Q4 2023 Sonendo Inc Earnings Call

Participants

Louisa Smith; IR; Gilmartin Group LLC

Bjarne Bergheim; President, Chief Executive Officer, Director; Sonendo Inc

Michael Watts; CFO; Sonendo, Inc.

Jon Block; Analyst; Stifel, Nicolaus & Company, Incorporated

Presentation

Operator

Good afternoon and welcome to Sonendo's Fourth Quarter Earnings Conference Call.
At this time, all participants are in listen only mode. We will be facilitating a question and answer session at the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Louisa Smith from the Gilmartin Group. A few introductory comments.

Louisa Smith

Thanks, operator. Good afternoon, and thank you for participating in today's call. Joining me from Sonendo are Bjarne Bergheim, President and CEO, and Michael Watts, CFO. Earlier today, Fernando released financial results for the quarter and year ended December 31, 2023. A copy of the press release is available on the company's website.
Before we begin, I'd like to remind you that management will make statements during this call include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements made on this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. All forward-looking statements including those relating to our operating trends and future financial performance, the impact of COVID-19 on our business expense management, expectations for hiring growth in our organization, market opportunity, revenue guidance, commercial expansion and product pipeline development are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recent annual report on Form 10-K filed today, March 11, 2023, with the Securities and Exchange Commission and available on EDGAR and in other public reports filed periodically with the SEC. This conference call contains time-sensitive information and is accurate only as of the live broadcast on March 11, 2024, and Endo disclaims any intention or obligation, except as required by law to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I will now turn the call over to Bjarne.

Bjarne Bergheim

Thanks, Louisa. Good afternoon, everyone, and thank you for joining us. I will start the call today by providing a high-level fourth quarter and full year update for 2023. I will then give a business update detailing how we've considerably sharpened our focus on specific key organizational priorities. Mike will conclude with a more detailed discussion of our financial performance and outlook for 2024. We will then open the call for questions as we enter 2024 our three key priorities for the organization are one commercial execution, two cash conservation and three margin expansion. We are progressing in all three areas and are committed to continuing this work Q4. As an example, reflects positive progress on cash and gross margin.
Finally, I'll highlight two additional steps we've taken to strengthen Cementos balance sheet, including the recently announced divestiture of TDO. Our practice management software platform and a revised debt agreement to provide greater flexibility for the organization.
As for our fourth quarter and full year results, 2023 full year revenue was $43.9 million, representing growth of 5% year-over-year, while revenue of $11.7 million for the fourth quarter was down 4% year over year the results were in line with our previously issued guidance. Non-gaap gross margin for the fourth quarter of 2023 was 35%, a significant improvement from 27% in the same period of 2022.
Non-GAAP loss from operations was $8 million for the fourth quarter of 2023, a 33% improvement compared to $11.9 million in the fourth quarter of 2022. We've garnered valuable lessons over the last few years, and I would now like to discuss how we are driving key priorities through the organization.
As for the priority around commercial execution, we are implementing several changes with Ensign and U.S. commercial team. It is all about focus and doing a few things very well, we believe we have the best offering for root canal therapy that drives the best quality of patient care we need, however, to get more efficient in how we sell and showcase the value proposition for the gentleman's system. First, things are changing around commercial execution is the way we onboard new customers. We have found that training a customer well according to our new onboarding playbook drives higher utilization right out of the gate, teaching doctors how they can drive better efficiency and economics in their practice with the gentleman's system is hard to learn we have demonstrated our cohorts who have been trained according to our onboarding playbook, continue to utilize at a high rate going forward. These cohorts also become great advocates for degenerative procedure. And now with our generally G4 console and our next-generation painful procedure instrument, our sales team has a strong product offering to drive both upgrade opportunities and new console placements. It is worth noting that the reliability of our G4 console is now on par with some of the most reliable capital equipment platforms found in dentistry and in medtech. This is an accomplishment that we are very proud of, coupled with efficiency improvements for the staff and doctors, we see that upgrade to G4 consoles are energizing users across our installed base. Doctors are very excited as they move from our legacy Gen three platform to our G4 consoles and driving that focus. In other words, the benefit of our new G4 consoles is key for our sales team. We're optimizing productivity by standardizing commercial program playbooks for the entire team. We also recognize that PR utilization is a key value driver for Sandoz overall growth. So establishing systems to increase consumable sales among our new and existing installed base remains an area of focus. We have further overhauled our compensation structure for the commercial team, incentivizing the right activities that we need to be focused on at this time. The quality of our sales pipeline remains strong, and we're seeing our commercial team energized by the changes we have made and the opportunities ahead of us for cash conservation. In the fourth quarter, we dramatically reduced our spend, resulting in a 17% sequential decrease in operating costs. We have continued to make progress on this front into the start of 2024.
Several programs have been completed and no longer require the same level of resources. One example is a program associated with the development of the G4 console spending has also been reduced by focusing on fewer things and doing more with less. We are prioritizing our efforts and activities in sales and marketing that have a higher return on investment and drive focus within our team. Our goal is to be more efficient and effective in the way we sell and put us on a quicker path to profitability in conjunction with lower spending. We were also pleased with our adjusted gross margin of 35% for the fourth quarter, contributing primarily to this improvement in margins is to complete transition to clean flow procedure instruments and bringing the production of Jelmoli G for consoles in house by December 31.Sonendo was manufacturing only one type of procedure instrument and one type of console, hence significantly simplifying our operations. We have been working toward this point for some time, and I'm pleased to have reached this milestone earlier than our original target of April 2024. In addition to our clean flow conversion and in-house assembly of the G4 console, we will also improve the reliability of our console and expect a reduction in the cost to service our installed base going forward.
Moving onto matters of our balance sheet. Last week we announced the sale of TDO resulting in gross proceeds of approximately $16 million. TDR was a great acquisition for us and Endo in 2018 and helped us drive significant growth and penetration into endodontic practices. It opened many doors for our sales team, allowing them to educate doctors on the benefits of the gentlemen procedure. We are pleased that TDO strategic opportunities can still be accomplished with the new partnership we have formed revolve soft CDO customers will be in good hands. This divestiture also allows the lender to focus all our time and efforts on driving the opportunity. We have with our regenerative platform.
And finally, as it relates to the health of our balance sheet, we negotiated our debt facility with Perceptive, which includes a revision of revenue covenants that will provide greater flexibility as we execute on our three key company priorities. Ultimately, the sale of TDO. and the revised deal with Perceptive will contribute to a stronger capital structure and allows the lender to bring our full focus on our core business.
I'll now turn the call over to Michael Watts for some commentary on our financial results.
Before opening the call for Q&A. But first, I'd like to take this opportunity to thank Mike for his outstanding contributions to stand up and his support and commitment to the organization for the last seven years. We announced last week that Mike will be leaving soon Endo later this month. They want to recognize that he has been an incredible valuable member of the executive team I'm grateful for both the professional and personal relationship we have established and we wish him and his family the very best in his ongoing endeavors. Mike?

Michael Watts

Thanks, Bjarne. As previously stated and ended Total revenue for the fourth quarter of 2023 was $11.7 million compared to $12.2 million for the fourth quarter of 2022, a decrease of 4%. The decrease was as a result of fewer placements and lower average selling prices of consoles versus the prior year. Q4 product segment declined 8% versus the prior year, driven by a decrease in console revenue and offset by PA revenue.
Q4 PI revenue was $5.1 million compared to $5 million in Q4 of 2022, an increase of approximately 2%. PI revenue growth was driven primarily by increased installed base and average selling prices, offset by reduced volume in our legacy installed base. In the fourth quarter, January console revenue was $2.9 million, a decrease of 24% when compared to the $3.9 million in the fourth quarter of 2022. The average selling price for the generalist console was approximately $50,000 in the fourth quarter of 2023. We placed 58 consoles in Q4 with one G3 trading, resulting in a net change of install base at 57. Our install base as of December 31, 2023, was 1,134 total Q4. Other product related revenue was $1 million in the quarter.
Total software revenue for the fourth quarter was $2.7 million compared to $2.4 million in the fourth quarter of 2022, an increase of 12%. Gaap gross margin for the fourth quarter of 2023 was 33% and 35% on a non-GAAP basis, a significant improvement from 27% in the same period of the prior year, reflecting our continued commitment to improve profitability, transitioned to in-house assembly of exclusively the G4 console and conversion clean flow. PI., along with other operating efficiencies provided sustained margin improvement.
Total operating expenses in the fourth quarter of 2023 with $13.7 million compared to $18.1 million in the same period of prior year. Decreases were driven primarily by reductions in SG&A through sales and marketing expenses and R&D spending loss from operations was $9.9 million in the fourth quarter of 2023 compared to $14.8 million in the fourth quarter of 2022. Net loss was $10.9 million for the fourth quarter of 2023 compared to net loss of $15.2 million in the fourth quarter of 2022. When you exclude the employee retention credit we reported in the prior year. Our cash and cash equivalents and short-term investments as of December 31, 2023, were approximately $46.8 million, while our gross Term Loan remained at $40 million at year end. As noted in our press release, on March 4, 2024, we restructured our term loan with Perceptive with a onetime principal payment of $15 million in March 2024, along with other changes, including monthly principal payments and revisions to our revenue covenants.
Turning to our full year 2023 results. Fernando total revenue for 2023 was $43.9 million compared to $41.7 million for 2022, an increase of 5%. 2023 products segment for the full year increased approximately 4% versus prior year, driven by an increase in PEO revenues offset by lower console revenue full year PI. revenue was $21.6 million compared to $18.9 million in 2022, an increase of 14%. Fee revenue growth was driven primarily by increased installed base and higher ASP. Total PI.s sold in the year were approximately 295,000. January console revenue for the full year was $9.2 million, a decrease of about 14% when compared to the $10.8 million in 2022 Total. Other product related revenue was $3.8 million in 2023. Total software revenue for the year was $9.2 million compared to $8.4 million in 2022, an increase of 10%.
Gross margin for 2023 was 24% compared to 25% in 2022. In 2023, we recorded a onetime impairment charge of $1.6 million related to long-lived assets and $2.9 million relating to the inventory adjustments and cost of sales impacting overall margins.
Total operating expenses for 2023 were $68.5 million compared to $68.7 million in 2022. During the year, we recorded a $2.1 million impairment charge of long-lived assets in operating expenses. Decreases were driven primarily by reductions in SG&A through sales and marketing expenses and R&D spending. Loss from operations was $57.7 million for 2023 compared to $58.2 million in 2022. Non-gaap loss from operations was $45.1 million in 2023 versus a $49 million in 2022. Non-gaap loss from operations excludes stock-based compensation expense, depreciation, amortization expense and impairment of long-lived assets. Net loss was $60.9 million for 2023 compared to $57.1 million in 2022.
As for our 2024 outlook, we are initiating full year 2024 net revenue guidance in the range of $28 million to $30 million. First quarter revenue is expected to be approximately $6 million. Note that this excludes revenue from TDO. software, which will be reported as discontinued operations moving forward.
Lastly, I want to thank Darren and the team from my time here, Cementbouw. It has been an incredible experience, and I leave knowing the Company is very well positioned for continued success.
At this point, I'd like to open the call for questions.

Question and Answer Session

Operator

Thank you. If you'd like to ask a question, please dial star one on your telephone keypad. And I'm preparing to ask your question, please ensure that your phone is unmuted locally.
And our first question is from the line of Jon Block of Stifel.
Jon, your line is now open. Please go ahead.

Jon Block

Hey, guys, good afternoon. Maybe I'll start with the 2024 guidance, which just seems a little low and certainly was below our expectations. So I'm trying to sort of pro forma it for the fourth quarter of 2023. And I think I've got these numbers right? Reg were about $11.7 million software was two seven. Mike, it seems like we should take out software for the entire year as a discontinued ops. But anyway, you'll call it pro forma for the sale of software, it looks like 4Q was about $9 million. You annualize that you get [36]. I know 4Q is a seasonally stronger quarter, but there's a pretty big delta between the 36 million exercise I just went through and the $29 million midpoint. So B or maybe you can start there and just walk us through that on and help bridge that back to the '24 guide. Thanks

Bjarne Bergheim

Yes. Happy to Jon. So let me just start off by saying that the goal for us is and put us on a quicker path to profitability just like we talked about in our prepared remarks, and I know another way to think about that is we're aiming to move more money and investments closer to our customers to focus more on general wave adoption. That's very different than a kind of a more general boil the ocean strategy that specifically as it relates to the quarterly guide here like we talked about in date, like you're mentioning, none of these numbers obviously includes TDO. But if I look back now and kind of think about the last two years, we've seen obviously, our sales and marketing expenses have been high and we didn't quite see the growth that we'd like to see. So we're reducing expenses. We're focusing on a few things, and let me just stress this is not just about cutting costs. It's about we're getting growth back into the business. And I like it just talked about really bringing this back to profitable growth. So while we're implementing these changes in the business, we will be a little bit more cautious on the revenue projections, but at the same time really bullish about the commercial opportunities going forward. So you should see growth come back as we continue to move forward here.
And let me just quickly run through the list of some of the things that make me excited about the business on the commercial side that really gives, I think, upside as we go forward on the guide.
First of all, obviously, we talked about great product offering around G4 and clean flow. We have significant opportunities to upgrade customers to G4 as we move forward. The DSO opportunity, like we've talked about before is real. And that's something that we're going to continue to work on. We're going to onboard customers better, driving better utilization and hence, better peer-to-peer. We're going to focus on specific sales activities that we know lead to results, such as professional education events. We're doing more profit events now than we've done before, and we're going to do that more effectively and efficiently as we go forward, we have a renewed focus on endodontics. And the other thing I just want to say is that the ADA code maintenance committee at their annual meeting last week in Chicago, the ADA agreed to an up believe will help doctors get increased reimbursement for degenerative procedure. That's another thing that we believe can really help drive upside so those are just some kind of qualitative perspectives. And Mike, I don't know if you want to anything else that you want to add.

Michael Watts

And I think you covered everything and we're seeing our utilization remained stable in the forecast. So really, we see that fluctuation is with console placements, and that's where I think Dan highlighted that we have the opportunity to do some upgrades as Phil. We're, of course, targeting to long so as much improvement throughout the year as we can.

Jon Block

Okay. Thank you. That was helpful. And I think my other question more. You're also focused on '24 a little bit. Just at the gross margin line. On a normalized basis, it's been pretty much flat for the past three quarters, 35%, 36%. How do we think about the GMs in 2024 especially with the higher margin software business going away?
Maybe, Mike, if you could just talk us through that a little bit? And then I'll ask one more.

Michael Watts

Yes.
So when we look at gross margin, if we will report the product segment in Q4, as you're able to go through the numbers, you'll see that the product segment had gross margins just under 30% for Q4, and we'll see that continued through Q1, largely in part due to lower revenue numbers. But as we move sequentially throughout the year, we'll see improvements from the in-house production of Gen four start to take hold and then, of course, will be 100% clean flow are beyond moving into Q2 and beyond. We've got a little bit of clean flow left in finished goods inventory that will burn through in Q1, maybe a trickle into Q2. But with two products in house assembly, we should be able to optimize that process. And then we've also got some other initiatives that we're working on to improve efficiencies around how we our service model is.

Jon Block

Okay. But sorry, just to push you a little bit, I think previously you talked about gross margins being in the 40% range for 2024 last quarter, of course, that was prior to the sale of TDOO. on a pro forma basis. Is that now a gross margin that's in the mid-30s for the year, the high 30s for the year. Is there sort of an updated number that we should be thinking about GM's for all of 2024?

Michael Watts

So mid 30s is where we're targeting for the full year. So we should see that improvement. And as we exit the year start to be in the mid to high 30s.

Bjarne Bergheim

And the key opportunities for us right to drive margins here going forward is obviously continuing to drug manufacture across the PAs and the console down and now with a significantly more reliable G4 unit that will give us less servicing costs of those are big opportunities for us to continue to drive margins. We still are very like we have said before, we still we have the opportunity to drive this towards more normalized medtech margins as SP as we move forward.

Jon Block

Okay. And maybe the final one for me is, I think a pretty broad question, maybe all-encompassing, but Mike, if I heard you right, you mentioned utilization sort of stable fluctuations in the capital side. But beyond over the past, like three to six months, you put in programs to stimulate capital, you've announced agreements that should, you know, sort of widen the net DSO opportunity, the trial period on placing capital to stimulate demand. So I just feel these are a little bit at odds had these programs not taken or that you still do the trial and the capital. Why have we not seen those sort of yield returns or payoff where we're now talking about stable utilization fluctuation on the capital means down with those programs in the background. Thanks, guys.

Bjarne Bergheim

Yes, thanks, John. I think in general, like I alluded to right, we have spent a lot of money on sales and marketing over the last two years and we need to get more efficient about the way we run this business on the sales and marketing side and one of the things that we alluded to, some of that during the call here, but we are making a significant number of changes on the commercial side to drive better efficiencies in the organization, but also to drive a more much more efficient engine by which we place capital and by which we also respond to doctors around utilization, not just new onboarding, but how we think about utilization across the existing installed base. So the things that we are doing and that will we think will meaningfully change the way we can perform here going forward. A significant amount of streamlining it within the organization, significant around of additional focus. It's all about focusing on sales, focusing on how we onboard doctors according to our playbooks, we've seen that if we onboard them well, they will utilize better. And the cohorts that have been onboarded well, stay steady and do not decline on refocusing our sales team on the most more effective sales activities, including G for sales profit activities. We also are ensuring that we have sufficient activities in the field to drive the close rates. We'd like to see. We're putting in place a standardized playbooks across the commercial team on compensation plans are being put in place to much better align with what's important for us on and professional education activities. That's something that we're going to do more of. We're going to put those into new regions. We're going to be much more driving more cost effective events, and we're driving more events. And then we'll continue to work closely with our KOLs on these different things. So I think I think if I was to summarize, there's a lot of things we're doing to change the commercial team. There's a lot of that combined with the different commercial opportunities we have. We're very excited about the opportunities that we have.

Jon Block

Thanks, guys. I'll take the rest offline. Thanks for the time.

Bjarne Bergheim

Thank you.

Operator

Thank you, and this will conclude today's Q&A session. So I'd like to hand back to the Sonendo management for any closing remarks.

Bjarne Bergheim

Thank you, operator. We appreciate everyone's time today.
Have a great day.

Operator

Thank you.
This concludes today's call and thank you all for joining You may now disconnect your lines.