]

Yes. So that percentage, we talked about it on the year-end call last quarter was about 13% for the full year of 2020. We did see sequential growth. Obviously, that includes total revenue within there. So that's normally aligner revenue, but it's also financing revenue. And it's other revenue associated with retainers and retail products as well. So that percentage is pretty flat on a quarter-over-quarter basis as you think about that 83% approximately. But again, I think it goes back to what I had mentioned to Kevin is that as we think about the overall spend and where we're expecting that growth to come from, we look at it, first and foremost, as executing against that 5% to 7%. Second to that, our view is growth is generally fungible. And with a preference, we prefer it to come from international markets. But the conversion curves there, just given the nature of sort of our aided awareness and brand awareness is still maturing. And so it's a little bit more difficult to predict how those orders ultimately convert in these newer markets. And so we have the lever with the core U.S. business and the growth engine there to be able to spend into that on a quarter-to-quarter basis, if needed, to hit that sort of 5% to 7%. But generally, I would expect our rest of world markets to grow faster than the U.S. market as we continue to overinvest there to gain market share in the foreseeable quarters here.

[Operator:]

Our next question is from Erin Wright with Crédit Suisse. Please proceed with your question.

[Erin Wright:]

Great. On the international side, I guess thinking about your omnichannel approach and the various channel strategies that you have. I guess can you speak to what strategies you plan to deploy or currently are deploying in international markets? What works well, what doesn't work well relative to U.S. markets, whether it's doctor-directed partnerships or traditional DTC approach? I think you originally said that you would enter these markets with an impression kit type of strategy and then move on from there. But where do you stand on that front in various markets?

[David Katzman:]

Yes. So I can take that one, Kyle. So pretty much they're mirroring the U.S. There are certain countries that we don't have impression kits. It's just the way they classify them as medical devices, very few. For the most part, we opened up SmileShops. We are doing what we call clinical lease partners, where we're opening up SmileShops inside dental offices, where we'll run it with our smile guide and then try to bring on those dental partners as what we call office direct, where they're then also offering SmileDirectClub. So this new model that we've taken on here, what we call partner network, is definitely in play in all countries, the U.K., Germany. We're signing up partners today. Spain, all of our countries, we're going with that model. We think it's another on-ramp the customer wants. Those that want to see a dentist in the dental chair. So it's pretty much the same, probably a little less heavy on SmileDirectClub and more on what we call clinical leases. We can open up quicker. The rent factor is a little bit less than going into a full retail environment. So -- but we still consider those as we look at new markets.

[Erin Wright:]

Okay. And then can you speak to the teen demographic, what the initiatives are there? And how much volume is attributable to teen today? I mean, how big could that realistically be for you longer term?

[David Katzman:]

Yes. So today, it's still about 10% of our business in total. I think if you look at the market, it's about 75% of total case starts. So clearly, a massive opportunity that we're really in the early stages of going after there. I think if you look at the teen product that we launched last summer continues to evolve and is part of our longer-term growth strategy that we've outlined, and that's a core component of that growth strategy. I think when we launched that product, it really -- if you think about it from a parent perspective, we needed the brand credibility that we have today and continue to improve to be able to address a large portion of that market. And I think we have that today. And so that was a good time to launch it. As you think about some of the more complex cases with teens, that's something that we continue to evolve. So mix dentition is a great example of a product that is currently in development with our treatment planning. And we're expecting to launch in the future at some point. But today, if you look at more mature teens, we can already address a large percentage of those cases today. With the existing treatment planning platforms that we have, and it's a core component to our longer-term growth strategy, as I said. But it's in the very early stages of continuing to ramp that platform and that product. Dave, anything you'd add to that?

[David Katzman:]

No, it's a huge opportunity for us of our 3 big initiatives, I think that's the one that's going to take the longest partner network, we're already seeing gains in that. International, obviously, with 13 countries open up and a couple more coming on soon. The teen, we're going to get there. It's a huge market for us, and I think we're doing all the right things right now with improved treatment planning, like you said, the credibility that our doctors have with the customer, great report. It's actually in the investor deck. You can see some excerpts from it on one of the slides. Take a look at that. It's something that we -- we initially do not go after, but we have the product offering, we have the credibility, and we're going to start improving our teen offering for sure.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation. Have a great day.