Align Technology Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2023

There are 12 speakers on the call.

Operator

Greetings. Welcome to the Align Second Quarter 2023 Earnings Call. Please note this conference is being recorded. I will now turn the conference over to your host, Shirley Stacy with Align Technology, you may begin.

Speaker 1

Thank you. Good afternoon and thank you for joining us. Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO and John Marici, CFO. We issued Q2 2023 financial results today via Business Wire, which is available on our website at investor.

Speaker 1

Aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately 1 month. A telephone replay will be available today by approximately 5:30 pm Eastern Time through 5:30 pm Eastern Time on August 9th. To access the telephone replay, domestic callers should dial 929 are in the same access code. As a reminder, the information provided and discussed today will include forward looking statements, including statements about Align's future events, products and outlook.

Speaker 1

These forward looking statements are only predictions and involve risks and uncertainties that are will be notified in more detail in our most recent periodic reports filed with the Securities and Exchange Commission available on our website and at sec.gov. All participants may vary significantly and Align expressly assumes no obligation to update any forward looking statement. We have posted historical financial statements, including the corresponding 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?

Speaker 2

Thanks, Shirley. Good afternoon, and thanks for joining us. On our call today, I'll provide an overview of our Q2 results and discuss a few highlights from our 2 operating segments, System Services and Clear Liners. John will provide more detail on our Q2 financial performance and comment on our views for the Q3 and 2023 overall. Following that, I'll come back and summarize a few key points and we'll open the call to questions.

Speaker 2

Overall, I'm pleased to report another better than expected quarter with Q2 revenues and operating margins that exceeded our guidance. Q2 results reflect improving trends across regions, strength in teen and younger patient volumes, driven by momentum in both submitters and utilization, As well as continued growth from Invisalign First. In the teen segment, which represents the largest portion of the $21,000,000 annual orthodontic case starts, 195,000 teens and kids started treatment with Invisalign clear aligners during the Q2, an increase of 7% sequentially and 10% year over year, Reflecting the highest annual growth rate in the teens segment since 2021. For Systems and Services, 2nd quarter revenues of 169,500,000 were up 10.5% sequentially and down very slightly 1% year over year. For Q2, sequential increases in systems and services revenues Reflect increased scanner volumes across the regions and higher services and non system revenues, reflecting increased sales of certified pre owned or what we call CTO scanners And higher subscription revenues.

Speaker 2

On a year over year basis, Q2 services revenues increased primarily due to higher subscription revenues from a large number of Itero scanners in the field. We also had higher non system scanner revenues related to our certified pre owned, again, CPOs And our scanner leasing and rental programs. For Q2, total Clear aligner revenues of $832,700,000 up 5.4% sequentially and 4.3% year over year. Q2 sequential revenue growth rate is consistent with our historical 3 year average it reflects growth across all regions. Q2 non case revenues of $80,000,000 were up 6.2% sequentially and 18% year over year, Reflecting continued growth from Vevera Retainers and Invisalign Doctor Subscription Program or DSP, our monthly subscription based clear aligner program and commerce sales for aligner related consumables like aligner cases and whitening and cleaning products.

Speaker 2

DSP has been successful in addressing an important and growing opportunity for experienced Invisalign doctors. It is our 1st subscription based clear aligner program that enables our participants are encouraged to reach new patients and provide them with a better overall experience. DSP enables doctors' flexibilities to treat simple touch up cases offer their patients a superior, flexible and convenient retention solution. We introduced DSP in the United States and Canada in 2021. We expanded it to Spain and the Nordic countries in Q2 2023 and will launch DSP in France and United Kingdom in the second half of this year.

Speaker 2

We have also extended DSP to DSO partners who recognize the value of our Invisalign subscription aligner model. Over the past 2 years, our DSP subscription program has continued to ramp and in Q2 drove strong volume growth in touch up cases, Typically, 5 to 10 stage cases of aligners. For Q2 'twenty three, we shipped over 18,000 DSP touch up cases in North America, up from $15,500 in Q1 'twenty 23 and more than double the case volume in Q2 'twenty two last year. Given its continued success and contribution to our growth this year, DSP touch up cases are included in my overall commentary for clear aligners. Otherwise, As specified in my remarks, our case volumes and metrics do not include DSP and touch up cases.

Speaker 2

For Q2, total clear aligner volumes were up 5% sequentially and up 1% year over year. Q2 clear aligner volumes, including DSP touch up cases, we're up 5.4% sequentially and up 2.4% year over year. For the Americas, Q2 Clear Aligner volumes reflect sequential growth across the region from both Ortho and GP Dentist channels, an increase in teen case starts driven by momentum from Invisalign First and increased adult patients from the GP Dentist channel. In North America, adoption of the Invisalign comprehensive 3 and 3 product drove sequential volume growth. For Q2, North American ortho utilization was up sequentially and down a fraction year over year, including DSP touch up cases.

Speaker 2

Q2 North American ortho utilization was up both sequentially and year over year as noted in our Q2 2023 earnings slides. For EMEA, Q2 Clearliner volumes were up sequentially and year over year, reflecting growth across the region and continued adoption of Invisalign moderate, Invisalign are in the range of 3 in 3 product as well as an increase in teen case starts, which grew sequentially and year over year driven by Invisalign First in our new Invisalign teen case packs, on a sequential basis, clear aligner growth was led by Iberia, Italy, DOCS In Turkey, for APAC, Q2 clear aligner volumes were up sequentially and up year over year, reflecting improving trends in China As well as other key markets like Japan, Taiwan, Korea and India. Q2 APAC results also reflect increased Invisalign submitters and higher utilization, especially for teen patients driven by growth from Invisalign First in the orthodontic channel, which is especially important as we enter the China teen season in Q3. Q2 APAC results also reflect growth in the GP channel 3 and 3 product in APAC, where it is now available in Hong Kong, Korea, Taiwan and India. We plan to launch Invisalign 3 and 3 in China in Q3.

Speaker 2

We are also pleased with the additional adoption of 3 in 3 product in APAC, where the majority of cases treated are comprehensive, allowing our doctor customers more flexibility within the Invisalign product portfolio. In June, we hosted 2023 Invisalign APAC Summit in Singapore And brought together nearly 1,000 orthodontists and general practitioners, dentists and clinic staff from 18 countries across the Asia Pacific region. The summit showcased Invisalign and iTero products, the Align Digital platform and the recent and upcoming innovations, we're also highlighting our doctors' experience with digital transformation and how it improves the patient treatment journey. Attendees joined expert sessions focused on enhancing treatment planning efficiency, optimizing digital workflows, addressing the unique needs KEY Orthodontic Treatment is the largest segment of the orthodontic market worldwide and represents our largest opportunity for clear aligner sales to orthos. We continue to focus on gaining share from traditional metal braces through team specific sales and marketing programs and product features unique to the Invisalign system.

Speaker 2

For Q2, total clear aligner cases for teenagers were up 7% sequentially and 9.7% year over year, reflecting improving trends across the regions. On a sequential basis, growth was driven by increased submitters in the APAC and EMEA regions on a year over year basis, T and K starts were in the APAC region driven by increased submitters and in the EMEA region driven by increased submitters and utilization both in the orthodontic channel. Last year, we introduced teen case packs in the United States and Canada, And in Q1, Q2, we launched them in France, Scandinavia and Iberia. For the quarter, teen case packs increased sequentially and year over year, driven by strength in EMEA. Invisalign First also was up sequentially in year over year across all regions and continues to drive adoption of Invisalign treatment among young patients.

Speaker 2

Invisalign first aligners are designed for Phase 1 treatment typically in growing children 6 to 10 years old, making up about 20% of orthodontic case starts. For the dental service organizations or DSO customers, Q2 Clear aligner volumes increased sequentially primarily from the Americas region. Overall Clear aligner growth rate from DSO doctors continues to outpace non DSO doctors our DSP touch up cases are ramping nicely up as DSO doctors understand the value of the subscription program brings Regarding pricing and flexibility for their patients. Invisalign is one of the most trusted brands in the orthodontic industry globally among both doctors and patients. On the consumer marketing front, we delivered 10,300,000,000 impressions and had 30,900,000 visits to our website In Q2, 2023.

Speaker 2

To increase awareness and educate young adults, parents, teens about the benefits of Invisalign brand, We continue to invest in top media platforms such as TikTok, YouTube, Snapchat, Instagram across all markets, as well as key social media influencers and brand ambassadors. In the Americas, we focused on reaching young adults as well as teams and their parents through our influencer and creator centric campaigns, partnering with leading Smile Squad creators, Including Marshall Martin, Riley Shaw and Jeremy Lin. Each of these creators shared their personal experiences with Invisalign treatment our high school sports social media platform that showcases the benefits of the Invisalign treatment. Brand interest remained strong throughout the quarter with 9,200,000 consumers visiting our websites in the Americas region, representing 17% growth year on year. In EMEA region, we partner with new influencers to reach consumers across social media platforms, including TikTok and Meta.

Speaker 2

In Germany, we launched new testimonial campaigns highlighting the stories of 7 young adults and teens who share why they chose Invisalign treatment and how it impacted their lives. Our consumer campaigns delivered more than 1,700,000,000 media impressions and 9,700,000 visitors to our website. We continue to invest in consumer advertising across the APAC region, resulting in more than 12,000,000 visitors to our websites over $4,800,000,000 impression. We expanded our region Japan and India via TikTok, Meta and YouTube. We partnered with key influencers like Remi Kelingal and Kamaya Yane, we saw increased brand interest in consumers as evidenced by 2 opportunity to 2 70% year over year increase in unique visitors to our website in India and a 46% year over year increase in Japan.

Speaker 2

Adoption of my Invisalign consumer and patient app continue to increase with 3,100,000 downloads to date over 350,000 monthly active users, a 28% year over year growth. Usage of other digital tools also continue to increase. ClinCheck Live update was used by 40,000 doctors on more than 580,000 cases, reducing time spent in modifying treatment By 20%. Invisalign practice app is increasing in adoption with 88,000 doctors who are actively using this app 5,100,000 photos were uploaded in Q2 via the Invisalign practice app. With that, I'll turn the call over to John.

Speaker 2

Thanks, Joe. Now for our

Speaker 3

Q2 financial results. Total revenues for the Q2 were $1,002,000,000 Up 6.3% from the prior quarter and up 3.4% from the corresponding quarter a year ago. On a constant currency basis, Q2 are and unfavorably impacted by approximately $19,400,000 year over year or approximately 1.9%. Operator For Clear aligners, Q2 revenues of $832,700,000 were up 5.4% sequentially, primarily from higher volumes, higher non case revenues and higher ASPs. On a year over year basis, Q2 clear aligner revenues were up 4.3%, all participants are up year over year.

Speaker 3

On a sequential basis, ASVs reflect larger discounts and product mix shift to lower priced products, are partially offset by price increases. On a year over year basis, the increase in comprehensive ASVs reflect price increases and higher additional liners, Partially offset by product mix shift, larger discounts and unfavorable foreign exchange. For Q2, Invisalign ASPs for non comprehensive treatment were up sequentially and year over year. On a sequential basis, the increase in ASPs reflect lower discounts, higher additional liners, price increases and favorable foreign exchange. On a year over year basis, the increase in non comprehensive ASPs reflect price increases and higher additional liners, Partially offset by product mix shift, larger discounts and unfavorable foreign exchange.

Speaker 3

In Q1 'twenty three, we launched Invisalign comprehensive 3 and 3 product in most markets and we have continued to expand into more markets as previously mentioned. The 3 and 3 configuration offers our doctor customers our Invisalign comprehensive treatment with 3 additional aligners included within 3 years At the 2022 Invisalign comprehensive product price, over time we have come to learn that on average Invisalign doctors complete a comprehensive Invisalign treatment with 2 or fewer additional aligners. We are pleased with the continued adoption of the Invisalign comprehensive 3 and 3 product anticipate that it will continue to grow, providing doctors the flexibility they desire and allowing us to recognize more revenue upfront. With deferred revenue being recognized over a shorter period of time compared to our traditional Invisalign comprehensive product. As revenues from subscriptions, retainers and ancillary products continue to grow globally, some of the historical metrics that only focus on case shipments are expected to account for a lesser percentage of our overall growth.

Speaker 3

In our earnings release and financial slides, you will see that we have added our total clear aligner revenue per case shipment, Which we believe to be more indicative measure of our overall growth strategy. Q2223 clear aligner revenues were impacted from favorable foreign exchange of approximately $1,200,000 or approximately 0.1% sequentially. On a year over year basis, Clear aligner revenues were unfavorably impacted by foreign exchange of approximately $16,300,000 or approximately 1.9%. Clear aligner deferred revenues on the balance sheet increased $13,000,000 or up 1% sequentially Q2 2023 Systems and Services revenue of $169,500,000 were up 10.5% sequentially, Mostly due to higher scanner volume, higher revenues from our certified pre owned program and higher services revenue from our larger base of scanners sold, partially offset by unfavorable ASPs. On a year over year basis, Q2 2023 systems and services revenue were down 1%, primarily due to lower scanner volume and unfavorable ASPs, partially offset by higher services revenues from our larger were impacted from favorable foreign exchange of approximately $100,000 or approximately 0.1% sequentially.

Speaker 3

On a year over year basis, systems and services revenue were unfavorably impacted by foreign exchange of approximately $3,100,000 are approximately 1.8%. Systems and Services deferred revenues on the balance sheet was down $2,300,000 or 0.8% sequentially, primarily due to the decrease in the deferral of service revenues included with our scanner purchase and up $8,600,000 or 3.3 percent year over year, primarily due to the increase in scanner sales and the deferral of service revenues included with our scanner purchase, which will be recognized ratably over the service period. As our scanner portfolio expands and we introduce new products, we increase the opportunities for customers to upgrade, make trade ins and provide Refurbished scanners for certain markets. As such, our model is changing. We expect to continue rolling our programs and as Offering our CPO units for purchase and selling the way the customer our customers desire.

Speaker 3

Developing new capital equipment opportunities to meet the digital transformation the needs of our customers and DSO partners is a natural progression for our equipment business with a large and growing base of scanners sold. Moving on to gross margin. 2nd quarter overall gross margin was 71.2%, up 1.2 points sequentially all participants are up 0.3 points year over year. Overall, gross margin was unfavorably impacted by foreign exchange of approximately 0.5 points on a year over year basis. Clear aligner gross margin for the 2nd quarter was 72.4%, up 0.7 points sequentially, primarily due to the lower mix of additional liners, favorable manufacturing variances and higher ASPs.

Speaker 3

Clear aligner gross margin for the Q2 was down 0.9 points year over year primarily due to increased manufacturing spend as we continue to ramp up operations at our new manufacturing facility in Poland increased 25.1%, up 3.5 points sequentially, primarily from lower service and freight costs, partially offset by lower ASPs. Systems and services gross margin for the 2nd quarter was up 5.3 points year over year, primarily from lower service and freight costs and higher services revenue, partially offset by lower ASPs. Q2 operating expenses were $541,700,000 up sequentially 2.8% and up 8.5% year over year. On a sequential basis, operating expenses were up $14,500,000 primarily from higher consumer marketing spend and higher incentive compensation. Operating expenses increased by $42,300,000 primarily due to higher incentive compensation our continued investments in sales and R and D activities, partially offset by controlled spending on advertising and marketing As part of our efforts to proactively manage costs, on a non GAAP basis, excluding stock based compensation and amortization of acquired intangibles related to certain acquisitions, partially offset by restructuring and other charges, operating expenses were $505,000,000 up 2.9% sequentially and up 8.4% year over year.

Speaker 3

Our 2nd quarter operating income of $171,900,000 resulted in an operating margin of 17.2%, up 3 points sequentially and down 2.2 points year over year. The sequential increase in operating margin is primarily attributed to higher gross margin as well as favorable impact from foreign exchange of 0.1 points. The year over year decrease in operating margin is primarily attributed to investments in our go to market teams and technology as well as unfavorable impact from foreign exchange by approximately 1.1 points. On a non GAAP basis, which excludes stock based compensation, amortization of intangibles related to certain acquisitions, Offset by restructuring and other charges, operating margin for the 2nd quarter was 21.3%, up 2.8 points sequentially and down 2 points year over year. Interest and other income and expense net for the 2nd quarter was a loss of $300,000 compared to an income of $1,100,000 in the Q1 and a loss of $14,600,000 in the 2nd quarter a year ago, primarily due to foreign exchange.

Speaker 3

The GAAP effective tax rate for the 2nd quarter was 34.8%, consistent with the 1st quarter effective tax rate for 2022, we changed our methodology for the computation of our non GAAP effective tax rate to a long term projected tax rate previously reported quarterly results in 2022. Our non GAAP effective tax rate in the Q2 was 20%, reflecting the change in our methodology. 2nd quarter net income per diluted share was $1.46 up sequentially $0.32 and up $0.02 compared to the prior year. Our EPS was unfavorably impacted by $0.02 on a sequential basis and unfavorably impacted by $0.15 on a year over year basis due to foreign exchange. On a non GAAP basis, net income per diluted share was $2.22 for the 2nd quarter, up $0.40 sequentially and up $0.07 Year over year, note that the prior year 2022 non GAAP net income per diluted share and our prior year 2022 non GAAP EPS reflects the Q4 2022 change in our methodology for the computation of our non GAAP effective tax rate.

Speaker 3

Moving on to the balance sheet. As of June 30, 2023, cash, cash equivalents and short term and long term marketable securities were $1,033,800,000 Up sequentially $112,400,000 and up $56,600,000 year over year. Of our $1,033,800,000,000 balance, $314,300,000 was held in the U. S. And $719,500,000 was held by our international entities.

Speaker 3

In Q2, we completed a $75,000,000 equity investment in Heartland Dental, a multidisciplinary DSO with GP and Ortho practices across the U. S. During Q1 2023, we announced that our Board of Directors authorized a new $1,000,000,000 stock repurchase repurchase under the 2023 $1,000,000,000 stock repurchase program. Q2 accounts receivable balance was $908,400,000 are up sequentially. Our overall days sales outstanding was 81 days, down approximately 2 days sequentially and down approximately 4 days as compared to Q2 last year.

Speaker 3

Cash flow from operations for the Q2 was $251,900,000 Capital expenditures for the 2nd quarter were $58,500,000 primarily related to our continued investments to increase aligner manufacturing capacity and facilities. Free cash flow, defined as cash flow from operations less capital expenditures, amounted to $193,300,000 Now turning to our outlook. As Joe mentioned earlier, we are pleased with our Q2 results. While the macroeconomic environment still remains uncertain, we have seen improvements in the operating environment and the consumer demand signals our outlook. For Q3 2023, we anticipate our worldwide revenue to be in the range of $990,000,000 to $1,010,000,000 up approximately 12% year over year at the midpoint.

Speaker 3

We expect our Q3 2023 GAAP and non GAAP operating margin to be slightly up from concludes our prepared remarks to our Q3 as we continue to strategically prioritize our investments in R and D and go to market activities to drive growth. For full year 2023, assuming no circumstances occur that are beyond our control, we anticipate our 2023 Worldwide revenue to be in the range of $3,970,000,000 to 3.99 dollars up approximately 7% year over year at the midpoint. We also expect our full year 2023 GAAP operating margin to be slightly above 17% and our 2023 non GAAP operating margin to be slightly above 21%, will be approximately $200,000,000 Capital expenditures are expected to primarily relate to building construction improvements As well as manufacturing capacity in support of our continued international expansion. With that, I'll turn it back over to Joe for final comments. Joe?

Speaker 2

Our continued growth our Q2 results demonstrate our resilience and adaptability. While we cannot predict future economic conditions, we're confident in our ability to focus and execute on our strategic growth initiatives. As a leader in digital transformation, we offer a powerful suite of innovative digital tools that make up the Align Digital platform, which provides a seamless end to end digital experience for doctors and their patients. Innovations launched over the last year include ClinCheck Live Update for 3 d controls. This enables doctors to generate modified Invisalign patient treatment plans in real time, Reducing modifications that used to take weeks to as little as 2 minutes, improving practice productivity while also improving the quality of treatment plans.

Speaker 2

Invisalign Personal Plan or IPP streamlines the treatment planning process and helps doctors achieve their desired treatment plans More consistently and efficiently. Invisalign Smile Architect allows general dentists to integrate clear aligner therapy into their comprehensive treatment plans By combining tooth alignment and restorative planning in a single platform. Invisalign Virtual Care equipped software with a next generation remote monitoring solution that has new artificial intelligence assisted capabilities to streamline their workflows. Cohen Bean Computed Tomography or CBCT enables doctors to visualize a patient's roots as part of the digital treatment planning process. Invisalign Outcomes Simulator Pro expands Align's existing Invisalign Outcomes Simulator technology and adds the benefit The company's ClinCheck in face visualization tool that combines a photo of a patient's face with their 3 d treatment simulation, creating a truly personalized view of how their new smile will look.

Speaker 2

ITero exocad connector integrates iTero inter oral camera and NIRI images with exocad DentalCAD 3.1 software, it allows dental professionals to visualize the internal and external structure of teeth. In addition to these and other incredible innovations in the coming years, we'll continue to build the digital platform and add new capabilities to improve clinical outcomes and elevate the patient experience to drive continued practice growth and positive patient experiences. Thank you for your time today. We look forward to speaking to you at our upcoming Investor Day on we will share with you our views about the incredible market opportunity we have and how Align is uniquely positioned to continue to lead The transformation of the digital orthodontic industry. Now I'll turn the call over to the operator for questions.

Speaker 2

Operator?

Operator

Thank you. At this time, we'll be conducting a question and answer session. Our first question comes from the line of Jeff Johnson with Baird. Please go ahead.

Speaker 4

Thank you. Good afternoon, guys. Hey, Joe, congrats on a nice bounce back quarter here. Wanted to start really on the teen market. Obviously, that's where we all focus long term on the business.

Speaker 4

But that 9.7% year over year growth, operator When I look back last year, it was your Q1 in a long time of negative year over year growth in teens. So you had a bit of an easy comp there, although obviously 2021 was Fantastic year. So I guess I'm trying to figure out in this economy, when I think about comps from 2021 that were so tough, When I think about competition that's out there, where do you think that 9%, 10% team growth is relative to where you expect to be Are we still expecting a nice improvement off this over the next few years back to kind of mid upper teens, something like that? Just would like to get your views on that.

Speaker 2

Hey, Jeff. I mean, you know how important that team market is to us. Like I talked about in the script of 21,000,000 case starts and majority of those 75%, 80% being teens. So I look at that sequential growth in teens as being really positive. Now we did have A good number to compare against like you said, but when I highlighted in our up the Invisalign First product line and how well that product is doing Overall, it continues to grow phenomenally throughout the world in all three regions that we have.

Speaker 2

Team packs, different business models or plans to be put together really helps with that piece too. So Jeff, when you look at our coming technology improvements and products and those kinds of things, They're targeted really well at that teen market also. So the numbers that you mentioned about potential growth and penetration in that marketplace In line with our investments and where we think we'll go in the marketplace. But let's be honest, it's been that's a struggle to get orthodontists to really move on teens. But our top docs are almost exclusively Invisalign across the board.

Speaker 2

And our job is to bring this new technology out, but will infuse it pretty well within doctors, so they're comfortable with the work practices and comfortable with the clinical outcomes. And I feel we've made really good progress in that area.

Speaker 5

Operator All right.

Speaker 4

That's helpful. Thank you. And then just would like an update maybe on China. Obviously, Q3 tends to be a big teen season there, but we're also some mixed macro feedback on China as a whole kind of from an overall economic standpoint. So just what's kind of current tenor of business in China?

Speaker 4

And just remind us how bad were things in Q3 last year in China. We just kind of lose track of the COVID shutdowns and all that. But should to Q3 be an easy comp in China or were things opening back up there before we got to the beginning of this year where they shut back down again? Thanks.

Speaker 2

Yes. China, obviously, from an economic standpoint, Jeff, it's we watch that closely as everybody does too, but we have to take it as it is right now. And We had a good quarter. We had a good start in the Q1 too, and so we're seeing good sequential momentum and improvement in that sense, Jeff, in the business overall. Obviously, when you look at the Q3, I mean, we all know you watch the stock closely.

Speaker 2

We know the Q3 is a huge team market in China, as I mentioned in the script too. And we're really glued on that, but we feel very confident in the sense of our positioning there and where China stands right now. I can't comment on future economic activity there with any more But what we've experienced in the Q2 and what we see going into the 3rd, we feel good about it. Thank you. Thank you, Joe.

Operator

Thank you. Our next question comes from the line of Jon Block with Stifel, please go ahead.

Speaker 5

Hi, John. Hi, good afternoon.

Speaker 6

Hey, Joe. I'll start on innovation. And Joe, going into 23 you called out this year is one of the biggest for Align in terms of innovation when we think about the company's history. And at the end of the prepared remarks, that was really helpful. You laid out A handful of innovations.

Speaker 6

Where are you with the next wave? And when I say the next wave, any details that you can give with paddle expansion In terms of timing in the U. S, maybe if you can elaborate a little bit on the limited rollout in Canada to date. And is there anything else that we should expect more near term, I. E.

Speaker 6

Maybe next 3 to 12 months before some of those longer term aspirations come into play on Direct printing. And then I'll ask my follow-up.

Speaker 2

Hey, John, obviously, Invisalign power expander has come a long way. You probably get we've had some four ways into Canada recently and good feedback on our product line. When we look at the investor conference coming up, we'll obviously give Much more detailed discussion in the sense of where that product stands and how we'll commercialize it. But overall, what I'd tell you, John, we know how to make it. We have a process that makes it remember, with our business, though, just making it doesn't mean anything.

Speaker 2

You got to scale this thing to 1,000,000. And so that's what our focus is right now is how we scale, how we roll this out. There's obviously, a lot of regulatory all qualifications we have to meet in each area because it's a new device too, but I feel good about that. And John, when you look at our development, you know this well, you can almost draw a line between The production of product and then the software that we talked about with the software piece. And obviously, IPE represents both of those, right?

Speaker 2

It's new software and new kind of treatment planning, But it's actually a 3 d printed device that we haven't launched before. So just think of us in a scale up mode, but when we see you on September 6, we'll I have many more details for you.

Speaker 6

Okay. That's helpful. And then maybe as my second question, sort of one of those famous 2 parters. John, to start with you, can you elaborate on the ASP for comprehensive q over q? I believe you said it was down q over q, Little confused because I think you would have had the full quarter of the price increase on the 3x3 in the comprehensive.

Speaker 6

So if I've got that right, Maybe if you can tease out why it would have been down Q over Q. And then Joe, the upside for the case is, I'm taking it around $10,000 relative To the implied guide that you gave back for 2Q, I've got the U. S. Cases essentially in line with our estimate. International seems to have really been the driver to the upside.

Speaker 6

Maybe to build on Jeff's question, can you just give some more details Where the outperformance was? Was it China? Was it EMEA? Where did you see maybe the better than expected results Specific to those international regions. Thanks guys.

Speaker 7

Yes,

Speaker 3

just first on the ASP, John. Yes, the comprehensive were down Slightly, it's just a reflection of some of the product mix that we had as well as some of the discounts that we have partially offset by price increase. So nothing Out of the ordinary there, we actually saw an increase on a sequential basis for non comp, but the comprehensive was just more mix.

Speaker 2

John, back to me is yes, you're right. I mean, when you look at from a regional standpoint, EMEA and APAC stood out. Really across the board in EMEA, like I mentioned in my script, you had Iberia did well, UK did well. Operator The Nordic side, we just introduced DSP and different things. We're excited about those areas too.

Speaker 2

So and then the team growth there overall across those Geographies was good. So I mean, just I think just good strong performance. And then when you think about the EMEA economy too, John, I mean, last year was a lot of uncertainty with Ukraine situation now that hasn't gotten any better, but the Europeans and the European countries I think have solidified their economies around that and we're seeing some improvement from a consumer sentiment standpoint too. So that's reflected in our numbers also. On APAC, obviously, China was good year on year.

Speaker 2

Japan actually was very strong for us too, along with Korea, Different parts of Asia, I mentioned. So it's still broadly really good improvements in both of those regions By country and also specifically in that team segment that I mentioned.

Speaker 7

Yes.

Speaker 2

So we're seeing good improvement, John, from a sequential standpoint.

Operator

All participants. Our next question comes from the line of Nathan Rich with Goldman Sachs. Please go ahead.

Speaker 8

Great. Good afternoon. Thanks for the questions. Hey, Joe. Hey, John.

Speaker 8

I guess, could you maybe just talk about how adult cases performed relative to your expectations improved slightly, but I think still down a little bit year over year? And operator How are you thinking about the biggest swing factors that could impact revenue in the back half? Does the guidance kind of just reflect a continuation of The environment that you saw in 2Q and is there any kind of part of the business that you're watching specifically either teen versus Undaltered or certain markets, that you feel are especially big swing factors in the back half?

Speaker 3

Operator Yes, I'll take that one, Nate. This is John. When you look at the commentary that we gave, we saw improving trends as we went into the Q2, we see that in the results and our guidance reflects that. It shows up in Q3 and It also gives us the confidence to talk to a guide for the total year. So that's how we've kind of factored things in and Looking at the normal metrics and indices that help us with that.

Speaker 3

As far as adult versus teen, as we said, teens are we're in Teen season now, we saw good results in Q2 and we expect that to continue in Q3. As we've said, China is a big market, U. S. Big market in In Q3 and we expect that to continue. And adult is important for us too.

Speaker 3

And we have a lot of capabilities to be able to go to those general dentists and try to work where those adults might be wanting to come into treatment And Bayer helped provide for them as well as our orthodontists. So we feel good about the efforts that we have to try to improve both teen and adult As we go through this year.

Speaker 8

Okay, great. And then just a clarification on the touch up cases. So It sounds like that's pressuring the North America ortho utilization metric. But if you back that out Or kind of include touch up, it would have been up year over year. I'd just be curious to get your sense of what portion of those 18,000 Touch up cases would have been cases kind of in your view in the past prior to DSP, just so we get a sense of, what that shift might look like?

Speaker 3

Yes. So those touch up cases as we talked to those 18,000, those would have been those are the touch up cases that would have been The lower stage products that we have 5 stage, maybe 7 up to 10, but in that range 5 to 10, but probably more on the low side Of that in terms of the stages and we see this great adoption with the DSP program, as we mentioned in the prepared remarks, it doubled from last year. We wanted to give some commentary about how big this is becoming And show them in our kind of our discussion about the year over year and the sequential and so on. And then at Investor Day in September, I'll give a lot more detail about kind of where it came Amber, I'll give a lot more detail about kind of where it came from, how it's become more and more important and what it means going forward because we're going to include these cases Going forward. But in the end, we see it in all cases where we see we've seen the DSP program, it drives incremental volume for us.

Speaker 3

Those doctors continue to do those comprehensive cases that we see, but those doctors are also doing these Low stage touch up cases as well as retention, and we think that's a good thing for our doctors.

Speaker 7

Great. Thank you.

Operator

Thank you.

Speaker 2

Thanks, Dave.

Operator

Our next question comes from the line of Brandon Vasquez with William Blair. Please go ahead.

Speaker 2

Hi, Brandon.

Speaker 5

Hi, everyone. Thanks for taking the Hello. Thanks for taking the question. I just wanted to follow-up first on the DSP program. If we're doing our math correctly, It seems like most, if not all of the year over year increase in case volumes is actually coming from the DSP program.

Speaker 5

So one, is that correct? And Maybe if it is, can you talk about where do you think the mix goes eventually to DSP? And is DSP at this point Accretive to your case volumes or are you seeing accounts kind of switch what they would have been doing as kind of normal These volumes into DSP.

Speaker 3

We're actually seeing DSP as accretive. So we're not seeing, we're seeing fundamentally we're seeing doctors who were either making them themselves or go into lab or other ways Making the liners actually switching over and continuing to give us those comprehensive cases, but then they're also now giving us the DSP cases. Remember, most of DSP, the majority of DSP is retention and it's the retention that we're providing. But then a subset of that is these touch up cases and like I said about 18,000 or so. And what we've also commented to, It would have helped us by about a point and a half on an overall basis.

Speaker 3

So we reported our volumes up about 0.9%. They would have been up 1.5 points on that to 2.4%. So it's accretive no matter how we look at it. And it's certainly accretive from a standpoint of the margin that it generates. It's generating some of the highest margin from our product portfolio that we have because The cost to serve is very straightforward for us.

Speaker 3

There's no additional liners or anything else. So we recognize all the revenue As soon as we ship without additional liners related to that.

Speaker 5

Okay. And then one other second one, one other clarification

Speaker 2

on your question was whether you put DSP in or not, operator Go ahead. Got

Speaker 5

it. That's helpful. The next question is just on teens. I think, Joe, you had said a little earlier, operator A little frank about there's hurdles within the teen market and kind of pushing that share into existing accounts to get a little deeper. Can you guys just talk about what are kind of the top hurdles right now?

Speaker 5

Why has it been a little bit tougher to get the incremental share in the teen market? And what do you guys kind of focus on in the next 6 to 12 months to push that share forward? Thanks.

Speaker 2

Operator Yes, Brennan, in general, when you look at orthodontic workflows, if they're not completely digitized in the sense of what they do and You're kind of in a down cycle right now with orthodontists and your challenge. They feel like on the wire bracket side, they can just make more money With wires and brackets versus Invisalign because the raw material costs are 3.5x. Now if you're fully digitized all participants are in the same store. Your workflows and everything else, obviously, you make more money with Invisalign. But I think in these kind of challenging economic times, it's just more difficult to move the orthodontic community over to the clear aligner piece because they're just used to the workflow of what we have with versus wires and brackets.

Speaker 2

I could say Invisalign first seems to be an exception to that, in the sense of how Phase 1 kind of patients are treated. That's not a constant when you look at what's going on in the orthodontic industry, but we see a lot more interest in Phase 1 with Invisalign First than we thought before. And I think that's going to help to be a span breaker for us in this whole thing. In the future, there's no doubt to us in the sense that clear aligners of the future, no white spot lesions, they'll be 6 months faster than a normal kind of a treatment, much easier for patients. We know all those things.

Speaker 2

When you ask what the biggest issues are, They're not basically clinical anymore. It's about workflow, workflow and confidence in orthodontic practice.

Operator

Thank you. Our next question comes from the line of Elizabeth Anderson with Evercore ISI. Please go ahead.

Speaker 9

Hi, guys. Congrats on the quarter and thanks so much for the question. 1, don't take this as a complaint because I'm very happy that we have full year guide. What I wanted to ask was like what Did you guys see sort of in the end markets or in your the visibility of your results to the macro picture that made sort of this time the right time to kind of move on from what we've had in the quarterly guide the last couple of quarters into this sort of longer guidance.

Speaker 2

Yes. I'll give you the high level view and I'll turn it over to John Elizabeth for the ground thing. But I mean, obviously, you we had a good second quarter And we feel we can see through to the Q3. Whatever at that point too, like we said with the qualifiers is Continued economic situation that we see now, we feel confident just based on what we understand from a cyclical standpoint to be able to call the 4th quarter. Operator And so look, we're still in very difficult economic times and uncertain times.

Speaker 2

But with the Q2 out of the way and with what we talked about improvement, Particularly in a sequential sense, we just felt like, I mean, we're going to give it to you or you're going to make it up. So we might as well give you The best guess we have is, but John can give you more color.

Speaker 3

Yes. Look, I can't add much more to that. We've got now a couple of good quarters behind us. We've seen stability kind of turning to improving trends. It's a good position to be in.

Speaker 3

We continue to see that into the Q3. As Joe said, it's not great, but it's better than it has been from an overall economic standpoint. And so based on the order trends and kind of how things are looking, we felt comfortable about Q3 and translate that to total year as well.

Speaker 9

Got it. And just as a follow-up, are you guys taking any different approach to sort of like sales either sort of from like a personnel perspective or a focus versus earlier in the year. I know sometimes you guys had sort of been ramping reps and That had sort of flat lined. So I just wanted to understand sort of like how you're thinking about that as we go into the balance of the year, and sort of set up for 2024?

Speaker 2

Elizabeth, I'd say our sales practices are consistent and dynamic in the same way. Consistent in the sense of number of salespeople we have, how we train those salespeople, how they go to market. We obviously offer opportunities for different products in different areas, we split up orthodontics salespeople and general dentistry salespeople specifically because it's just a different Kind of a call. So there's no, I'd say, big change in the sense of how we go to market. And obviously, our Itero sales force works really closely with Invisalign sales and overlaps in some areas, but I might be missing your question, but there's no, I'd say material changes going off from Salespeople, number of salespeople standpoint and specifically the way we approach the marketplace.

Speaker 9

Okay. Thank you, guys.

Operator

Okay. Thank you. Our next question comes from the line of Michael Ryzhkin with Bank of America. Please go ahead.

Speaker 7

Great. Thanks for taking the question, guys. I got a couple of quick ones. One is, well, 2 are actually kind of related. 1 is just related to the results 1Q, 2Q and sort of your outlook for 3Q.

Speaker 7

Just sort of

Speaker 2

a yes or no question.

Speaker 7

Is it safe to say that you're kind of back to the usual seasonality you've seen historically? It's been a little volatile for the last couple of years. We're set in the back of that routine. Is it safe to say that that should be our base case approach going forward?

Speaker 3

Well, I think what we see is in terms of our Q2 to Q3 guide, that is more of Typical seasonality flat to slightly up from Q2 to Q3. So that is that. How that goes going forward, I think Given the commentary that we've given just the overall macro uncertainty, we're not ready to say that we're completely back to normal seasonality. But What we see in the short term here, in the guidance that we gave, it reflects that.

Speaker 7

Okay. And then the second one would be on the Analyst Day. I mean, a couple of pieces there. One is, could you just what goes into the thought process that now is the right time to have the Analyst Day? If you say markets are still Pretty uncertain.

Speaker 7

There's still some volatility. Visibility is not fully back. So kind of what goes into that decision? And then related to that, The long term guide, is that something you're going to be addressing, just as we start thinking about modeling 2024 and going forward from there?

Speaker 2

We usually do this about every 2 years, Michael. It's a really sophisticated algorithm we use to figure that out, but it's about every 2 years. And we think it's just about time for that too from a standpoint of just to reinitiate the investor base in the sense of where we're investing, how we see the marketplace. Just a good summary of a lot of the questions that have been asked.

Speaker 1

All participants Is

Speaker 5

there one more

Operator

question? Our next question comes from the line of Jason Bednar with Piper Sandler. Please go ahead.

Speaker 10

Wanted to touch on a few things that stood out to us in the quarter. Maybe first, just really the combination of sequential increase in doctors you shipped to plus higher utilization across all channels that you serve. Again, always good to see that combination come together. I know you don't provide the granularity anymore on doctors shipped across the U. S.

Speaker 10

Or international markets. But just, I guess, directionally, are you able to whether the increase in doctors was exclusive to China coming back online and expansion in APAC or did you see an increase in users in Your North American channels and EMEA channels as well.

Speaker 3

Yes, Jason, you're right. We don't give that level of detail, but we saw more doctors that we shipped to in APAC related to China as you said and we saw it in other regions as well. We were pleased with the number of doctors that we're shipping to. It's a reflection of our products and what they want to do. And then as Well, being able to be up on a utilization basis is a good metric as well.

Speaker 10

Okay. I guess maybe just to follow-up there, John, real quick. Can you confirm whether or not you saw that increase In North America? In North those were GPs or both?

Speaker 4

Yes.

Speaker 3

We saw improvement all participants For North America as well.

Speaker 10

Okay. All right. Great. And then I know we got some good details on some of your APAC markets, including China. I guess, wondering if you can talk about just monthly cadence of U.

Speaker 10

S. Trends throughout the quarter and maybe even here in July. Some of the work we've done showed that there's maybe a bit more mixed trends April June, May was pretty strong. I guess just wondering how that drives with what you were seeing in your case shipment trends And then same question for EMEA, if you could elaborate just on how the quarter unfolded in that region? Thank you.

Speaker 3

Yes. We're really not giving like I don't Really want to get into the month by month activity. I think the results kind of show where they were, Jason. And then it also kind of reflects what we've been able to give from a guided standpoint as well, but without getting into months by country and region and so on, it gets a little difficult operator To give that level of detail, but I think the results that we have for Q2 and what we've talked about how The sequential improvement and what we were able to see on a quarter over quarter basis and what it means for the guidance kind of speak to that.

Speaker 7

Okay. Fair enough. Thanks.

Speaker 9

Thanks, Jason.

Operator

Our next question comes from the line of Brandon Couillard with Jefferies. Please go ahead.

Speaker 2

Thanks, Stephanie. Hi, Brandon.

Speaker 11

You mentioned scanner ASPs is a bad guy in terms of the segment gross margin Sequentially and year over year. Joe, could you just talk about the competitive environment and whether you're seeing pricing pressure intensifying, just your macro view there would be helpful. Thanks.

Speaker 2

Yes, Jay, I wouldn't call it a bad guy. I think what we tried to communicate was we got a mix in there that's from a price standpoint. We're still Good about our upper end product line and the prices we're able to get for 5 d Plus and 5 d Flex and its premier scanner in the marketplace. As you mentioned before and as you know, I mean, there's a certain sensitivity in the marketplace about these kind of capital expenditures In the dental office when a lot of the economics are challenged right now in the orthodontic and dental side. So, we say that.

Speaker 2

But despite that, you could see we turned Really good numbers around. Our CPOs help us to fight on the lower end. CPOs are the certified pre owned that allow us to go down market if we have to. And Obviously, when you

Speaker 7

look at the

Speaker 2

marketplace, it's pretty you have the what we would call the confocal imaging scanners like that we lead with. And then there's products like Medidata, Korea or whatever, they try to take the low end and whatever. But we feel I feel good about our capability, our value proposition. And I think our numbers reflect that this quarter and in the past too. So I'm not saying there's not a competitive environment.

Speaker 2

I just feel we have a superior product line and then we have a good value stream that we offer from a standpoint of the integration with Invisalign through Itero and then OnDeckx. Okay?

Speaker 11

Great. And John, you mentioned freight costs coming down year over year is a positive tailwind to gross margins. I think First time in a while, I think that's been the case. Do you expect that to be sustainable over the next several quarters? And any color on how we should think about gross margins in the second half of the year

Speaker 3

I think it's a reflection of just its freight, but maybe some of the material costs and others that As we manage things, manage our business, and we see less inflationary pressure from kind of the raw material freight and other inputs. And we're always driving productivity, always trying to be improve our productivity. We saw that in Some of our gross margin improvements both for clear aligner and the scanner and services and we'll work to continue to manage it. But seeing some of those the input pricing pressure come down, hopefully that continues.

Speaker 7

Very good. Thank you.

Operator

Thank you. And we have reached the end of our question and answer session. I will now turn the call back over to Shirley Stacy for closing remarks.

Speaker 1

Thank you, everyone, And thank you again for joining us. We look forward to speaking to you at any financial conferences and industry meetings. And as Joe mentioned, all participants are hosting its 2023 Investor Day, September 6 in Las Vegas. For more information, Please visit our Investor Relations page on aligntech.com. Or if you have any questions, please contact Investor Relations.

Speaker 1

Thanks, and have a great day.

Operator

Thank you for your participation.

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Earnings Conference Call
Align Technology Q2 2023
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