SmileDirectClub Targets IPO Price Range Of $19-$22 Per Share

Morning Markets: SmileDirectClub has set a price range for its IPO. Let’s dig into the numbers.

Welcome back from the holiday week, I hope you got some rest. We’re heading into busy IPO waters so expect a lot from Crunchbase News over the next few weeks. Also, make sure you are following our new late-stage reporter for the full scoop as a number of unicorns go public.

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Let’s kick off this week’s working coverage with an IPO update from SmileDirectClub. In a fresh S-1 filing this morning SmileDirect announced that it intends to price its public offering between $19 and $22 per share. As the company is looking to sell over 58.5 million shares (67.3 million, inclusive of the underwriters’ option), SmileDirect is looking to raise comfortably over $1.1 billion in its debut.

The firm’s S-1/A notes a possible maximum raise of $1.48 billion, which appears to take into account a sliding share count that declines with a higher per-share IPO price (pg. 15).

SmileDirect raised $380 million while private from Kleiner Perkins, Spark, Gin Lane, and a private equity firm. The Nashville-based consumer health goods company was founded in 2013, making it a younger IPO than we’ve become accustomed to seeing. And with SmileDirect working in the dental space, it’s apart from our usual technology fare. But as it is a high-growth, private company, it fits comfortably into our regular orbit.

What’s That Worth?

Valuing the firm is slightly complicated, given a two-class share structure and possible “automatic cancellation” of Class B shares for Class A shares in the offering. It appears that SmileDirect will have 386.7 million shares (387.3 million including the underwriters’ option) shares outstanding if it goes public priced at the midpoint of its range. (The company’s share count depends on the company’s final offering price; expect a final valuation note from us when we have a final price. For now, it’s a slightly annoying game.)

At the midpoint, SmileDirect is worth about $7.93 billion.

Why can SmileDirectClub command such a high pricetag? The firm has lots of revenue and lots of revenue growth. As we covered when the company first filed to go public, SmileDirect grew its revenue from $175.1 million in the first half of 2018 to $373.5 million in the first half of 2019. The company’s resulting net loss grew between the two time periods but fell as a percent of revenue. And, SmileDirect’s adjusted EBITDA swung from a small loss to a smaller profit over the same timeframe.

SmileDirect’s business is cash hungry, and more so over time. Observe:

Consuming $164.8 million in cash in six months works out to nearly $1 million per day, giving us a good idea of why SmileDirect needs to go public: Its business may be high margin, but the firm’s sales and marketing costs are high. So, the company’s growth is a bit more expensive than you’d have guessed, given the nature of its business.

A quick example of that before we go. In the quarter ending June 30, 2019, SmileDirectClub posted revenue of $195.8 million, up from $177.7 million the quarter before. From its fresh revenue result, SmileDirect generated gross profit of $161.1 million, or about 82 percent of revenue. That’s good. But then SmileDirect spent a hair of 70 percent of its gross profit on sales and marketing costs.

The company wound up posting a net loss of $32.4 million in the quarter.

We’ll know more about the value of the company when it sets a final price, freezing its share count so that we can nail down its valuation. For now, keep in mind that SmileDirectClub is just one of a number of unicorn offerings coming out soon.

Illustration: Dom Guzman