Align Technology Q3 2021 Earnings Report

Align Technology EPS Results

• Actual EPS: $2.87
• Consensus EPS: $2.60
• Beat/Miss: Beat by +$0.27
• One Year Ago EPS: $1.76

Align Technology Revenue Results

• Actual Revenue: $1.02 billion
• Expected Revenue: $977.81 million
• Beat/Miss: Beat by +$38.10 million
• YoY Revenue Growth: +38.40%

Align Technology Announcement Details

• Quarter: Q3 2021
• Date: 10/26/2021
• Time: After Market Closes
• Conference Call Date: Tuesday, October 26, 2021
• Conference Call Time: 8:00PM ET

Align Technology (NASDAQ:ALGN) (NASDAQ: ALGN) pioneered the use of digital technology in orthodontics through the development of the Invisalign system, a series of clear, removable aligners that provide an alternative to traditional metal braces. Since its founding in 1997 by Zia Chishti and Kelsey Wirth, the Tempe, Arizona–based company has expanded its focus to include intraoral scanners, CAD/CAM software for dental laboratories and comprehensive digital dentistry solutions.

The company’s signature Invisalign system leverages 3D imaging and computer-aided design (CAD) to create customized aligners that gradually reposition teeth, improving patient comfort and treatment predictability. Align’s iTero intraoral scanners capture high-resolution digital impressions, streamlining treatment planning and reducing the need for conventional molds. In 2019, Align further broadened its digital portfolio with the acquisition of exocad, augmenting its software capabilities for dental labs to design restorations, prosthetics and orthodontic appliances.

Today, Align Technology serves dental professionals in more than 100 countries through a combination of direct sales offices and distributor partnerships. The company maintains manufacturing facilities in the United States and other strategic locations to meet global demand and ensure product consistency. With ongoing investments in research and development, Align continues to enhance its clinical applications, expand digital workflows and introduce patient engagement tools aimed at improving outcomes and practice efficiency worldwide.

Align Technology Q3 2021 Earnings Call Transcript

Key Takeaways

• In Q3, Align delivered $1.016 billion in revenue, up 38.4% year-over-year, with system services revenues rising 57.3% and clear aligner revenues up 34.9%, and shipped to a record 85,500 Invisalign doctors.
• System and services revenues grew 57.3% YoY and 5% sequentially as the iTero Element 5D Plus series, featuring NIRI for radiation-free interproximal caries detection, gained traction globally alongside exocad CAD/CAM integration.
• Clear aligner revenues benefited from robust demand across regions and products, with 206,000 teen cases shipped in Q3 (up 26.6% YoY and 13.8% sequentially), though slight sequential declines reflected stronger seasonality in EMEA and APAC.
• To capture the underpenetrated retainer market, Align launched a dedicated Vivera retainer marketing team, social media campaigns and a U.S./Canada subscription pilot, receiving positive feedback from high-volume Invisalign practices.
• The company expects 2021 revenues of $3.9–3.95 billion (at the high end of guidance), full-year GAAP operating margin of ~25%, sustained investments in sales, R&D and manufacturing capacity (including a new Poland facility), and continued share repurchases.

Presentation

[Operator]

Greetings, and welcome to Align Technology's third quarter 2021 earnings conference call. At this time, all participants are on a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Shirley Stacy, Vice President of Corporate Communications. Thank you. You may begin.

[Shirley Stacy, VP of Corporate Communications at Align Technology]

Good afternoon, and thank you for joining us. Joining me today for our conference call is Joe Hogan, President and CEO, and John Morici, CFO. We issued third quarter 2021 financial results today via GlobeNewswire, which is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately one month. A telephone replay will be available today by approximately 5:30 P.M. Eastern time through 5:30 P.M. Eastern time on November 10. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13723267, followed by pound. International callers should dial 201-612-7415 with the same conference number.

[Shirley Stacy, VP of Corporate Communications at Align Technology]

As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events and product outlook. These forward-looking statements are only predictions and involve risks and uncertainties that are described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission, available on our website and at sec.gov. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statement. We have posted historical financial statements, including the corresponding reconciliations of our GAAP and non-GAAP, if applicable, and our third quarter 2021 conference call slides on our website under quarterly results. Please refer to these files for more detailed information. With that, I'd like to turn the call over to Align Technology's President and CEO, Joe Hogan. Joe?

[Joe Hogan, President and CEO at Align Technology]

Thanks, Shirley. Good afternoon, and thanks for joining us. On our call today, I'll provide some highlights from the third quarter, then briefly discuss the performance of our two operating segments, system services and clear aligners. John will provide more detail on our financial results and discuss our outlook. Following that, I'll come back and summarize a few key points and open the call to questions. I'm pleased to report strong third quarter results, with revenue growth of 38.4% year-over-year on top of a record third quarter last year, driven by the strength across all regions, customer channels, and products. For Q3, we shipped to a record 85,500 doctors in the quarter and reached 11.6 million Invisalign patients cumulatively.

[Joe Hogan, President and CEO at Align Technology]

On a sequential basis, Q3 results reflect continued adoption of iTero scanners and increased utilization of Invisalign clear aligners in the Americas and APAC regions, as well as the growth in teen segment, especially in the North American orthodontics channel. Our third quarter revenues reflect a growing confidence of doctors and patients with Invisalign treatment, iTero scanners and exocad software as more doctors discover the benefits of digital treatment and transform their practices with the Align Digital Platform. For Q3, systems and services revenues were up 57.3% year-over-year, with strong revenue growth across all regions and up 5% sequentially, primarily in North America.

[Joe Hogan, President and CEO at Align Technology]

Q3 results reflect a continued adoption of iTero Element 5D Plus Series, our next generation scanners and imaging system, which launched earlier this year and feature innovative technology like near-infrared technology we call NIRI, which aids in detection and monitoring of interproximal caries lesions or cavities above the gingiva without harmful radiation. For Q3, clear aligner revenues were up 34.9% year-over-year, with strong revenue growth across all regions and across the portfolio, including comprehensive and non-comprehensive products, as well as Invisalign Moderate and Invisalign Go. On a sequential basis, Q3 clear aligner revenues were down very slightly from record Q2, reflecting more pronounced summer seasonality than last year, especially in EMEA, where practices and patients appear to have taken extended holidays and where offices were impacted due to resurgence of COVID-19 cases and restrictions, especially in some markets in Asia Pacific.

[Joe Hogan, President and CEO at Align Technology]

In the teen segment, Q3 2021 Invisalign clear aligner volumes for teens were strong, up 13.8 sequentially and 26.6% year-over-year to a record 206,000 teens, representing approximately one-third of total cases shipped, with strong shipment growth from North American orthodontists and a record quarter for teen in APAC. Our third quarter revenues also include non-case revenue for clinical training and education and doctor-prescribed retainer products. Retention is a critical part of creating and maintaining a beautiful new smile. Retainers prevent teeth from gradually shifting back to their initial positions after treatment ends. Studies show that without retention, even perfectly aligned teeth can gradually revert to their pre-treatment state and that dentition continues to change as patients age, often requiring limited treatment, also known as touch-up treatment, if not properly retained.

[Joe Hogan, President and CEO at Align Technology]

Our retention products are designed to maintain teeth that have been aligned by Invisalign aligners, braces or other aligners. These retainer products can accommodate lingual bars, wires, also known as a permanent retainer, missing teeth that require an artificial tooth and bite ramps, also known as turbos or blocks. While our retainer business continues to deliver solid revenue growth, our share of retention market is significantly underpenetrated, even more so than in our share of the orthodontic case starts. We've been developing a robust retainer strategy, including a separate marketing team focused solely on driving adoption and increasing market share in the United States. Our objective is to build brand awareness for Vivera retainers and drive engagement with doctors through clinical education and sales initiatives, while connecting consumers to doctors through demand creation programs and our concierge service.

[Joe Hogan, President and CEO at Align Technology]

We've also recently implemented social media campaigns featuring the benefits of Vivera from the makers of Invisalign clear aligners. We believe that incremental investments will provide increased value for Invisalign practices and drive growth consistent with our long-term financial model target. In addition, we successfully rolled out a limited pilot program to participating Invisalign providers in the United States and Canada that offers a monthly targeted subscription program to address the unmet patient demand for retention or touch-up cases. Our goal is to encourage experienced, high-volume Invisalign practices who regularly treat patients with our comprehensive products to offer premium retention or entry-level products for the long-term health of their patients and to grow their businesses. Practices in this pilot program can purchase a monthly subscription at a fixed price based on their monthly needs for retention or limited treatment.

[Joe Hogan, President and CEO at Align Technology]

The program allows doctors the flexibility to order both touch-up or retention aligners with their tier subscription. The program is designed for a segment of experienced Invisalign doctors who are not regularly using our retainers or low-stage aligners. The positive feedback from our doctors has been encouraging. For instance, the doctors at Bray and Tarby told us the program is very straightforward and easy to understand, and they've been hoping Align would do something like this. Dr. Jonathan Nicasio at Princeton Orthodontics called the program a home run. He went on to predict it should replace the idea that doctors invest in 3D printing and the additional complications and expenses it requires, including the need for a full-time employee and additional overhead costs, particularly because he believes his treatment outcomes are always better with Align.

[Joe Hogan, President and CEO at Align Technology]

Q3 non-case revenues also included accessories and consumables such as aligner cases called clamshells, cleaning crystals, and other oral health products that are available on our e-commerce channels in the U.S. only, including the Invisalign accessory store, Walmart, and Amazon. In Q3, we announced an exclusive supply distribution agreement with Ultradent Products, Inc, a leading developer and manufacturer of high-tech dental materials, devices, and instruments worldwide. The Invisalign professional whitening program, powered by Opalescence, is optimized for Invisalign aligners and Vivera retainers and is available only through Invisalign-trained doctors. Also in Q3, we launched the Invisalign whitening pen through our e-commerce channels in the U.S. only. The whitening pen is an over-the-counter retail product for consumers seeking quick tooth whitening at a lower price and is not intended to be used with aligners.

[Joe Hogan, President and CEO at Align Technology]

The whitening pen complements the other accessory products that Align already markets to consumers through its existing e-commerce channels and is a key addition to our consumable product portfolio. Now let's turn to the specifics around our third quarter results, starting with the Americas. In the Americas, Q3 results reflected strong performance, including record revenues for Latin America, as well as summer seasonality for adult case starts in North America that primarily impacted GP practices, strong ortho performance, especially in the teen market, that included increased utilization from the orthodontic channel. Invisalign case volume was up 0.7% sequentially and up 36.4% year-over-year, reflecting growth across the region, especially in LATAM. DSO utilization continued to be a strong growth driver as well, led by Heartland and Smile Doctors.

[Joe Hogan, President and CEO at Align Technology]

For our international business, Q3 Invisalign case volume was up 27% year-over-year on top of record growth in the same quarter last year. On a sequential basis, international shipments were down sequentially 4.3%, primarily as a result of greater seasonality and COVID-related shutdowns in APAC markets. For EMEA, Q3 Invisalign case volumes were up 49.6% year-over-year, with broad-based growth across all markets, led by the U.K. and Iberia, along with continued growth in our expansion markets in Central and Eastern Europe and the Benelux. For Q3, year-over-year Invisalign volume in EMEA was driven by increased submitters from both orthodontists and GPs and increased utilization, primarily from orthos.

[Joe Hogan, President and CEO at Align Technology]

On a sequential basis, EMEA was down sequentially 16.5%, following a record Q2, primarily as a result of the extended seasonality we had anticipated, primarily from summer holidays and vacations across the region. For APAC, Q3 volumes were up 4.2% compared to a record Q3 last year in APAC. On a year-over-year basis, growth was uneven in the market in APAC, the first region to emerge from the depths of the COVID lockdown in 2020. Additionally, we saw COVID resurgences and lockdowns sporadically impact various APAC countries in Q3. On a sequential basis, Q3 Invisalign volumes were up 21.2%, reflecting growth across the region, led by a record quarter in China, especially from teen cases, as well as strong growth in Japan and ANZ.

[Joe Hogan, President and CEO at Align Technology]

In Q3, growth from both channels was strong, with ortho growth driven by increased Invisalign utilization and GP growth, channel growth driven by increased Invisalign submitters. APAC teen shipments reached an all-time high in Q3. At the recent tenth China Finance Summit Awards, Align was recognized as the 2021 most innovative enterprise for its advancements and outstanding contributions in the field of digital orthodontics. This award builds on our prior recognition of Align's leadership in the digital orthodontics industry and its efforts to promote the modernization of orthodontics. Our consumer marketing focuses on educating consumers about the Invisalign system to drive demand to Invisalign doctors' offices, ultimately capitalizing on the massive market opportunity to transform 500 million smiles. In Q3, we expanded the next generation of the Invisalign's media campaign across EMEA, APAC, and Brazil to increase awareness with adult, mom, and teen consumers.

[Joe Hogan, President and CEO at Align Technology]

Globally, we delivered 6.45 billion impressions, growing 42% year-over-year, resulting in a 70% year-over-year increase in unique visitors to our websites. In the U.S., we connected with teens on Snapchat, YouTube, and Twitch with our Invisalign is not your parents' braces campaign. These campaigns continue to feature some of the largest teen influencers from our Invisalign Smile Squad, like Charli D'Amelio, Marsai Martin, Michael Le and Collins Key, and Devan Key. These influencers share their personal experience with Invisalign treatment, including why they chose Invisalign treatment to shape their smiles. As part of our focus on teens with our Invisalign ChangeMakers program, we held a recognition event hosted by Marsai Martin with teens across the country to celebrate and recognize 100 teens across the country who drove positive change within their communities.

[Joe Hogan, President and CEO at Align Technology]

To continue growing for our young adult businesses, we expanded the Invisalign Is a Powerful Thing campaign, which highlights how powerful the smile transformation with Invisalign treatment can be for their self-confidence. In the U.S., we expanded our Invisalign Smile Squad to include young adult influencers such as Cody Rigsby, Lana Condor, and Emily Hampshire, who helped to deliver over 405 million impressions. Additionally, our influencer partnerships with TikTok creators helped increase traffic to our sites with a 127% increase in click-through rates. In Brazil, we launched the Invisalign Is a Powerful Thing campaign and teamed up with mega influencer Taís Araújo to increase website traffic by 30%. In the APAC-EMEA region, we expanded into new media channels such as TikTok and Snapchat across the U.K., Germany, and France to drive engagement.

[Joe Hogan, President and CEO at Align Technology]

These efforts led to more than 153% increase in unique visitors. We also started consumer advertising in Russia, which resulted in more than a thousand increase in unique visitors to our website. In Q3, we continued to expand our consumer advertising across the APAC region, experienced a 132% increase in unique visitors to our websites. In Australia, we expanded our media mix to include partners such as TikTok and Snapchat, which resulted in a 250% growth year over year in unique visitors to our website. In Japan, we continue to see a strong response from consumers to our Invisalign campaign, resulting more than an 800% increase year over year in unique visitors to our website.

[Joe Hogan, President and CEO at Align Technology]

Adoption of our consumer and patient app, My Invisalign, continued to increase in Q3, with 1.2 million downloads to date. Usage of our four digital tools also continued to increase. For example, our Invisalign Virtual Appointment tool was used over 15,000 times, and our insurance verification feature was used 14,000 times in Q3. Furthermore, we received more than 1.5 million patient photos in our virtual care feature to date globally, which continues to provide us with rich data to leverage our AI capabilities and improve our services for doctors that is used to enhance their patients' care. For our systems and services business, Q3 revenues grew 57.3% year over year, reflecting strong scanner shipments and services, and was up 5% sequentially. This is the fifth consecutive quarter of sequential revenue growth for our systems and services business.

[Joe Hogan, President and CEO at Align Technology]

The iTero Element 5D Plus imaging system continued gaining traction across all regions, with the most recent launch in Japan in Q3. The iTero Element 5D Plus imaging system will be available in China in Q4 of this year. Additionally, the iTero Element Plus series was launched in Korea in Q3. The series expands the portfolio of iTero Element scanners and imaging systems to include new solutions that serve the needs of a broader range of doctors and patients in the dental market. Moreover, I'm proud to say that in a recent clinical study, the iTero Element 5D intraoral scanner was found to be more sensitive than bite-wing radiology in detecting early enamel lesions, providing further evidence of the benefits of iTero 5D scanner in detection and monitoring of interproximal caries lesions or cavities above the gingiva without exposing patients to harmful ionizing radiation.

[Joe Hogan, President and CEO at Align Technology]

This is great news for our iTero business, as the study further supports the diagnostic validity of near-infrared imaging technology offered by the iTero 5D scanner for early proximal caries detection. The findings also underscore the valuable role that NIRI technology can have in dental health assessment and early detection of cavities, which is important to the overall oral health care treatment options and a comfortable, safe experience for a broad population of patients. A strong indicator of the digital acceleration with dental offices is the number of intraoral digital scans used for Invisalign case submissions. Total worldwide intraoral digital scans used to start an Invisalign case in Q3 increased 84.2% from 78.3% in Q3 last year.

[Joe Hogan, President and CEO at Align Technology]

International intraoral digital scans for Invisalign case submissions increased 79.3%, up from 72.1% in the same period last year. For the Americas, 88% of cases were submitted using an intraoral digital scan, compared to 83.2% a year ago. Cumulatively, over 44.9 million orthodontic scans and 9.3 million restorative scans have been performed with iTero scanners. Our Q3 systems and services revenues also includes exocad, CAD/CAM products and services. exocad's expertise in restorative dentistry, implantology, guided surgery, and smile design extends our digital dental solutions and broadens our Align Digital Platform towards fully integrated interdisciplinary end workflows. We remain excited about our continued integration progress and product plans with exocad. During the quarter, exocad launched ChairsideCAD 3.0 Galway, the next generation of exocad's easy-to-use CAD software for single-visit dentistry.

[Joe Hogan, President and CEO at Align Technology]

The software has improved automation for fast crown design and enables users to integrate open hardware and materials of choice. exocad's ChairsideCAD received 2021 Cellerant's Best of Class Technology Award for the third consecutive year. Also, during the quarter, exocad had its largest ever presence at IDS, the International Dental Show, where they showcased their seamless digital workflows and the simplicity of the use of exocad's Galway software release. exocad was the only company at IDS to showcase live patient treatment with a Smile Creator Experience station, featuring iTero scans, instant smile makeovers, and production of clip-on smiles. With that, I'll now turn it over to John.

[John Morici, CFO at Align Technology]

Thanks, Joe. Now for our Q3 financial results. Total revenues for the third quarter were $1.016 billion, up 0.5% from the prior quarter and up 38.4% from the corresponding quarter a year ago. For clear aligners, Q3 revenues of $837.6 million were down 0.4% sequentially and up 34.9% year-over-year, reflecting Invisalign volume growth across all geographies. In Q3, we shipped 655,100 Invisalign cases, a decrease of 1.6% sequentially, with an increase of 32.1% year-over-year. In addition, we shipped to a record 85,500 Invisalign doctors worldwide, of which approximately 7,200 were first-time customers.

[John Morici, CFO at Align Technology]

Q3 clear aligner revenues reflect strong growth across the Invisalign portfolio, led by comprehensive products. Q3 comprehensive volume increased 1.3% sequentially and 30.3% year-over-year. Q3 non-comprehensive volume decreased 8.1 sequentially and increased 36.8% year-over-year. Q3 adult patients decreased 7.3% sequentially and increased 34.7% year-over-year. In Q3, teens or younger patients increased 13.8% sequentially and 26.6% year-over-year. Clear aligner revenues were unfavorably impacted by foreign exchange of approximately $1.5 million, or approximately 0.2 points sequentially. On a year-over-year basis, clear aligner revenues were favorably impacted by foreign exchange of approximately $16.1 million, or approximately 2.6 points. For Q3, Invisalign comprehensive ASPs increased sequentially and year-over-year.

[John Morici, CFO at Align Technology]

On a sequential basis, Invisalign comprehensive ASPs reflect higher additional aligners. On a year-over-year basis, comprehensive ASPs reflect favorable foreign exchange, partially offset by the increase in net revenue deferrals for new Invisalign cases versus additional aligner shipments. Q3 Invisalign non-comprehensive ASPs increased sequentially and year-over-year. On a sequential basis, Invisalign non-comprehensive ASPs reflect higher additional aligners, partially offset by higher discounts. On a year-over-year basis, Invisalign non-comprehensive ASPs were favorably impacted by foreign exchange, higher additional aligners, and lower discounts. Clear aligner deferred revenues on the balance sheet increased $84 million, or 9.3% sequentially, and $347.3 million, or 53.9% year-over-year, and will be recognized as the additional aligners are shipped.

[John Morici, CFO at Align Technology]

Our Systems and Services revenues for the third quarter were a record $178.3 million, up 5% sequentially and up 57.3% year-over-year. This marks the 5th quarter in a row of sequential revenue increase. The increase sequentially can be attributed to increased scanner shipments and increased services revenues from our larger installed base. The increase year-over-year can be attributed to increased scanner shipments, increased service revenues from our larger installed base, as well as higher ASPs from a favorable mix shift towards higher priced iTero 5D scanners and imaging systems.

[John Morici, CFO at Align Technology]

Our systems and services deferred revenue on the balance sheet was up $27.2 million, or 17% sequentially, and up $100.1 million, or 115.2% year-over-year, primarily due to the increase in scanner sales and deferral of services revenue, which we recognize ratably over the service period. Moving on to gross margin. Third quarter overall gross margin was 74.3%, down 0.7 points sequentially and up 1.6 points year-over-year. On a non-GAAP basis, excluding stock-based compensation and amortization of intangibles related to our 2020 exocad acquisition, overall gross margin was 74.7% for the third quarter, down 0.7 points sequentially and up 1.4 points year-over-year.

[John Morici, CFO at Align Technology]

Overall gross margin was favorably impacted by approximately 0.5 points on a year-over-year basis due to foreign exchange and relatively unchanged sequentially. Clear aligner gross margin for the third quarter was 76.2%, down 0.7 points sequentially due to higher manufacturing costs and higher additional aligners, partially offset by higher ASPs and lower freight. Clear aligner gross margin was up 1.5 points year-over-year due to improved manufacturing efficiencies from higher production volume, partially offset by higher ASPs. Systems and services gross margin for the third quarter was 65.6%, down 0.3 points sequentially, primarily due to lower ASPs and higher manufacturing variances, partially offset by higher service revenue.

[John Morici, CFO at Align Technology]

Systems and services gross margin was up 3.6 points year-over-year due to higher ASPs from product mix shift to iTero 5D and 5D Plus series and service revenues, partially offset by higher freight costs. Q3 operating expenses were $494 million, up sequentially 0.9% and up 38.4% year-over-year. On a sequential basis, operating expenses were up slightly by $4.4 million. Year-over-year, operating expenses increased by $137 million, reflecting increased headcount and our continued investment in marketing, sales, and R&D activities and investments commensurate with business growth.

[John Morici, CFO at Align Technology]

On a non-GAAP basis, excluding stock-based compensation and amortization of intangibles and acquisition costs related to our 2020 exocad acquisition, operating expenses were $466.1 million, up sequentially 1% and up 40.3% year-over-year due to the reasons described earlier. Our third quarter operating income of $261.1 million resulted in an operating margin of 25.7%, down 0.9 points from the prior quarter and up 1.6 points year-over-year. The sequential decrease in operating margin was attributable primarily to lower gross margin. The year-over-year increase in operating margin was primarily attributed to higher gross margin and operating leverage, as well as the favorable impact from foreign exchange by approximately 0.7 points, partially offset by continued investments, as mentioned earlier.

[John Morici, CFO at Align Technology]

On a non-GAAP basis, which excludes stock-based compensation and amortization of intangibles and acquisition-related costs, the operating margin for the third quarter was 28.8%, down 0.9 points sequentially and up 0.8 points year-over-year. Interest and other income and expense net for the third quarter was a gain of $0.8 million, up sequentially by $0.9 million and down year-over-year by $6.6 million. On a year-over-year basis, interest and other income and expense decreased primarily due to net foreign exchange losses in the three months ended September 30, 2021, as compared to net foreign exchange gains in the same period in 2020, which was partially offset by an unrealized gain on an investment held in a private company recognized in the three months ended September 30, 2021.

[John Morici, CFO at Align Technology]

The GAAP effective tax rate for the third quarter was 30.9%, compared to 25.7% in the second quarter and 24.5% in the third quarter of the prior year. Our non-GAAP effective tax rate was 22.2% in the third quarter, compared to 19.5% in the second quarter and 16.6% in the third quarter of the prior year. The third quarter GAAP and non-GAAP effective tax rates were higher than the second quarter, primarily due to our foreign income being taxed at different rates and tax true-ups.

[John Morici, CFO at Align Technology]

Our GAAP and non-GAAP third quarter effective tax rates were higher than the third quarter of the prior year, primarily due to lower tax benefits from foreign income taxed at lower rates and a tax benefit recognized last year resulting from an income tax audit settlement. Third quarter net income per diluted share was $2.28, down sequentially $0.23 and up $0.52 compared to the prior year. On a non-GAAP basis, net income per diluted share was $2.87 for the third quarter, down $0.17 sequentially and up $0.62 year-over-year. Moving on to the balance sheet. As of September 30, 2021, cash and cash equivalents were $1.2 billion, up sequentially $151.5 million and up $622.3 million year-over-year.

[John Morici, CFO at Align Technology]

Of our $1.2 billion of cash and cash equivalents, $607.5 million was held in the U.S. and $630.3 million was held by our international entities. Q3 accounts receivable balance was $855 million, up approximately 5.8% sequentially. Our overall days sales outstanding was 75 days, up approximately three days sequentially, and down approximately two days as compared to Q3 last year. Cash flow from operations for the third quarter was $355 million. Capital expenditures for the third quarter were $124.3 million as we continue to invest in increasing the line of capacity and facilities. Free cash flow, defined as cash flow from operations less capital expenditures, amounted to $230.7 million.

[John Morici, CFO at Align Technology]

We also have $300 million available under our untapped revolving line of credit. Under our $1 billion repurchase program announced in May of 2021, we have $825 million remaining available for repurchase of our common stock. Now let me turn to our outlook and the factors that inform our view for the remainder of the year. We are very pleased with our Q3 results and strong year-over-year growth, which reflects continued customer adoption of the iTero scanners and increased Invisalign utilization across customer channels, including teens, adults, and young patients. Over the last 18 months, our investment decisions have helped drive and capture demand across all regions and customer channels. We continued spending in many areas and have seen good return on our investments and strong revenue growth.

[John Morici, CFO at Align Technology]

Consumer interest in improving smiles is high, and doctor acceptance in the Align Digital Platform is helping drive growth across all regions and market segments. As anticipated in our Q3 outlook, we experienced more pronounced summer seasonality, more noticeably in September and continued into October as practices took more extended vacations and patient traffic flow was sporadically interrupted by regional COVID resurgence, restrictions, and other lockdowns. We anticipate these COVID challenges and the general macroeconomic uncertainties to continue into Q4. Taking this all into account, as we look at the remainder of 2021, we expect revenues for the year to be in the range of $3.9 billion-$3.95 billion, at the high end of our original guidance range.

[John Morici, CFO at Align Technology]

We also expect our outlook in revenue growth for the second half of 2021 to be in the high end of our long-term operating model of 20%-30%. On a GAAP basis, we anticipate our 2021 operating margin to be around 25%. On a non-GAAP basis, we expect 2021 operating margin to be approximately 3 points higher than our GAAP operating margin, after excluding stock-based compensation and intangible amortization from our 2020 exocad acquisition. We remain confident in the huge market opportunities for our business, our industry leadership, and our ability to execute. We will continue to invest in sales, marketing, innovation, and manufacturing capacity to drive our growth and accelerate adoption in a huge under-penetrated market.

[John Morici, CFO at Align Technology]

In addition, during Q4 2021, we expect to repurchase up to $100 million of our common stock through either a combination of open market repurchases or an accelerated stock repurchase agreement. For 2021, we expect our investments in capital expenditures to be above $400 million. Capital expenditures primarily relate to building construction improvements, as well as additional manufacturing capacity to support our international expansion. This includes our planned investment in our new facility in Wrocław, Poland, the first in the EMEA region. With that, I'll turn it back over to Joe for final comments. Joe?

[Joe Hogan, President and CEO at Align Technology]

Thanks, John. In summary, Q3 was a strong quarter, and we're pleased with our performance across the business. Align is uniquely positioned. We have a clinical capability and product portfolio supported by doctor and patient workflows only accessible through the proprietary Align Digital Platform to address the broadest range of orthodontic cases with the Invisalign system through a network of trained Invisalign doctors who have the expertise to reach more than 500 million potential global patients. As we develop our annual plan for 2022 over the next few months, it's important that we continue to expand our commercial, manufacturing, R&D, clinical, treatment planning, and manufacturing operations and continue to leverage our global quality and regulatory muscles in existing and emerging markets.

[Joe Hogan, President and CEO at Align Technology]

Reach millions of consumers who want to transform their smile with the most advanced clear aligner systems in the world through advertising, PR, digital, social media, and influencer marketing to drive demand and conversion through Invisalign-trained doctors. Increase ortho adoption and teen utilization of Invisalign treatment and train and educate GP dentists on how the iTero Element family of intraoral scanners and imaging systems propel today's dental practice into the future by enhancing patient experience and elevating clinical precision, and in the benefits of digital dentistry with the Invisalign system, trusted by more than 11 million people worldwide to improve their smiles. Remain focused on strategic execution, accountability, agility, customer service excellence, and continuing to make investments to grow our business. This is a multivariable equation that we continue to talk about and that, in combination, we remain uniquely able to offer.

[Joe Hogan, President and CEO at Align Technology]

As we continue to stay the course with our strategic initiatives, we also continue to navigate the COVID-19 environment and the challenges and uncertainty that go with it. Throughout the pandemic, our top priority has been consistent, the health and safety of our employees and their families, doctors and their staff, and that has not changed. The situation with COVID remains very fluid, and with the rise of the Delta variant, many cities, states, and countries have issued or plan to issue new guidance, including mask requirements, regular testing, capacity limits, and vaccination mandates. Operating in this evolving environment is challenging for everyone. We are staying as close as we can to the situation. The shift from traditional analog wires and brackets to a fully end-to-end digital platform is not easy. It cannot be done without very complex and industry-leading technology and talented, passionate people.

[Joe Hogan, President and CEO at Align Technology]

The digital transformation in orthodontics is inevitable. Our technology is prevalent, touching every aspect of what we do from manufacturing excellence, where we currently produce over 750,000 unique aligners a day, to expanding our geographic footprint to over 100 markets, to building a network of over 210,000 trained Invisalign doctors, and providing the technology to our doctors in a complete digital system, the Align Digital Platform. As the inventor of the leading clear aligner system, we've been investing in this therapy for over 24 years to get it to where it is today, and yet the majority of the market opportunity remains largely untapped. With over 500 million potential case starts globally.

[Joe Hogan, President and CEO at Align Technology]

Align is in a rare position to address this market with the Align Digital Platform, powered by two decades of research and development, manufacturing excellence, clinical data based on more than 11 million patients with AI machine learning and digital tools to help our doctors efficiently communicate with their patients, show and explain any issues, and visualize potential treatment options. Together with doctors, we're going to unleash the power of digital for dentistry in orthodontics more than ever. Thank you for your time today. I look forward to speaking with you on Friday at our Investor Day, where we'll share more detail, details on the Align Digital Platform and our vision and strategy to make clear aligner treatment available to everyone through doctors. Now I'll turn the call over to our operator for your questions. Operator?

[Operator]

Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. We ask that you please limit to one question and one follow-up. You also may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from Nathan Rich with Goldman Sachs. Please proceed with your question.

[Nathan Rich, VP of Global Investment Research at Goldman Sachs]

Hi, good afternoon. Hey, Joe. Joe and John, you highlighted the seasonal softness in September, and that extended into October. I wonder if you could maybe just provide a little bit more detail on what you've seen in October so far, and maybe how that compared to September. You know, as we've seen the latest COVID case spike subside in recent weeks, have you seen the patient traffic flow that you mentioned? Has that started to pick up as COVID cases have ticked down?

[John Morici, CFO at Align Technology]

Yeah. Hi, Nate. This is John. You know, as we said, you know, the extended seasonality continued into September and October. Then some of the COVID uncertainty still remains in some places more back to normal than others. But that uncertainty remains. Taking all that together, our forecast reflects that. The total year, the remaining for total year reflects everything that we've seen to this date.

[Nathan Rich, VP of Global Investment Research at Goldman Sachs]

Okay. That's fair. I guess, Joe, maybe a follow-up. I mean, you've continued to have confidence in that 20%-30% long-term range. Maybe we'll hear more on Friday at the Analyst Day. Do you have an initial view on growth for next year? You know, do you feel like once this, you know, period of more pronounced seasonality is behind you, we get back to, like, a more normalized kind of trajectory for the business as we head into next year? Thanks for the questions.

[Joe Hogan, President and CEO at Align Technology]

Well, I mean, Nathan, this, you know, we're growing at a pretty good pace right now, right? It's actually, you know, above our, you know, our long-term growth model, which is 20%-30%. As we move into 2022, we'll retain that, you know, 20%-20% revenue growth target. We're happy to discuss it, you know, more in detail on Friday.

[Operator]

Thanks, Nate. Next question, please. Our next question is from Jonathan Block with Stifel. Please proceed with your question.

[Jonathan Block, Managing Director at Stifel]

Thanks, guys. Good afternoon. John, this might follow Nathan's sort of path, but let me take a different approach. The new rev range that you gave for this year, you clearly brought it up a little bit. It seems to imply a bit over $1 billion for the fourth quarter. If I assume the scanner up sequentially from the $178 million, you know, and $55 million-ish, give or take, in non-case revenue, it looks like case volume is expected to be flat to maybe even down low- to mid-single digits sequentially. A couple of things there. Is that the right way to think about things specific to case volumes?

[Jonathan Block, Managing Director at Stifel]

If so, you know, I know you touched on this a little bit, but why sort of the different trend line versus prior, you know, prior to COVID, if you would, where that was more up mid-single-digit plus?

[John Morici, CFO at Align Technology]

Yeah, John, I think when you look at prior years, you know, with COVID not in the mix, things were maybe more seasonal, and you could see some of that, the standard patterns from, like, let's say a Q3 to Q4. Given COVID and given some of the uncertainties that you have and certain economies, and how they are responding and opening up, things don't always apply to maybe what's happened in the past. That guidance that we gave is just a reflection of what we've seen.

[Jonathan Block, Managing Director at Stifel]

Okay. Got it. Joe, just a follow-up. You know, we keep on hearing about the iOS change from Apple on privacy, and you guys have such a broad reach in terms of marketing, but I am curious if you're seeing any impact. Is it impacting leads? You know, yes or no? If so, could that actually continue into 2022? Would love your feedback there. Thanks.

[Joe Hogan, President and CEO at Align Technology]

I mean, yeah. Yeah, John, it's a good question. I mean, we've seen an impact on it. The thing is, there's a lot of other, you know, media you can pivot to in order to find those patients. You know, have we seen it, and have we had to do a certain amount of pivot to do that? Yes. You know, as far as our marketing efforts, I wouldn't discount them in any way in the sense of that change being material in some sense in the near future.

[Jonathan Block, Managing Director at Stifel]

Fair enough. See you Friday.

[Joe Hogan, President and CEO at Align Technology]

Yeah. See you, John.

[Operator]

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

[John Kreger, Equity Research Analyst at William Blair]

Hey, guys. Thanks. I'm curious, now that you've exited another kind of typical teen season, what sort of penetration do you think Invisalign has of total teen starts at this point?

[Joe Hogan, President and CEO at Align Technology]

Well, I mean, globally, John. Hey, John, it's Joe. You know, globally, it's less than 5%. I mean, you know, and we'll show you know, on Friday exactly what we think that is. In the United States, you know, I think our current number is mid-teens percentage. Yep. John, I think you know that, too. We have so far to go, right? This is a superior treatment, like I said in our script. You know, we can do 90% of the orthodontic cases that are out there. It's just, you know, us continuing to work really closely with orthodontists and advertise to consumers to explain the benefits of digital orthodontics and move this forward. Like I said, this is inevitable. Digital's better. We know it's better. We've made it better. It's more comprehensive than it was before. It's faster, less invasive.

[Joe Hogan, President and CEO at Align Technology]

I could go on all day. That's what drives this company. That's our purpose. We know we'll hit it. It's just, there's just a lot of work to get from here to there.

[John Kreger, Equity Research Analyst at William Blair]

Thanks. That was, Joe, my follow-up. As you talk to your kind of power users or maybe people that are just getting started, you've made the product better, you've made the software better. What do you think is the key point of friction at this point to sort of you know get that adoption rate up, you know, where I think most of us on this call sort of assume it can get to longer term?

[Joe Hogan, President and CEO at Align Technology]

John, I think it's the classic early adopter syndrome. The doctors who use our product almost exclusively 100% can't imagine not using our product line, right? They're early adopters in the classical sense. There's two things. There's one, there's the clinical confidence people that are out there that we have to convince. It's much easier today than it was five years ago, given products like First, given products like Mandibular Advancement, those kind of things that extend it, and then the predictability of our products. Secondly, it's the business equation inside the orthodontic practices that they're convinced they can actually keep up the margins and the growth capability they have for their practices, and we understand that.

[Joe Hogan, President and CEO at Align Technology]

That's why we have programs like ADAPT that we've put together, John, that orthodontists who want to engage with us, we can show them how to really operate in a digital environment and actually exceed from a margin standpoint and a growth standpoint.

[John Kreger, Equity Research Analyst at William Blair]

Sounds good. Thank you.

[Joe Hogan, President and CEO at Align Technology]

Yeah. Thanks, John.

[Operator]

Our next question comes from Jason Bednar with Piper Sandler. Please proceed with your question.

[Jason Bednar, Senior Research Analyst at Piper Sandler]

Hey, thanks for taking the questions, and congrats on another record quarter here.

[Joe Hogan, President and CEO at Align Technology]

Thanks, Jason.

[Jason Bednar, Senior Research Analyst at Piper Sandler]

A couple questions from our side. Yeah, one big picture, you know, first for you, Joe, is one of the key drivers of growth the past year has been really the adult category outpacing that of teens. You know, really seemed like heading into this quarter, it could be the proof point quarter on whether that growth would flip back to teens. You know, adult was again stronger than teens here, so, you know, seems like some good staying power. I guess, Joe, how do you think about these, how these two segments play out from here? Both obviously have a ton of growth potential, but, you know, has the business for Align shifted to where we should be thinking about adult growth outpacing that of teens as we look forward to the coming quarters and years?

[Joe Hogan, President and CEO at Align Technology]

Yeah, Jason, it's a good question. You know, I think it's, and you'll hear a lot about this Friday, is the demand equation on this business is incredible, right? The 500 million patients we talk about could primarily be serviced, you know, the general dentistry area, and then the over 20 million that's in the orthodontic side. I mean, that's. You look at that. It's a wide open marketplace. You know, adults have done well. Teens will do well. I just think you have to have them both go up. Remember, they're dealing from different bases in the sense of, you know, traditionally, 75% of our cases have been adults and 25% teens.

[Joe Hogan, President and CEO at Align Technology]

You know, there is kind of a law of large number on the adult side, but the growth potential is amazing, and we're just gonna go after both ends of that equation as aggressively as we can.

[Jason Bednar, Senior Research Analyst at Piper Sandler]

Got it. Okay. That's helpful. I'll look forward to more on Friday then. And then maybe just more of a real-time look and on Nate's question there to start out, but ask it in a different way. Maybe wondering if you could talk about how utilization trends have gone here month to month on a regional basis, you know, September, October. And then, you know, maybe based on the treatment plans, admissions, other measures of your funnel, you know, what does the utilization look like as we shift from October to November? Thanks.

[John Morici, CFO at Align Technology]

Yeah, Jason, this is John. You know, we've seen some improvements in utilization, and it's a reflection of, you know, kind of coming out of that seasonality piece of what we've talked about and kind of navigating through COVID. But we've been happy with the utilization that we've seen as of late.

[Jason Bednar, Senior Research Analyst at Piper Sandler]

All right. Thanks so much.

[Joe Hogan, President and CEO at Align Technology]

Thanks, Jason.

[Operator]

Our next question comes from Elizabeth Anderson with Evercore. Please proceed with your question.

[Joe Hogan, President and CEO at Align Technology]

Hi, Elizabeth.

[Elizabeth Anderson, Director at Evercore]

Hey, guys. Thanks so much for the question. I had a question on the gross margin line. I think you guys talked about how you're seeing maybe slightly higher manufacturing costs in clear aligners, and then lower freight and higher freight in iTero. There's other.

[Elizabeth Anderson, Director at Evercore]

The higher freight cost there. I was just wondering, you know, as we think about some of the global supply chain issues that we've been reading about and hearing about from other companies, if you could just elaborate a little bit on what you're seeing in both of those areas. Thanks.

[John Morici, CFO at Align Technology]

Hi, Elizabeth. This is John. I can take that. I think when you look at our overall gross margin, broadly impacted, as we've talked about additional aligners as we now have ramped up, and we've seen those cases from the last several quarters, as doctors make refinements and get patients in to make refinements to the care. We see an improvement there in ASP, but there's some offset in gross margin. Broadly, when we look at some of the inflationary pressures and so on, we have long-term contracts. We have got a supply chain where we're driving a lot of productivity and efficiencies through. We feel we're pretty well balanced as we see some of these inflationary headwinds.

[John Morici, CFO at Align Technology]

It's not a challenge, you know, it's not that it's not a challenge out there for everybody, but we feel that between the contracts we have and the efficiencies we can drive, we balance it.

[Elizabeth Anderson, Director at Evercore]

That's really helpful. Maybe I saw that in your outlook, you're obviously talking about around $100 million in share repurchases in the fourth quarter. You know, your cash balance is moving up nicely, and I was wondering if you could comment on what you see sort of as the preferred level of cash balance and, you know, if there's any potential for, you know, acceleration on the share repurchase line or, you know, things that we should consider in sort of thinking that should be a little bit higher than where it's been traditionally.

[John Morici, CFO at Align Technology]

Yeah. I think when you look at, on balance, Elizabeth, we're very pleased with the cash generation. Almost $900 million of CFOA three quarters of the year. Phenomenal cash, a lot going back into the business to grow our business, make investments in some of the operating expenditures to grow our business, continue to make investments in capacity and adding capacity, getting closer to our customers. As we've said with our cash, we'll give back to shareholders through repurchase. We're very happy with how things have progressed. We don't have a magical number in terms of how much cash we should have, but all things in balance, we feel like you know, we're executing to our strategy.

[Joe Hogan, President and CEO at Align Technology]

Perfect. Thanks.

[Operator]

Our next question comes from Jeff Johnson with Baird. Please proceed with your question.

[Jeff Johnson, Managing Director and Senior Research Analyst at Baird]

Thanks. Good afternoon, guys. Joe, I wanted to start maybe on system and services, or maybe John, this is for you. You know, where are we at, what portion of that revenue is kind of the recurring services side as opposed to the system sales? In 4Q, you know, we're still hearing about a decent amount of PPP money floating around. Obviously, you've got the incremental launch coming in China and that of 5D. Should we think of 4Q being a better system quarter sequentially, again, just with seasonality there?

[John Morici, CFO at Align Technology]

Yeah, Jeff, this is John. I mean, we've been very pleased with our sequential improvements that we've seen in the systems and services and scanner and services business. When we look at five quarters in a row of kind of, you know, really helping us lead the recovery out of COVID, and a lot of investments that our doctors are making in the digital platform, this is an excellent reflection of that. We have a lot of new doctors that started Invisalign this quarter with us, and many of them start with, you know, getting an iTero and being able to utilize that within their practice. So we feel very good about the scanner and services business. About a third of that business is services, so that's the recurring.

[John Morici, CFO at Align Technology]

As we improve and have more of an installed base, that just grows that business. You got a very big and growing installed base coupled with great products that are really driving that adoption, and especially amongst newer doctors coming in, they're coming in with that scanner to really incorporate that digital technology into their practice.

[Jeff Johnson, Managing Director and Senior Research Analyst at Baird]

Yeah, understood. Joe, maybe bigger picture question just on kind of, you know, the return in the chair and what docs are seeing for clear aligners and Invisalign especially relative to braces. You know, we've talked to more and more docs just even over the last maybe few months who seem to be really spacing those follow-up visits in Invisalign out to three or even four months. You know, it's cutting the chair time even in half relative to pre-COVID levels and well below braces. You know, are you seeing the same thing? I know virtual is helping that a little bit. I think some docs even doing it without virtual, just given their confidence in outcomes.

[Jeff Johnson, Managing Director and Senior Research Analyst at Baird]

How much is that kind of driving the argument and that kind of secular push into clear aligners, especially with staffing issues that maybe you guys are hearing about at some of the offices, things like that?

[Joe Hogan, President and CEO at Align Technology]

Yeah. You know, Jeff, that's one of the, you know, key ingredients is the productivity of a doctor's time and the productivity of the real estate within that office. In a digital kind of situation, you can remote monitor it like you do on virtual care or some other products that are out there, and doctors are taking advantage of that. Also there's a lot of confidence doctors have too, if their patients are using the aligners, they will bring them back every so often and take a look. That, that's a big part of it. You know, secondly, Jeff, you know, you can actually work with, you know, less labor content and just doctor content and people in the office and also size of the office too. You see a lot of orthodontists understanding that and really embracing it.

[Joe Hogan, President and CEO at Align Technology]

There's also a referral aspect of Invisalign. Once a patient has an experience with Invisalign, they're often ready to refer another patient to that doctor, much more so than wires and brackets. They say they benefit from that because they see an increase in their sales too. We see that constantly in ADAPT, and we focus on that and can actually predict it to a certain extent at times. Hope I'm answering your question, Jeff, but that is the whole idea of digital.

[Joe Hogan, President and CEO at Align Technology]

We keep talking about, you know, our Align Digital, you know, capability and being able to service a doctor through iTero, having virtual care on both ends, and having the kind of capability and horsepower that we can provide with our algorithms and the extent of our clinical capability is just. It gives us a huge amount of breadth and capability at orthodontists.

[Jeff Johnson, Managing Director and Senior Research Analyst at Baird]

Sure. Understood. Thanks, guys.

[John Morici, CFO at Align Technology]

Yeah, thanks.

[Joe Hogan, President and CEO at Align Technology]

Thanks, Jeff.

[Operator]

Our next question comes from Brandon Couillard with Jefferies. Please proceed with your question.

[Brandon Couillard, SVP and Senior Analyst at Jefferies]

Hey, thanks. Good afternoon.

[Joe Hogan, President and CEO at Align Technology]

Hey, Brandon.

[Brandon Couillard, SVP and Senior Analyst at Jefferies]

Joe, I actually want to switch gears. You talked quite a bit about the non-case business and the retainer business. Can you just help us understand why your share has historically lagged there, maybe a sense of what your capture rate is today in terms of the cases that also have a follow-on retainer? And how would you sort of frame the revenue opportunity, you know, from these newer initiatives?

[Joe Hogan, President and CEO at Align Technology]

Brandon, it's why we highlighted it, and it's obviously why we've put money into this thing and a focus on it, you know, over the last years. You know, there are certain things in this business that we all know, but there's so many things to do and focus on that sometimes something that's so obvious like that lacks the attention that you wanna give to it. We've been talking about this over time. Beginning of this year, we put a team together to really go after those things. It's hard to say the reason why. It's just that we haven't been as focused on retention as we need to be. You know, many orthodontists, like, you know, they make their own retainers.

[Joe Hogan, President and CEO at Align Technology]

They do it because we just haven't been competitive in the sense of how we can deliver, how fast we can deliver, how easy we make it for them. I guarantee you, if you go out, Brandon, and you query even orthodontists that seldom use our retainers, they'll tell you we make the best retainers in the world. We should when you make 750,000 unique parts a day, right? We know what we're doing. The fits are exquisite when you have an iTero scanner be able to do that. We set this thing up as a play for doctors that they can feel confident that we'll get these retainers to them in a quick amount of time. They're gonna be, you know, terrific retainers, something they're proud to really give to their patients.

[Joe Hogan, President and CEO at Align Technology]

We've had, you know, great feedback on this so far. I can't apologize for the past or give you the whole history why we haven't done it, but I feel really good about the progress we've made so far.

[Brandon Couillard, SVP and Senior Analyst at Jefferies]

That's right. Then just a question on the scanner business. I mean, you know, pretty remarkable strength for a while now. Can you just help us understand, like, where kind of the sources of this momentum and is the NIRI study the type of dataset that can move the needle with GPs? You don't often talk about clinical studies, especially with intraoral scanners, but just trying to get a sense of, like, how significant, you know, being able to go in and have this data, you know, might be for a GP that doesn't, you know, use digital impressioning today or might be on the fence.

[Joe Hogan, President and CEO at Align Technology]

Yeah, I think NIRI really helps. I really do. It's one of those. You know, in electronics, we all know there's killer apps, right? Killer applications. When you can see caries, cavities, right? We use the clinical term, but when you can see cavities without ionizing radiation. You know, Brandon, what's amazing when you see this too, what happens is the enamel almost becomes invisible. It's almost translucent. You can see through the enamel right to where the caries is. And there's a certain amount of training that has to be done in order to do it. Look, I grew up in an ionizing radiation business. I know what it is, in CT and X-ray, and it's, that radiation component is better today than it used to be, but it still exists, and patients are still concerned with it over time.

[Joe Hogan, President and CEO at Align Technology]

To be able to do this in a sense, in a safe way and as quick way like we do it, you know what it is to put bite wings in a chair, and it's terrible in a dentist chair, right? Bite down, turn your head sideways. I could go through it all day. This is, you know, quick scan, 1-minute scan, 1.5-minute scan. It pops up on the screen. You can have a conversation with the patient and say, "There it is," what it deals with. Yeah, I think it's a killer application. Will it convince all GPs to buy iTero? No. But then you have to look at exocad, that critical workflow between labs and GPs really sets us up nicely for restorative pieces.

[Joe Hogan, President and CEO at Align Technology]

You know, soon to announce Smile Architect, which really allows doctors to use restorative orthodontics as a standard of care. We'll talk about that more Friday. You know, look, I'm biased. I've been in the medical imaging equipment business for 15 years of my life counting iTero. This is the best scanner in the marketplace, and we're just out to show it and to prove it.

[Brandon Couillard, SVP and Senior Analyst at Jefferies]

Great. Thank you.

[Joe Hogan, President and CEO at Align Technology]

Thank you.

[Operator]

Our next question is from Chris Cooley with Stephens. Please proceed with your question.

[Chris Cooley, Managing Director and Senior Equity Research Analyst of Medical Device and Hospital Supply at Stephens]

Good afternoon, and thanks for taking the questions. Congratulations on the record quarter.

[Joe Hogan, President and CEO at Align Technology]

Thanks, Chris.

[Chris Cooley, Managing Director and Senior Equity Research Analyst of Medical Device and Hospital Supply at Stephens]

Just for me as we all start looking forward to the upcoming event here this Friday and Saturday, maybe a bigger picture question. As we think about the business, you've made significant investments in technology, not only pioneering the category, but expanding its indications for use. You subsequently invested in chairside, really facilitating the diagnostic aspect. As the business is now kind of inflecting here two straight quarters of $1 billion plus, do we think about the next stage of investment really kinda going back to a prior question being, you know, tools that enable or enhance the productivity of the clinician or patient flow? Is it more to marketing at the consumer and clinical level? I'm just kinda thinking about how the business now pivots for that next stage of continued growth at this greater scale.

[Chris Cooley, Managing Director and Senior Equity Research Analyst of Medical Device and Hospital Supply at Stephens]

I have just one quick follow-up after that, if I may.

[Joe Hogan, President and CEO at Align Technology]

Hey, Chris, it's a really good question because obviously, as we're going through our, you know, AOP for next year and putting those things together. When you say pivot, I wouldn't use the word pivot. I'd say that we extend what we're doing, and then we place, you know, bets accordingly on where we think we'll get the best return. You know, I gotta continue advertising. We have a superior system. We have a wonderful brand. We have to leverage that piece. Specifically, and this goes to the last questions we had too, doctor productivity is a big deal. When you look at our Align Digital Platform, inherently, that's what it's about.

[Joe Hogan, President and CEO at Align Technology]

It's how do you make doctors more productive to make sure that we don't go back and forth with a ClinCheck or, you know, how do we make sure that, you know, from our standpoint, that we can respond quickly to customer issues? We're investing heavily in all those things and making good progress. It's expensive. There's a lot of things that you have to do when you're really grounded in software and making those changes. We have really great talent here that knows how to do that. We've been actually working on the productivity of ClinCheck and those things for, you know, three to four years, and it's just starting to bring technology to the marketplace. You're right, we're not pivoting toward that.

[Joe Hogan, President and CEO at Align Technology]

We've been investing in it, but you'll see the culmination of that more and more as we enter next year and in the second half of next year, too. John, anything to add?

[John Morici, CFO at Align Technology]

No, I think that's the investment that we continue to make. It's about productivity, it's about you know, growing in this digital orthodontics and our doctors expect it, and our tools will provide that.

[Chris Cooley, Managing Director and Senior Equity Research Analyst of Medical Device and Hospital Supply at Stephens]

That's great. If I could just squeeze in a quick follow on. Just wanna make sure it doesn't look out of proportion, but I just wanna make sure we didn't miss something there. On the deferred piece, in the quarter, I think it was approximately $84 million. Anything just COVID related that we should be mindful of there? Or is that just normal course of business when we look at the deferred revenue component for the 3Q? Thanks so much.

[Chris Cooley, Managing Director and Senior Equity Research Analyst of Medical Device and Hospital Supply at Stephens]

Congrats on the quarter.

[John Morici, CFO at Align Technology]

Thanks, Chris.

[Joe Hogan, President and CEO at Align Technology]

Thanks, Chris.

[John Morici, CFO at Align Technology]

It's completely normal course of business. Nothing COVID related within there, just deferred revenue that we'll recognize in future periods.

[Chris Cooley, Managing Director and Senior Equity Research Analyst of Medical Device and Hospital Supply at Stephens]

Thanks.

[Joe Hogan, President and CEO at Align Technology]

Thanks, Chris.

[Operator]

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

[Michael Ryskin, Director at Bank of America]

Thanks for taking the question, guys. A couple of quick ones from me, but I'll try to tie them together into one. On the scanners and the service revenue, you know, I noted that your digitally submitted cases continues to grind higher, pretty, you know, pretty close to hitting 90% maybe in a year or two. I'm just wondering, as you continue to place iTero into the field, you know, how often are you sort of placing a second or third unit versus getting a new one out there versus a competitive placement where you're displacing someone else potentially? And then as a follow on to that, sort of building off of, I think Elizabeth's question earlier on the supply chain, anything specific to semis that we should be thinking about?

[Michael Ryskin, Director at Bank of America]

It's just a question that's come up a lot, some of our other names, and I wanna make sure we tie that off, as far as it relates to scanners. Thanks.

[Joe Hogan, President and CEO at Align Technology]

Hey, Mike. You know, from a scanner standpoint, you know, obviously we have a great scanner, and I think your question asks more about saturation than anything. You know, our feeling is you got, you know, 2 million dentists out there and orthodontists, right? Each of them actually, if you're gonna run a digital practice, you need more than one scanner. You need a scanner per chair. You think, let's just say the average, you know, doc has three chairs, and there's 2 million doctors out there. You know, we're just touching this thing. We got a 50,000-unit installed base. You know, obviously, this is a growth equation. It's not one where we're looking to play out in some time.

[Joe Hogan, President and CEO at Align Technology]

Obviously it's a portfolio that churns over time because the technology moves fast, too. It creates some of its own demand through obsolescence, too. John, on the scanner.

[John Morici, CFO at Align Technology]

From a supply standpoint, obviously we're mindful of concerns and things that go on from a global supply chain. We feel comfortable that between the inventory we have and some of the things that we've been able to do, that we can manage through any supply chain concerns that are out there.

[Michael Ryskin, Director at Bank of America]

All right. Thanks a lot.

[Operator]

Our next question is from Devin Misra with Berenberg. Please proceed with your question.

[Devin Misra, Equity Research Analyst at Berenberg]

Hey, Devin. Dev here for Ravi, from Berenberg. Thanks for taking my question.

[Joe Hogan, President and CEO at Align Technology]

Yeah, sure.

[Devin Misra, Equity Research Analyst at Berenberg]

I wanna kind of review the marketing side. You know, I think you guys have been ramping up marketing spend and there was a long list of things with very large percentage increases noted earlier. You know, where are you seeing a higher ROI in regards to marketing? You know, are there any specific regions? Also just going back to a question on, you know, growth of teens versus adults. You know, if we kind of look at the marketing spend and things that you've noted, it seems like a focus is on the teen side, which is, you know, kind of indicative that, you know, that's where you'll see more growth and stronger returns. Any color around that? I have a quick follow up.

[Joe Hogan, President and CEO at Align Technology]

Yeah. You know, first of all, from a marketing spend standpoint, I mean, we really do understand, you know, by region, our kind of return on investment and what we get. I'm not gonna share that over the phone, but we're very aware of that and what it is. We also, you know, when you ask about the teen advertisements, you know, there's a seasonality for teens around the world, too. You'll see, like in, you know, the quarter we just came out of and the second quarter we were going into, the teen season. It's big in China, big in the States, and so you'll see a larger part of our advertising budget go toward that in order to capture that demand. But you know, this is part of how we go to market. We have a great brand.

[Joe Hogan, President and CEO at Align Technology]

That brand needs to be enhanced with patients, and we want those patients going to doctors asking for Invisalign. We have a good capability here from a marketing standpoint to exercise that. John, anything?

[John Morici, CFO at Align Technology]

What we've learned over time is, it's not one size fits all across all the markets. You're trying to maximize return on investment. In certain markets, you're doing things that are different than others. Maybe more established markets, you try something different. Maybe other markets that we have where we can advertise, we try different things. I think the key is we understand what levers to pull. We've learned a lot over the last several years. We're very excited about these opportunities. As Joe said, we have the best brand, the best global brand out there, and we wanna be able to reach those potential patients in the way that they are living their lives. That's the philosophy that we have.

[John Morici, CFO at Align Technology]

We talk a lot about that front end, that top of the funnel, metrics, and we're very excited about what we're seeing as we've gone through the last several quarters.

[Devin Misra, Equity Research Analyst at Berenberg]

Okay, great. Then kind of following up on that direct to consumer focus question early on. You know, there was a launch of that teen teeth whitening solution and, you know, a couple of years ago, there was Align shops that, you know, pre-litigation with the SDC was kind of a focus point there. As we envision kind of where the direct to consumer side of Align business goes, you know, how does that teeth whitening solution and how does that fit in? I'm trying to see, you know, it seems like there's a big push toward direct to consumer with that side coming up. Any color around that would be helpful.

[Joe Hogan, President and CEO at Align Technology]

Well, I mean, if your question implies a direct to consumer kind of a mode, that's not us. It's not what we do. You know, we always have an e-commerce site. We have a great brand called Invisalign. Patients ask us all the time for whitening, cleansers, different chewies, things associated with it, and we're just exercising that capability. It's one with a whitening standpoint, we probably should have been more aggressive on, you know, before. Again, it's one of those things that we decided to focus on recently, and we're getting, you know, great feedback from the doctors in doing that. It only makes sense. It's classic brand extension, and we're gonna leverage that Invisalign brand as well as we can.

[Devin Misra, Equity Research Analyst at Berenberg]

Great. Thanks.

[Joe Hogan, President and CEO at Align Technology]

Thank you.

[Operator]

We have reached the end of the question and answer session. At this time, I'd like to turn the call over to Shirley Stacy for closing comments.

[Shirley Stacy, VP of Corporate Communications at Align Technology]

Thank you, operator. Thank you everyone for joining us today. This concludes our conference call. We look forward to speaking to you again on Friday at the Align 2021 Investor Day in conjunction with our GP Growth Summit here in Las Vegas. If you have any future questions, please contact investor relations, and thank you for your time and have a great day.

Participants

Executives

• Joe Hogan, President and CEO
• John Morici, CFO
• Shirley Stacy, VP of Corporate Communications

Analysts

• Brandon Couillard, SVP and Senior Analyst at Jefferies
• Chris Cooley, Managing Director and Senior Equity Research Analyst of Medical Device and Hospital Supply at Stephens
• Devin Misra, Equity Research Analyst at Berenberg
• Elizabeth Anderson, Director at Evercore
• Jason Bednar, Senior Research Analyst at Piper Sandler
• Jeff Johnson, Managing Director and Senior Research Analyst at Baird
• John Kreger, Equity Research Analyst at William Blair
• Jonathan Block, Managing Director at Stifel
• Michael Ryskin, Director at Bank of America
• Nathan Rich, VP of Global Investment Research at Goldman Sachs