SmileDirectClub, Inc.
Q3 2020 Earnings Call Transcript

Published: 16 Nov 2020

[Operator:]

Greetings, and welcome to SmileDirectClub Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the presentation . Please note that this conference is being recorded. I would now turn the conference over to our host Alison Sternberg, Vice President, Investor Relations. Thank you. 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.

[David Katzman:]

Thanks, Alison. Good afternoon, and thank you for joining us today. I'm pleased to report that Q3 results exceeded expectations and demonstrate continued execution against our long-term growth and margin targets. Q3 was a pivotal quarter for us, and we were especially pleased to have reached adjusted EBITDA profitability for the quarter, while also outperforming our revenue growth expectations. We achieved EBITDA profitability one quarter ahead of plan, and we are now focused on ramping towards our long-term target of 25% to 30% adjusted EBITDA margins over the next several years. Our performance in Q3 was continued validation of the strength of our business model and the power of the competitive moats around our platform. It also demonstrated our continued focus on controlled growth with profitability. We outlined this strategy in Q4 of 2019, and we have been executing against it in the three quarters since even with the COVID outbreak at the end of Q1. As a reminder, our controlled growth plan is firmly rooted in the integrity of the customer experience, and that is our central focus. As we have cited before, we are still in the early innings of a massive opportunity and we believe our focus on the customer experience is the most efficient way for us to capture long-term market share. With this strategy, we expect to achieve continued growth into 2021 consistent with our long-term targets, along with profitability, as reflected in our Q3 results. We made good progress on this front within the quarter with referrals reaching 23% of all orders, which is up from 21% in Q2. And we also launched our second generation manufacturing in October as planned. Both developments not only reflect meaningful advancement against our customer service ambitions, but also accrue to our margin profile.

[Kyle Wailes:]

Thank you, David. As David mentioned, we are pleased with our accomplishments over the course of the quarter and our continued progress against our plan of control growth with profitability. Similar to the second quarter, the flexibility and scalability of our business model served us well in Q3. As David alluded to earlier, in Q3, we made progress against the growth initiatives and our advancement on the cost side allowed us to turn adjusted EBITDA profitable one quarter ahead of our plan. Before turning to our results, I want to remind everyone of the philosophy behind our control growth plan as laid out on our 2019 year-end call this past February. At that time, we explained that the integrity of our club member experience is the cornerstone of our growth plan. And we have been executing against that plan ever since. Over the last three quarters, we have continued to see positive momentum against all of the key revenue growth drivers and cost levers that we outlined in our plan. We are managing a business to this plan, and this is especially important to bear in mind when looking at the year-over-year comparisons versus quarter-over-quarter. You'll recall this plan positions us to generate the following. Average revenue growth of 20% to 30% per year for the next five years. Adjusted EBITDA margins of 25% to 30% as we scale during that time period. And now turn into our results for the quarter. Revenue for the quarter was $169 million, which represents 94% of Q3 2019 revenue. This was driven primarily by 93,301 aligner shipments, which is 10% higher than the midpoint of our guidance at an ASP of 1794. On a sequential basis, this was a 63% improvements in shipments and reflects continued recovery against pre-COVID levels. Providing some details on the other revenue items. Implicit price concessions were 9% of gross aligner revenue. And we are expecting similar performance in Q4. Reserves and other adjustments, which includes impression kit revenue, refunds and sales tax came in at 10% of gross aligner revenue. We are expecting similar performance in Q4. Financing revenue, which is interest associated with our SmilePay program came in at $12 million. This is flat to Q2 and we expect similar performance in Q4. Other revenue and adjustments, which includes net revenue related to retainers, whitening, and other ancillary products came in at $17 million, which is also flat to Q2. And again, we expect similar performance in Q4. As David mentioned, it is extremely difficult to predict the future given the current macro environment. That said, our Q4 expectation of unique aligner order shipments of 100,000, and revenue of $180 million represents a 7% sequential improvement on both metrics. Even more notably, this puts us at over 90% of our Q4 2019 revenue, but also is a much more efficient cost structure, which is driving us to adjusted EBITDA profitability. Now turning to SmilePay. In Q3 2020, SmilePay as percentage of total aligners purchase was consistent with past quarters. Overall, SmilePay has continued to perform well, that delinquency rates in Q3 and since Q3 were flat to prior quarters, because we keep a credit card on file and have a low monthly payment. We expect SmilePay to continue to perform well. Our success rates on credit card attempts, which is a proxy for monthly payments. I've seen no degradation. Authorizations continue to show improvement, and we remained focused on improving operations and collection strategies. Turning to expenses and margins. Gross margin for the quarter was 70%, representing a 1600 basis point sequential improvement. As previously noted, the gross margin pressure in Q2 was transitory. And we were starting to see gross margin trend back to historical levels, lower initial aligner volumes compared to history is still waiting on gross margins a little, as initial aligners were 64% of aligners shift in Q3, compared to 61% in Q2. And an average of 77% from Q3 2019 to 1Q 2020. We expect gross margin to continue to strengthen as normalized volumes return. And we remain confident in our long-term gross margin target of 85% that we previously provided. Additionally, as we've also previously cited, we continue to focus on streamlining our manufacturing facilities. And as David indicated earlier, our second generation automation machines are now alive and producing roughly 10% of aligners. At the end of the year, we anticipate the majority of our aligners will be produced by the gen two machines. And we expect these new capabilities to reduce our turnaround time, reduce our scrap and provide a more consistent and superior product. This rollout has been a key component of our adjusted EBITDA positive results in the quarter, and will continue to be a vital component of our traction towards our long-term adjusted EBITDA margin target. Marketing and selling expenses came in at $67 million or 40% of net revenue in the quarter compared to 73% of net revenue in Q3 2019. Even with this reduced spend, approximately 70% of club members, who purchased the liners in Q3, were new leads. This is consistent with where we've come in historically on this metric at 60% to 70%, but achieved that reduced sale and marketing spend and underscores the sustainability of lower sales and marketing spend to support our revenue growth going forward. Our efficient deployment of acquisition spend continued advancements in aided awareness and referral rates, which continue to climb, access to highly efficient lead sources and our network of SmileShops, which function as fulfillment centers, positioned us to continue to perform well against our long-term targets in quarters to come. General and administrative expenses were $74 million in Q3 compared to $69 million in Q2 2020. G&A expenses were up to $5 million sequentially, but labor and other G&A expenses remain down 22% since Q4 of 2019. G&A expenses in July increased from June due to bringing back select team members from furlough to support the business. After July, G&A remained flat through the balance of the quarter. We plan to continue to stay vigilant with cost control throughout the remainder of the year and beyond. And you can expect to see continued leverage from this line item. In Q3, we had a one-time charge of $6 million associated with lease abandonment and impairment of long-lived assets. And we continue to optimize our shop footprint and corporate office portfolio in the new operating environment. Other expenses include interest of $16 million related to the debt facility we entered into in Q2. Tax expense of $1.2 million due to the mix of earnings and losses in countries in which we operate and other gains of $1 million, which is primarily associated with currency gains and losses recognized in the quarter. All of the above produces an adjusted EBITDA of positive $3 million in the quarter with an all-in net loss of $44 million compared to $95 million net loss in Q2 2020 and a net loss of $388 million in Q3 of 2019. Of this $44 million net loss in Q3, $6 million is associated with one-time charges as noted above. Moving to the balance sheet. We ended the quarter with $373 million in cash and cash equivalents. Cash from operations for the third quarter was positive $17 million. Cash spent on investment for the third quarter was $21 million, mainly associated with leasehold improvements, capitalized software and building our manufacturing automation. Free cash flow for the quarter, defined as cash from operations plus cash from investing was negative $4 million, which represents an 89% improvement in our cash burn rate quarter-over-quarter. Looking at Q3 2019, it was a 97% improvement or an improvement of $118 million on a year-over-year basis. In closing, as David mentioned, our performance in the third quarter reflects progress against our long-term revenue and margin targets in support of our controlled growth plan. I would like to reiterate a few key points. Our efforts across all three of our main cost drivers have allowed us to turn adjusted EBITDA positive earlier than our plan and we expect this trend to continue. We've been encouraged by our ability to execute against our growth targets at efficient levels of sales and marketing spend. In Q4, assuming no changes in the COVID environment, we expect to ship 100,000 initial liner orders, which is a 70% sequential improvement. On cost of goods sold, we're making good progress on manufacturing automation with our second gen machines now live and producing approximately 10% of our liners. We plan to increase that percentage significantly by the end of the year. As we have often stated, we believe streamlining our cost profile through operational efficiencies by not only improve our margin profile, but more importantly will provide a consistently superior customer experience that meets our expectations and upholds our brand promise. On sales and marketing, you'll recall that our SmileShops function primarily as fulfillment centers, not as sources of demand generation. Today, we have 110 shops open with 76 of those in North America. We continue to see our shops performing well with higher utilization, which is a key part of meeting our long-term financial targets. On liquidity, we're well positioned with almost $375 million of cash on our balance sheet as of Q3. This gives us ample liquidity to manage through a protracted COVID environment or alternatively to spend faster in a higher growth environment. Lastly, I would like to reemphasize that our long-term objectives have not changed. We remain laser focused on providing the best club member experience and our mantra remains to drive controlled and profitable growth. We remain the low cost provider with brand presence, no pricing pressure and no real competitor that provides an end-to-end vertically integrated platform for the consumer. As we have said in previous quarters and as recently demonstrated, we will continue to make strategic investments in the professional channel, international national growth, and in penetrating new demographics to drive controlled growth while also executing against our profitability goals. Lastly, we continue to see favorable industry dynamics with broader acceptance of telehealth and specifically teledentistry, minimal penetration against the total addressable market, and clear aligners gaining share in the overall industry. All of these position us well for long-term success. We look forward to continuing to update you on progress in days and weeks to come. Thank you to everyone for joining today. With that, I'll turn the call back over to the operator for Q&A.

[Operator:]

Thank you. At this time, we will be conducting our question-and-answer session. Our first question comes from Jon Block with Stifel. Please state your question.

[Trevor Brown:]

Hi, this is Trevor on for Jon. Thank you for taking my questions. I've just got two questions. I'll put them out upfront. Just first one on case volume guidance, Kyle 100,000 case volume guide that you gave us, what are some of the puts and takes to that as we go through the fourth quarter and how can some of those dynamics improve through 2021? And then the second question is going to be on gross margin. You called out manufacturing improvements in the fourth quarter here. How much of that do you expect to impact the gross margin in 4Q? And then how can we think about things in the first quarter of 2021? Thank you.

[Kyle Wailes:]

Yes, thanks, Trevor. Look, I think, as you look at 2021, just given the macro state of the world right now, it's going to be difficult to predict, right. But what I will give some more detail on is Q4 as you're asking. So if you look at Q4 and 100,000 shipments in particular, so that's up 7% sequentially over Q3, revenue of $180 million is also up 7% sequentially over the third quarter. I think just as importantly though we're doing it in a profitable way and we're tracking very well against our long-term targets. And, as we said on the call, that's what we're focused on. It's very difficult for us and we get this question a lot, but it's difficult to look at this on a month to month basis. And the reason being is it really doesn't give a complete picture, just given the complexity of our acquisition funnel, right. So with the acquisition funnel that we have and the overall complexity behind that, there's puts and takes in any given month. And so you've got to look at this over a multi-month period, and that gives a much more accurate portrayal of the underlying demand that we see in the business. And when we look at it that way that's effectively what we're guiding to Q4, which is the 100,000 shipments and the 7% sequentially like we talked about. We’re looking at gross margin, overall, as we talked about on the call. So, gen two is now live. It's ramping up nicely. It's currently doing about 10% of our orders overall. As I look at the fourth quarter with the volume that we're expecting, I would expect gross margins to be in the mid-70s. As we've talked about, we still have a little bit of a correction just from the balance of initial aligners versus MCC or refinement aligners that are shipped. And so, we expect a little bit of pickup from that in Q4. We expect a little bit of a pickup from our gen two as well and then just the overall volumes continuing to normalize. So the three of those together really drive us back to the mid-70s.

[Trevor Brown:]

Great. Thank you.

[Operator:]

Our next question comes from Robbie Marcus with JP Morgan. Please state your question.

[Robbie Marcus:]

Hi, thanks for taking the question and congrats on a good quarter. Kyle, I was hoping you could give us a little more color on the progress during third quarter. How did that trend versus your exit rate in second quarter exiting third quarter, just trying to get a sense of is fourth quarter may be a step down as you're taking in a decent amount of conservatism given what's going on around the world right now? Or is this still - have we hit a plateau here given the amount of SG&A spending you're putting forward for advertisements? Just trying to get - understand how much is you pushing the throttle on SG&A spend in its relationship to sales or conservatism given rising COVID rates?

[Kyle Wailes:]

Yes. Look as we think about it and just to go back to some of the quarterly numbers that you mentioned, so - we shipped just over 57,000 shipments in the second quarter. We grew that about 60% in the third quarter to about 93,000. We're expecting to be up sequentially again about 7% on a quarter-over-quarter basis to a 100,000. And if you really look at what we talked about on the call and what we're focused on, it goes back to executing against the plan that we put in place in Q4 of last year. That's focused on controlled growth with profitability. And so, we're driving to that plan on the top-line. If you extrapolate out that 7% on an annual basis that gets you in line with the top-line 20% to 30% growth that we're expecting on a year-over-year basis, but we're doing it in a profitable way. So gross margin of 75% driving that to our longer-term target over the next several years of 85%. Sales and marketing in line with our expectations of 40% to 45% and G&A also continuing to get leverage out of it as well. So that's what we're really focused on is executing against the plan that we put out in Q4 of last year. And as we look at Q4 of this year and the 100,000 shipments that we're expecting, it's directly in line with executing against that plan.

[Robbie Marcus:]

Great. And the other thing that stood out to me was the adjusted EBITDA profitability in -- within spin distance of free cash flow profitable, how should we think about those trends going forward? Is there a possibility it might backtrack as you ramp up spending as the economy starts to open post vaccine or do you think this is now you're going in one direction and that's positive from here? Thanks.

[Kyle Wailes:]

Yes. Good question, Robbie. I would say we're sticking with one direction and it's positive. We've laid out a longer-term target of 25% to 30% EBITDA margins. This is our first quarter that we're profitable and now we're looking forward to ramping our EBITDA margins against that on a quarter after quarter basis. So you should expect that to occur again in the fourth quarter off of the 100,000 shipments that we've outlined in the $180 million that we've outlined as well. In terms of overall free cash flow, I would expect CapEx to be in line with where it's been historically, which is about that $25 million range in total.

[Robbie Marcus:]

Thanks a lot.

[David Katzman:]

Yes.

[Operator:]

Our next question comes from Nathan Rich with Goldman Sachs. Please state your question.

[Nathan Rich:]

Hi, good afternoon. Thanks for the question. Kyle, sorry to go back to the fourth quarter guidance, but I guess when we look at, I think, how the third quarter progressed, I think, you kind of had talked about 28,500 cases, I believe, in July, obviously coming in at 93,000 for the quarter. You saw some sequential improvement over the course of the third quarter. But, I guess, when we look at the fourth quarter guidance, it doesn't seem like much sequential improvement there. I kind of get that you can't maybe isolate each month, but I think as we think about the fourth quarter, could you kind of just talk about some of the puts and takes that have informed the guidance that you gave?

[Kyle Wailes:]

Obviously, we're six weeks into the quarter. And so, we have pretty good insight into what we've seen thus far. And we have pretty good insight into what we expect to see for the remainder of the quarter based on the demand that we're seeing in the business and the overall acquisition funnel that we see in the puts and takes around that acquisition funnel. And so, we have good insight into the 100,000. What I would say at a bigger picture is going back to what I had said before, but we're really focused on and the 100,000 shipments that we have that we've outlined here, which is about 7% on a quarter-over-quarter basis, it executing our top line against the long-term plan that we've outlined. Our long-term plan that we outlined in Q4 of last year was a plan that really focused on controlled growth and profitability. I think you saw that in the third quarter. I think with the guide that we outlined you're seeing it again in the fourth quarter. And if you extrapolate the guidance that we put out there based on that, it's directly in line with the 20% or 30% top-line growth that we should expect to see in future years. And so, that's how we're thinking about the fourth quarter.

[Nathan Rich:]

Makes sense. And just to clarify what you just said. So, it seems like the business is on track to kind of active this year at a revenue run rate of over $700 million. Would you expect the growth next year to be in line with that 20% to 30% longer-term range just given the factors that you've kind of outlined?

[Kyle Wailes:]

Yes, I would say overall it's very difficult to predict overall what 2021 is going to look like, just given the nature of the macro environment. What I would say is that the 20% or 30% that we've outlined was not a limitation on the market factor or the ability to grow, right. The 20% or 30% that we set in Q4 of last year, when that plan was enacted was really driven by what we believe we can grow the business by based on what we've seen from a fulfillment perspective and from a customer service perspective. And so at that point in time, what we had talked about is putting the club member experience first. And as we do that that's really what is going to drive and optimize the long-term growth that we expect to see as a business. And so, although it's difficult to predict what 2021 would look like. Our expectation is for it to be within that 20% to 30% based on the controlled growth plan that we put in place. And that's a controlled growth plan that we've enacted for the next five years. And it's a plan that we're focused on both from a top-line perspective and a bottom line perspective as well.

[Nathan Rich:]

Thanks for the comments.

[Operator:]

Our next question comes from John Kreger with William Blair. Please state your question.

[John Kreger:]

Hi, thanks very much. I was hoping you could expand a little bit on the professional channel. I know that's a fairly new strategy for you. It sounds like you've got maybe a couple of additional partnerships. Where do you stand with that? Is that - have you sort of optimized the economic model and are we in a rollout phase or would you still characterize it as more of a pilot phase at this point?

[David Katzman:]

Yes, I can take that one, Kyle. So we're definitely out of pilot phase, very early innings to this program, but we've seen good adoption. We've had some of the key DSO leaders step forward and go from pilot. Now, we're going to start rolling out into all their offices. It started out as a pilot. And we just signed DECA Dental, Unified Smile. We're also working on some large DSOs in the UK and Australia as well. So, we actually just had a call today about ramp up on the sales team, the internal G&A team to support this. So we're very excited about it the GPs and some ortho offices as well have really adopted this. I think that the timing was right with COVID and telehealth having much more broad acceptance. So the GPs are liking this program. It also - I think what is really unique to it is that it allows the dentist and ortho for this type of product to continue and not have to give up share time. So we're using our telehealth platform to take care of these customers. We're also introducing new customers to their dental home for care. So, increasing traffic, increasing patient count is something - especially right now when revenue is down for a lot of GPs is very important. So we're putting a plan together to roll this - to start rolling this out of pilot mode in hiring up and staffing up. So you'll see more of this in 2021.

[John Kreger:]

Great. Thanks, David. That's helpful. Another follow-up, where do you feel international stands at this point? How has that been ramping relative to your expectations? And are you going to be handling fulfillment and customer service out of your U.S. production capabilities? Or will you be looking to add facilities in Europe? Thanks.

[David Katzman:]

Yes. So as of now all of our production and shipments are coming out of the U.S. There's no plans until we get to much larger scale to put any kind of manufacturing facility in Europe or in Asia. Even during the COVID environment, we continued to expand. We opened up Spain. And we've got two shops open there, doing very well. We also opened up in Singapore recently, doing well, and we're going to be announcing several more countries. So we've got a really great international team that has gated all these various countries, and you'll continue to see those rollout in the future. As far as customer care goes, we do have facilities. There is one in Greece, that's serving Germany and as we open up the Netherlands and then we also have the Philippines that we just opened up that is servicing Asia.

[John Kreger:]

Great. Thank you.

[Operator:]

Our next question comes from Glen Santangelo with Guggenheim. Please state your question.

[Glen Santangelo:]

Hi, thanks for taking my question. Hi, David, I just want to follow-up on the sales and marketing issue a little bit more, certainly a big change in the company in the past couple of quarters in terms of customer acquisition costs, it's obviously a pretty big inflection. Two quarters ago, we had over 400 SmileShops. That number has been cut by over 70%. I'm kind of curious in your mind, what were the biggest drivers of that inflection and does that mean that sales and marketing should stay in this 40% to 45% range going forward as we think about 4Q in 2021, which I think is kind of consistent your long-term targets in that 40 to 45 range, I just want to be clear in terms of what you're thinking in terms of the near-term expectations versus your long-term targets? Thanks.

[David Katzman:]

Yes. So, during COVID, we actually shut down all of our shops, and we rebuilt from the ground up. We have spent a lot of time with our analytics team and really understanding the incrementality of those shops. As we've stated many times, they're not demand drivers, they're really fulfillment centers. They're really there to have incrementality above the kits in a market where a customer doesn't want to start their journey with a kit. So we've become very proficient now in understanding, and COVID allowed us to do that. How many shops do we need in a market, where those shops should be, and so we've been strategically opened them and we're not done, but the bigger markets, the largest seventy-five DMAs, we've opened up these shops, we're now incrementally opening up a few more here and there. But as far as the 40%, which is a big part of that, because we're getting - the utilization we're getting out of these shops now is much, much higher than we had pre-COVID. And so that's accruing to the bottom line at 40%, 40% to 45% is where we are going to be on sales marketing. That's a key driver to our controlled growth and profitability. We will not go over that number that's not part of the plan. And that's an all countries. So you'll continue to see that. And I think, what you're seeing too with some of the clear aligner tailwinds that's going on here, where consumers, who may have been looking at braces in the past as an option for teeth straightening because of COVID and the amount of offices that are required with braces are looking more to clear aligner therapy. We're seeing that and we will continue to see that in more efficient sales and marketing spent. So expect that in the future as well. Kyle, you want to add anything to that?

[Kyle Wailes:]

Yes, I think you said it very well, David, that the targets that we've outlined are consistent with where we expect to be in future quarters. I would expect in the fourth quarter to be on the higher end of that range, as we continue to ramp up spend in preparation for Q1. And as David said, as we look at the very favorable industry dynamics that we're seeing across the industry. We're enabling that to accrue to our bottom line. And we're seeing that efficiency in the sales and marketing spend as a percentage of revenue.

[Glen Santangelo:]

Maybe if I could just ask one quick question on the balance sheet. I mean, you're talking a lot more about controlled profitable growth, and it's great. The company has crossed profitably, but EBITDA here a quarter early, but as you think about the opportunity, I mean, it seems like kind of the balance sheet would support a more aggressive strategy. And so how are you thinking about, you know, balancing that going forward with respect to sort of the needs of the business versus the current cash burn. I mean, where do you see the path to free cash flow generation relative to that, I think it is $373 million in cash. You still have on the balance sheet. Do you to have to raise additional capital to sort of hit your goals, or do you feel like you can do it based on your outlook for free cash flow going forward?

[David Katzman:]

Yes, I don't see us having to raise additional capital, and with the $375 million we have on the balance sheets, that puts us in a really good position, be it in a resurgence of COVID, and things slow down again in the alternative in a faster growth environment as well. I think that puts us in a good position. If you look at our cash flow overall, as we become either the positive like we were in the third quarter. Overall, EBITDA less CapEx is a great proxy for our free cash flow. We're expecting to spend about 25 million per quarter on CapEx, we've got about 15 million per quarter with our new debt facility as well. And as I look at our overall cash burn at least within the foreseeable future, I would expect us to be in the range of approximately $15 million per month as you look at the fourth quarter of this year, so sufficient cash and sufficient liquidity to support the long-term growth needs of the business.

[Glen Santangelo:]

Thank you.

[Operator:]

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

[Michael Ryskin:]

Hi guys, thanks for taking the question. I want to follow-up on something that was kind of came up tangentially a few times and prior questions about the sort of the go-to market strategy and the various channels you're pursuing now. I mean as you said, a small shops are starting to come back, you're up to 92 at the end of quarter. I think you said you're at around 110 now and clearly ramping that back up, but you've also got the dental office, the other TSOs, you've got the referral networks. There is a bunch of different channels that you're pursuing to go after the customer that's out there. If I was just sort of take a step back and look forward a couple of years, how would you stratify these opportunities for you and what this feeds into sort of the question of where the spend is going to go, which channel are you going to push the most? Is it going to - are you really leaning on the dental channel or is it going to go back to the small shops, more just sort of general sales and marketing to get the referrals. Is there any particular way you could stratify these to help us think about the go-to-market strategy longer-term?

[David Katzman:]

Yes, at this point in time, the core business and how we operate with kits and scans that's how we started. That's what was delivered to us off the shelf. One of the things we haven't talked about on this call is innovation and R&D. And we are really focused including myself with the team on new ways of going to market beyond a SmileShop in a scanner in a impression putty kit that goes to the home. So hopefully some of those things will come to fruition in 2021, if not 2022. It's not a matter of - if it's a matter of when. So those types of things that are not in our plan. We're working very, very hard on which will make it easier and less friction for the customer. I say today, all of these channels we're supporting, we're investing in, and so it's hard to say two years from now, which is going to be the main driver, but we're optimizing all of them today. It is a kit and scan business, and that's we're making sense of that with our 40% to 45% sales and marketing target. This new acquisition channel in the professional channel is very exciting to us. So that could something that could really, really take off come 2021, but our projections are pretty conservative on it right now, even though we're seeing good adoption. So I would say it's really where we're at today. And as things change quarter-by-quarter, we'll definitely keep you informed.

[Michael Ryskin:]

All right. Thank you.

[Kyle Wailes:]

Yes, Michael. I would just add to that a little bit as well. I think it's important to remember we're agnostic to where consumers want to start their journey, right? Whether it's a kit or a SmileShop or a dental office, we're driving consumers to the website and we're empowering them to make that decision. And I think you can look at Q2 through now. Prior to COVID, we were doing 90% of the business through SmileShops. During the second, it was 90% through kits. And today it's back more to 50% to 60% split between the two. And so, what that really demonstrates is just the overall importance of the omni-channel approach and the flexibility of the business model overall. And because we're driving that demand to the website and empowering that consumer to decide how they want to start their journey. We're pretty agnostic to which channel they choose. It's more about providing the on ramps for them to be able to start that journey.

[Michael Ryskin:]

Thanks. Yes, it's exactly that swaying from 90% one way to 90% the other way that I was kind of getting that, but I appreciate that color and the update on where you are now. Thanks.

[Operator:]

Our next question comes from Kevin Caliendo with UBS. Please state your question.

[Kevin Caliendo:]

Hi, thanks for taking my call. I guess I just want to make sure I understand the commentary around the 20% to 30% long-term growth targets and the context of 2021. I'm not asking you to guide for 2021, but given the easier comps that you experienced because of COVID. I mean, is it still that sort of range that you're expecting? Or do you expect maybe something better if COVID goes away you up - you're spending a little bit like can you talk us through how we should think about that because obviously 2Q is a pretty easy camp even 3Q should be a pretty easy comp for you despite of the solid quarter that you just put up.

[Kyle Wailes:]

Yes, look what I would say overall, if you look at 3Q, we were almost 95% of where we were last year, but we did it in a much more profitable way whereas last year we had an EBITDA loss of $45 million. And so as you're thinking about sort of comps and ramping from there, so that's growing again 7% sequentially into Q4 both for shipments and for overall revenue. It's very difficult just given the macro environment for us to be able to predict what 2021 is going to look like. I think what I would focus on overall is that sequential growth that we're seeing in the business from Q3 and the Q4. And if you look at the long-term targets and growth targets that we're expecting to see, we're still expecting that 20% to 30% growth on a year-over-year basis, year in your out for the next five years. And again, it's not to say it might be slightly higher than that if the COVID environment gets better. But if you recall that entire plan was designed around - for us capturing market share, but most importantly, not forfeiting the integrity of our customer experience. And so I would expect us to be in that 20% or 30% range year in and year out based on that, because that's the amount that we believe we can grow the business by and do it in a profitable way, but more importantly do it in a way that's not going to forfeit the integrity of the customer experience.

[Kevin Caliendo:]

Understood, that's helpful. My follow up is that you mentioned the credit facility, any update on that. I know that was a goal for the company to maybe get a new credit facility improved terms. Where are we with that? I would think that given the profitability in the quarter that maybe - there were some progress made on that regard.

[Kyle Wailes:]

So, we're always looking at different options around that. So we signed that deal in Q2 of this year. We do have a non-call provision under that credit facility where we could call it, but the rate at which we would have to do that would be a pretty high penalty for that. So I would look more at the Q2 timeframe of next year for when we would look at potentially refinancing that. And as you point out, I think given the EBITDA profitability that we're seeing, it opens up a lot of different avenues for us to look at refinancing that facility. And we also continue to look at factoring relationships as well. So if you look at the performance of SmilePay, it performed very well in the third quarter. Our delinquency rates continue to improve. Our credit card authorization rates continue to improve. And so that sets us up well to also look at a variety of factoring scenarios as well.

[Kevin Caliendo:]

Got it. Thanks so much.

[Operator:]

Our next question comes from Steve Beuchaw with Wolfe Research. Please state your question.

[Steve Beuchaw:]

Hi, thanks for the time here. I'll ask a two parter on retail and then just one follow up. So as we try to fill in the rest of the model, you mentioned in your repaired remarks that you have two additional partners coming along here in the fairly near-term, Walgreens and Sam's Club. So I wonder first could you talk about within the efforts that you've gone through so far with Walmart, how close are you to getting full exposure there, all the shelf space, all the impacts that you want. And should we think about Walgreens and Sam's Club as being incremental to that effort? And at a scale that's at least in the ballpark of what we've seen so far within Walmart? And then I do have one follow-up.

[David Katzman:]

Yes, I can take that. So at Walmart, we feel that we've done very well for a new brand going in last year, especially on the whitening category, we went in with a variety of oral care products, but the whitening has really taken off. And so we're coming up with a lot of new innovative whitening products that will be introduced back into Walmart next year and the year after. Good partners to have. CVS also, we're in 3,000 doors, so not quite complete count, I think there are 7,000 to 8,000 doors, but also a good partner. So Walgreens, we look at it as incremental as well. Sam's Club, we're doing a - I believe, it's a 200 store test and we'll see how that goes. And we're talking to other retailers as well. So for us look at it's a nice business. It continues to grow. It's really a lead channel as we look at it for teeth straightening. And we're starting to track that as customers, who get introduced to SmileDirectClub by being in a retail store and then shifting after they like the products into teeth straightening. So we're doing things to get emails, get leads, offer coupons inside the packaging and things like that. So - and we're also looking at this internationally, Watsons in Asia, we're going to be launching a whitening program there, and we're talking to other retailers in the UK and other countries.

[Steve Beuchaw:]

Okay. I appreciate the color. And then the one thing in my model, the one line in my model that we haven't talked about here in Q&A is Teen. And I know it's very early. I wonder if you could just give any color commentary around what you're seeing in terms of the receptivity within Teen market. And how long you think it takes to get that part of the business to being a material contributor? Thanks much.

[David Katzman:]

Yes, so, it's early. We just launched Teens this year right before COVID. We're very excited about it. I think it's a long-term process to shift over to Teens. It was less than 10% of our total business. And we have seen that ramp now. It does represent 75% of case starts in the industry. So there's a lot of opportunity there that we - when we first launched SmileDirectClub, we were not going after. Some of the things that we put together for this program in the case for the Teen, the ability for parents to get notifications, or I want to change out the aligners, guaranteed replacement program if the Teen loses the aligner, all these kinds of things are helping to get adoption. We're also very excited that with the professional channel. So a lot of parents want their Teen to start at in a dentist chair or ortho chair. And so by having this partnership with them, we're starting to see Teens come in through that on ramp. So I think more of that to come. We're committed to it. It's one of our pillars of growth initiatives, and we're going to continue to penetrate that channel.

[Operator:]

Thank you. Ladies and gentlemen, that's all the time we have for questions today. All parties may now disconnect. Have a great day. Thank you.