Align Technology Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2021

There are 15 speakers on the call.

Operator

Greetings and welcome to the Align Technology Incorporated Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Shirley Stacy, VEP, Corporate Communications and Investor Relations.

Speaker 1

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 2021 financial results today via GlobeNewswire, which is available on our website at investor. Alignetech.com.

Speaker 1

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 by approximately 5:30 p. M. Eastern Time through 5:30 pm Eastern Time on August 11th. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 1,000,000,000,000,000,000,000 International callers should dial 201-612-741 5 with the same conference number.

Speaker 1

As a reminder, the information provided and discussed today will include forward looking statements, including statements about Align's future events 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 the company's earnings release will be available on our website and atsec.gov. Actual results may vary significantly and Align expressly assumes no obligation to update any We have posted historical financial statements, including the corresponding reconciliations, including our GAAP to non GAAP reconciliation, if applicable, and our Q2 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.

Speaker 1

Joe?

Speaker 2

Thanks, Shirley. Good afternoon, and thanks for joining us. On our call today, I'll provide some highlights in the Q2, then briefly discuss the performance of our 2 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.

Speaker 2

I'm pleased to report our 1st $1,000,000,000 revenue quarter with record volumes reflecting continued momentum from both Clear aligners, systems and services. For Q2, systems and services revenues reflect strong growth across all regions and the strategic value of the Itero business With continued adoption of the Itero Element 5D Plus series of next generation scanners and imaging systems, which launched in February. Increasingly doctors are seeing the strategic impact and value of Itero scanners in their practices. In addition to its role in Invisalign case submissions, it's true it's a true workhorse and digital enabler in every type of practice and across every type of orthodontic and restorative workflow. Q2 sequential clear aligner volumes were primarily driven by strength in both adult and teen market segments and across customer channels and regions, Especially from the Americas and EMEA regions, reflecting the expanding opportunity for Invisalign treatment among adults globally as well as the underlying orthodontic market.

Speaker 2

As we continue to build awareness of Invisalign brand and drive utilization among teens and younger patients. For Q2 2021, Invisalign clear aligner volumes for Teens were up 9.5% sequentially, 156% year over year to 181,000 teens, Representing 1 third of total cases shipped with strong growth from North America and EMEA Orthodontists. During the quarter, we hosted several teen focused peer to peer events designed to build clinical confidence in teen treatment and highlight the teen digital treatment journey with Invisalign treatment. The recent APAC virtual symposium featured leading providers focusing on clinical excellence with teen treatment and North America hosted the Invisalign Teen Forum virtual edition for Invisalign doctors bringing together clinical speakers, digital industry experts and team patient panelists to share their insights. In May, Align focused on the Align digital platform at the 2021 AAO Annual Session, featuring a dynamic virtual lineup of Invisalign doctors describing how they have grown their practices through adoption of digital technology.

Speaker 2

Our Q2 results also reflect the positive impact of our investments in consumer marketing, generating billions of impressions and 33% year over year increase and leads for Invisalign doctors. During the quarter, we launched the next phase of our Mung Teen Multi Touch campaign as well as the new Invis is a powerful thing campaign designed to engage teens and young adults. We also deepened our partnership with influencers like Charli D'Amelio with the 1st limited edition aligner case as part of our new e commerce initiative featuring custom cases, cleaning and oral care products as well as accessories like Invisalign Stickables, all of which are available on invisalign.com. These and other consumer initiatives are important in supporting doctors' practices, especially through the busy summer teen season and beyond. They also build out our investments in digital technology and innovation that are the foundation of the Align Digital platform, including integrated digital workflows and virtual tools Designed to improve clinical confidence, treatment, efficiency and patient outcomes.

Speaker 2

A year ago, we released Invisalign Virtual Appointment Invisalign Virtual Care tools within our My Invisalign app in response to the global pandemic to enable Invisalign doctors to provide continuity of care for their patients. Today, Invisalign Virtual Care is available globally in 60 markets and the My Invisalign app has been downloaded 1,000,000 times with Invisalign patients worldwide. It was recently recognized as the best virtual care platform by the MedTech Breakthrough Awards Program And as a digital innovation of the year by Healthcare Asia MedTech Awards. As part of the Invisalign Virtual Care, patients use my Invisalign app to stay engaged with their treatment and convey progress photos to their doctor, fostering two way communications with a doctor through their Invisalign treatment journey. Now let's turn to the specifics around our 2nd quarter results starting with the Americas.

Speaker 2

For the Americas region, Q2 is another strong quarter With Invisalign case volumes up 11% sequentially and 2 61% year over year, reflecting growth across the region, especially in the United States and Canada, From both comprehensive and non comprehensive products and increased Invisalign utilization from orthodontic and GP channels. DSO utilization continues to be a strong growth driver as well, led by Heartland and SmileDox. For international business, Q2 Invisalign case volume was up sequentially 12.7% on a year over year basis. International shipments were up 149%. For EMEA, Q2 volumes were up sequentially, 17% and 2 65% year over year with broad based growth across all markets, Led by Iberia, UK and Italy, along with continued growth in our expansion markets.

Speaker 2

In Q2, growth from both channels was strong, With orthodontic channel growth reflecting increased Invisalign utilization and GP channel growth driven by increased Invisalign submitters. For Q2, EMEA Growth also reflects adoption of the Invisalign First product, designed to treat a broad range of teeth straightening issues in growing children from simple to complex, including crowding, spacing and narrow dental arches, aiding in treatment engagement for those younger patients, Invisalign Stickables are innovative accessories designed exclusively for use with a patented SmartTrak material in Invisalign Clear Systems. Available in array of designs, colors, shapes and scenes, Invisalign Stickables are a fun way for patients to show their personal style During the quarter, we also hosted a successful virtual edition of GP Growth Summit attended by over 1200 doctors from the EMEA region. For APAC, Q2 volumes were up sequentially 4.8% 50% on a year over year basis, reflecting growth across the region, Led by Japan, China and ANZ, despite new and extended COVID restrictions in several APAC markets. APAC performance reflects strength in GP channel With increased Invisalign submitters, especially in Japan, which continues to deliver strong growth.

Speaker 2

During the quarter, we hosted our China Forum attended by over 1500 doctors from private clinics, our APAC virtual symposium attended by 1400 doctors as well as the China public hospital forum in June. Our consumer marketing is focused on educating consumers about the Invisalign system and driving that demand to Invisalign doctors' This is ultimately capitalizing on the massive market opportunity to transform 500,000,000 smiles. We have provided many of our key metrics That show increased activity engagement with the Invisalign brand and our Q2 quarterly presentation slides available on alignetech.com. In Q2, we launched the next generation of envis is multi touch campaign, driving reach and awareness with adult, mom and teen consumers, Yielding more than 200% growth in visitors globally to our websites and more than 82% increase in searches for an Invisalign trained doctor. Leading with the Invis is not your parents braces campaign, we connected with teens utilizing digital media such as YouTube, Twitch and social media.

Speaker 2

We also continue with our Invisalign Changemakers program that celebrated and recognized teens driving change in their communities, which was covered by multiple media outlets Such as Elite Daily, Refinery 29, Yahoo! Unwind Hollywood Life, she knows, J14, Yahoo! Finance, Parents.com, Glamour and NewBeauty and generated more than 600,000,000 impressions. In the major region, our new marketing campaign to drive engagement and this is a powerful thing, went live in the UK, Germany and France during the quarter, Resulting in more than 170% year over year increase in unique visitors and 136% year over year increase in doctor locator searches. We will continue to roll out the campaign to additional markets in the region during the Q3.

Speaker 2

We continue to expand our consumer advertising in the APAC region in Australia, Japan and China and saw more than an 800% increase in consumer engagement and 55% year over year increase in leads. Lastly, we continue to build strong relationship with global search and social media giants like Google, Snapchat, TikTok in order to further leverage our best in class consumer demand programs more effectively more effective globally. These partners recognize the power of the Invisalign brand And are helping us to amplify and gain efficiencies from our investments. For our Systems and Services business, Q2 revenues were up 20% sequentially And up 2 14% year over year, reflecting strong scanner shipments and services. This represents the 4th consecutive quarter of sequential revenue growth.

Speaker 2

The Itera Element 5D Plus Imaging System continues to gain traction across all regions With strong adoption with new customers in the APAC and EMEA regions and with existing customers in the Americas region. In APAC, The Itera Element 2 intraoral scanner did well during the quarter, helping to transform digital workflows and chairside consults for doctors. During the quarter, we announced a new Itero Workflow 2.0 software and previewed auto upload functionality in the Itero Element 5 d imaging system. The Itero Workflow 2.0 software advanced features include faster scanning, improved visualization and enhanced patient communication tools. We're rolled out regionally in all markets where the iTero Element Plus Imaging Systems are sold.

Speaker 2

The iTero Element 5D Imaging System auto upload feature will eliminate steps in streamlining Invisalign case submissions with intraoral color scan images that can be used in place of traditional intraoral photos, the auto upload functionality is scheduled for release during the Q3 of 2021. There's great symmetry between systems and services business with clear aligner business reflected in the positive correlation between the deployment of scanners And the increased utilization of Invisalign Clear Aligners. In terms of digital scans used for Invisalign case submissions, total digital scans in Q2 increased to 82.2% from 78.5% in Q2 last year. International scans increased to 76.2%, up from 72% in the same quarter last year. For the Americas, 86.6% of cases were submitted digitally compared to 86% a year ago.

Speaker 2

Cumulatively, over 40,100,000 orthodontic scans an 8,400,000 restorative scans have been performed with iTero scanners. I'm also pleased to share that Align received regulatory approval the iTero 5D Plus series in Japan on July 1, with a formal launch event planned for August. Turning to exocad. During the quarter, exocad launched the Creator Center, the new exocad one stop shop for online and in person educational events with a database consisting of 35 educational webinars showcasing the highlights and add on features of exocad software solutions, DentalCAD Galloway 3.0, exoplan 3.0 Galloway, more than 2,500 users and distributors have been trained on the new software releases worldwide. Exocad has also expanded their market coverage with a new global OEM partner, Avoclar Vivident, or we call IV, one of the largest manufacturers in the dental industry.

Speaker 2

This strategic collaboration will give exoCAD access to thousands of new IV users worldwide, we'll also provide exocad users with access to product production processes with removable prosthetics in the future. Earlier this month, exocad has released Partial CAD 3.0 Galway, its module for removable partial dental frameworks, Which has new and advanced features for the design of high quality partial dentures. This new release enhances digital CADCAM possibilities for exocad users and dental technicians by providing simpler design solutions for complex cases. PartialCAD 3.0 Galloway provides both experts and new users with smooth improved integration with DentalCAD, exocad's leading software for dental laboratories. Bringing the Itero and Exocad businesses together makes us more viable within the GP segment and more relevant in day to day comprehensive dentistry for our customers.

Speaker 2

The combination of Invisalign Clear Aligners and iTero scanners have long provided a seamless workflow for orthodontic treatment. The integration of exocad's expertise in restorative dentistry and implantology, guided surgery and smile design, takes the aligned technical portfolio beyond our established footprint in orthodontics to ortho restorative and restorative treatment and paves the way for new cross disciplinary workflows that span from visualization and treatment planning to lab production to chairside, exocat also broadens Align's platform reach And digital dentistry with over 200 partners and more than 40,000 licenses installed worldwide. With that, I'll now turn the call over to John.

Speaker 3

Thanks, Joe. Let me begin by reminding everyone that for Align and many companies, Q2 2020 was significantly impacted by COVID-nineteen, business disruptions and comparisons of our results for Q2 2021 should be considered accordingly. Now for our Q2 financial results. Total revenues for the Q2 were $1,000,000,000 up 13% from the prior quarter and up 186.9% from the corresponding quarter a year ago. For clear aligners, Q2 revenues of $841,000,000 were up 11.6% sequentially And up 181.9 percent year over year, reflecting Invisalign volume growth in most geographies.

Speaker 3

In Q2, we shipped a record 665,600 Invisalign cases, an increase of 11.7% sequentially and 200% year over year. In addition, we shipped a record 83,500 Invisalign doctors worldwide, Of which approximately 7,200,000 were first time customers. Q2 Clear aligner revenues reflect strong growth across the Invisalign portfolio for both comprehensive and non comprehensive products. Q2 comprehensive volume increased 11.4% sequentially And 181.9 percent year over year. And Q2 non comprehensive volume increased 12.3% sequentially, driven by strength in Invisalign Moderate and Invisalign Go and up 251.7% year over year.

Speaker 3

Q2 adult patients increased 12.6% sequentially and 220.4% year over year. In Q2, teens or younger patients increased 9.5% sequentially and 156.3% year over year. Clear aligner revenues were unfavorably impacted by foreign exchange of approximately $3,400,000 or approximately 0.5 points sequentially. On a year over year basis, Clear aligner revenues were favorably impacted by foreign exchange of approximately $36,700,000 or approximately 12.3 points. For Q2, Invisalign comprehensive ASPs decreased sequentially and year over year.

Speaker 3

On a sequential basis, Invisalign comprehensive ASPs reflect higher discounts, credits and foreign exchange, partially offset by regional mix. On a year over year basis, comprehensive ASPs reflect the increase in net revenue deferrals for new Invisalign cases versus additional aligner shipments, partially offset by foreign exchange. Recall Q2 2020 ASVs increased as a result of more additional shipments of aligner shipments as doctors were focused on maintaining treatment progress for existing Invisalign patients. This trend reversed itself after practices reopened in Q3 and demand for new cases ramped up significantly. Q2 Invisalign non comprehensive ASPs increased sequentially and were flat year over year.

Speaker 3

On a sequential basis, Invisalign non comprehensive ASPs reflect lower discounts, partially offset by foreign exchange. On a year over year basis, Invisalign non comprehensive ASPs were favorably impacted by foreign exchange, offset by higher mix of new Invisalign cases versus additional liner shipments. Clear aligner deferred revenues on the balance sheet increased $101,000,000 sequentially and $337,000,000 year over year and will be recognized as the additional liners are shipped. Our system and services revenues for the Q2 were a record $169,800,000 up 20% sequentially And up 214.7 percent year over year. The increase sequentially and year over year can be attributed to increased scanner shipments, higher ASP and increased services revenue for our larger installed base.

Speaker 3

Our systems and services revenue deferred revenue on the balance sheet was up 22% sequentially and up 135% year over year, primarily due to the increase in scanner sales and the deferral of service revenues, which will be recognized ratably over the service period. Moving on to gross margin. 2nd quarter gross margin was 75%, down 0.6 points sequentially and up 11.4 points year over year. On a non GAAP basis, excluding stock based compensation and amortization of intangibles related to our exocad acquisition, overall gross margin was 75.4 percent for the 2nd quarter, down 0.7 points sequentially and up 11 points year over year. Overall gross margin was favorably impacted by approximately 1.1 points on a year over year basis due to foreign exchange and relatively unchanged sequentially.

Speaker 3

Clear aligner gross margin for the 2nd quarter was 76.9%, down 0.7 points sequentially due to higher freight costs and slightly lower ASPs, Clear aligner gross margin was 12.4 points year over year due to increased manufacturing efficiencies from higher production values volumes, partially offset by lower ASPs. Systems and services gross margin for the 2nd quarter was a record 65.9%, up 0.5 points sequentially, primarily due to higher ASPs, partially offset by manufacturing variances and higher freight costs. Systems and Services gross margin was up 6.6 points year over year due to higher ASPs and services revenues, in addition to improved manufacturing efficiencies higher production volumes partially offset by higher freight costs. Q2 operating expenses were $489,600,000 Up sequentially 8.4% and up 64.7% year over year. The sequential increase in operating expenses is due to increased consumer marketing spend, increased compensation related to additional headcount and higher commissions and other general and administrative costs.

Speaker 3

Year over year operating expenses increased by $192,300,000 reflecting our continued investment in marketing and sales and R and D activities and investments commensurate with business growth. On a non GAAP basis, which includes stock based compensation and amortization of intangibles related to our exocad acquisition, operating expenses were $461,200,000 up sequentially 8.6% and up 73.6% year over year due to the reasons described above. Our 2nd quarter operating income of $268,900,000 resulted in an operating margin of 26.6 percent, Up 1.4 points versus prior quarter and up 47.3 points year over year. The sequential increase in operating margin was attributed primarily to operational leverage. 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 1.8 points.

Speaker 3

On a non GAAP basis, which excludes stock based compensation and amortization of intangibles, operating margin for the Q2 was 29.8%, up 1.2 points sequentially and up 40.8 points year over year. Interest and other income and expense, net for the Q2 was a loss of $100,000 down sequentially by $36,300,000 primarily due to the SDC arbitration award gain recorded in the Q1. With regards to the 2nd quarter tax provision, our GAAP tax rate was 25.7%, which was higher than the prior quarter rate of 23.4%, primarily due to lower excess tax benefits from stock based compensation. Our GAAP tax rate was lower than the same quarter last year, which was 44.8%, primarily due to foreign income tax and lower rates. The 2nd quarter tax rate on a non GAAP basis was 19.5% compared to 20.2% in the prior quarter and 27.8% in the prior year.

Speaker 3

The 2nd quarter non GAAP tax rate was lower than the prior quarter and the 2nd quarter of the prior year rates due to foreign income tax at lower rates. 2nd quarter net income per diluted share was $2.51 Flat sequentially and up $3.03 compared to the prior year. On a non GAAP basis, net income per diluted share was $3.04 for the 2nd quarter, up 0.55 dollars sequentially and up $3.39 year over year. Moving on to the balance sheet. As of June 30, 2020, cash and cash equivalents were $1,100,000,000 flat sequentially.

Speaker 3

Of our $1,100,000,000 of cash and cash equivalents, dollars 551,000,000 was held in the U. S. And $535,300,000 was held we will be conducting a discussion of our international entities. Q2 accounts receivable balance was $808,100,000 Up approximately 12.4 percent sequentially. Our overall days sales outstanding was 72 days, flat sequentially and down approximately 49.1 days as compared to Q2 last year.

Speaker 3

Cash flow from operations for the 2nd quarter was $317,500,000 Capital expenditures for the 2nd quarter were $124,200,000 primarily related to our continued investment in increasing aligner capacity and facilities. Free cash flow, defined as cash flow from operation, less capital expenditures amounted to $193,300,000 We also have $300,000,000 available under our revolving line of credit. Under our $1,000,000,000 repurchase program announced in May 2021, we have $900,000,000 remaining available for repurchase of our common stock. Now let me turn to our outlook and the factors that form our view for the remainder of the year. Overall, we are very pleased with our Q2 results and our continued strong performance across regions, customer channels and products.

Speaker 3

While there continues to be uncertainty around the pandemic and increasing restrictions related to COVID-nineteen in certain geographies, we are continuing to invest in our strategic growth initiatives, including sales, marketing, innovation and manufacturing capacity more pronounced summer seasonality across all regions than we have experienced in recent years as doctors, their staff and patience take long overdue vacations. Notwithstanding seasonality, given our strong performance and continued confidence in the huge market opportunity, our industry leadership and our ability to execute, we are increasing our 2021 revenue guidance provided in April on the Q1 2021 earnings call to a range of $3,850,000,000 to $3,950,000,000 Additionally, we now expect our second half year over year revenue growth rate to be above the midpoint of our long term operating model target of 20% to 30%. On a GAAP basis, we now anticipate our 2021 operating margin Approximately 3 points higher than our GAAP operating margin after excluding stock based compensation and intangible amortization. In addition, during Q3 'twenty one, we expect to repurchase up to $75,000,000 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 approximately $500,000,000 Capital expenditures primarily relate to building construction and improvements as well as additional manufacturing capacity to support our international expansion.

Speaker 3

This includes our planned investment in our new manufacturing facility in Poland, our first one in the EMEA region. With that, I'll turn it back over to Joe for final comments.

Speaker 2

Joe? Thanks, John. Q2 was a terrific quarter and we're very pleased with the improvements we're seeing in recovering doctor practices. We truly value their increasing adoption of digital treatment approaches, their confidence in the unique aligned digital platform That spans from iTero to the world's most sophisticated treatment planning, the world's largest 3 d printing business on the globe to a patient app with over 1,000,000 consumers along with the world's most recognized orthodontic brand Has driven strong performance across the business. Our performance over the last year confirms the incredible size of our target market it demonstrates that our strategy and investments in recent years have helped further solidify our competitive position.

Speaker 2

We have numerous growth drivers in a vastly under penetrated market. And while we continue to see some lasting impact and continued uncertainty due to COVID, we remain confident in both the enormous opportunity we have to lead The evolution of digital orthodontics and comprehensive dentistry with our doctor customers and in our ability to execute our strategy to increase adoption of Invisalign treatment globally. We're also confident in and excited about the benefits of digital treatment that more and more doctors are experiencing by transforming their practices With Invisalign Digital Orthodontics and Itero Scanners for Chairside Treatment Planning and Visualization. In fact, Invisalign treatment requires on an average 30% fewer doctor visits than fixed appliances, creating efficiency gains for the doctors and a better patient experience. And 85 percent of orthodontists surveyed agreed that adopting the Align digital platform have made a huge difference in their practices.

Speaker 2

It provides ways to improve their efficiency and productivity. I look forward to updating you at the GP Summit and Investor Day in October in Las Vegas and sharing more examples of how Align is helping doctors transform their practices and their approach to treatment. I'll turn the call over to the operator for questions. Operator?

Operator

Thank you. At this time, we will be conducting a question and answer a confirmation tone will indicate your line is in the question our first question comes from Nathan Rich with Goldman Sachs. Please state your question.

Speaker 4

Hi, good afternoon. Thanks for the questions. Joe, I wanted to start with the increased guidance and the expectations around the back half of the year Being at the high end of the long term range, I guess several of the factors that you highlighted on the call, the growth in new customers, the strong iTero placements, Those have all historically been good leading indicators of growth in Invisalign. It also sounds like you're seeing better uptake from the DSO channels, that's obviously an opportunity that you guys have been going after for a long time. So I guess at this point, does that change how you're thinking about what the right target is

Speaker 2

Hey, Nathan. Look, I think you cited Really well what we're seeing right now, what we're experiencing overall and we are calling strong growth for the second half of this year. But Look, our revenue guidance is for long term for the business is 20% to 30%, and we continue to work within those boundaries. So we're not prepared to change that at the moment. John, any thoughts on your

Speaker 3

That's exactly we feel good about the what we're seeing in the marketplace and our guide reflects that.

Speaker 4

Appreciate that. And then John, maybe a follow-up for you. Could you maybe go into a little bit more detail around your comments on the more pronounced summer seasonality? Just how that impacts your expectations for the sequential growth we're likely to see in Q and 4Q of this year maybe versus what you would expect in a normal year?

Speaker 3

Well, as we know, I mean, there's summer period where people take vacations, holidays and so on in EMEA and other places and we expect and I think what we see in our own lives is you take longer weekends or maybe more pronounced vacations, people doing things in advance of shutdowns or lockdowns that might happen and I think we're just being reflective of that, but really looking at all the variables that we normally see and talking to the what we expect for the second half, which is To the upper point or upper side of our midpoint on a year over year basis.

Speaker 4

All right. Thanks for the questions.

Speaker 2

Thanks.

Operator

Our next question comes from Jon Block with Stifel. Please go ahead.

Speaker 2

Hi, John.

Speaker 5

Hey, Joe. Good afternoon, guys. I think, Joe, I'll start with you with the first one. I think it was 5.3 percent North American GPU utilization number It was huge and I think we all waited for a while to get that to get to 4, now it's worth a 5. Just talk to us on what that is.

Speaker 5

I mean, I'm assuming It's what? It's more scanners? Is it also just increased utilization with even those that have had the scanner for some time? Would love some color and maybe just more importantly is that 5 handle on the North American GPU utilization, do you view that as sustainable going forward? And then I've got a follow-up.

Speaker 2

Hey, John, I consider everything we do has more than a single variable to it. And that's the platform that we work with, which you know as well as anybody. But I'd say, yes, scanners serve that very well. Our increased advertising helps to drive that too. It brings more patients to the GPs.

Speaker 2

And thirdly, new products like working iGo and different derivatives of that product line that are very efficient for GPs And it gives them a huge amount of confidence in our product line when they use it, John. So it's a combination of our brand. It's a combination of digital platform with Itero. It's a combination of product piece. And then we don't talk about it a lot, but we split our sales force years ago.

Speaker 2

And we have a specific focused sales force on GPs. And the GPs speak a different language, John. It's different than orthodontists altogether. And that Team has been incredibly effective in being able to work with doctors, how they can integrate Invisalign into their workflow and from a restorative standpoint, how you use this proactively. So, we're I'm confident that is a that's a great market for us.

Speaker 2

We know that 500,000,000 patients we talk about globally sits broadly in that segment and but you need a different kind of a product approach, a different sales approach And a strong platform geared to those guys to keep that going, and

Speaker 3

we feel good about it. Thanks.

Speaker 5

Yes, and actually you brought up an interesting point. I think that The sales force was, I believe, bifurcated international more recently in North America. So I guess we're starting to see that come through. A second question, John, just let me try to be as detailed as possible. So you've got solid 2Q 'twenty one sales upside that you just reported.

Speaker 5

Then you raised the back part of the year from roughly 25% year over year revenue midpoint growth to closer to 27%, Yet you call out some more pronounced summer seasonality and those seem at odds with one another. So can you just reconcile those two data points? In other words, alluding to more seasonality yet you just took up the forecast in the back part of the year even in the face of that. So any color would be great.

Speaker 3

I think it really reflects just the timing between quarters and not kind of as you said, looking at the second half in a way, not knowing how vacations, Holidays and lockdowns potential might play out, but looking at it in totality and kind of looking at it from a second half standpoint.

Speaker 5

Thanks, guys.

Speaker 1

Thanks, John.

Operator

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

Speaker 6

Yes. Hey, everyone. Good afternoon. Congrats on a strong quarter here. Joe, I wanted to follow-up on Nathan's question there, going back to the first one.

Speaker 6

Maybe if you can unpack a bit further What you're seeing here as we look ahead in the next couple of quarters, especially now that we've lapped the easiest of your comps, your guide here would suggest momentum, Strong cost of business. But the key question I keep getting from investors is really how that adult consumer in the second half of the year and then into 2022, how they're going to respond. So the question I guess for you is just how you're seeing the adult consumer respond in your various geographies as economies have opened back up and as we start staring down some

Speaker 2

I think, Jason, what we see With adults and we see this really all over the globe is we obviously had a big uptake from an adult standpoint, but you can see our teen numbers up pretty substantially 2 at the same time. So it's a good balance. The previous question that John asked too at GPs, it comes into broadly in adult segment and that segment also. My explanation in the sense of why we've been effective in that segment, we think we can continue to be helps to contribute to that. Now when we talk about Q3 and seasonality or John is talking about whatever, a lot of that is around adult patients and vacations and different things too and it affects different parts of the organization, And how we go to market, but in general, we just feel good about the direction of the business, the signal and words that we're getting from our doctors and what they're explaining they're seeing out there and That's all incorporated into what we've been forecasting for you.

Speaker 2

And the one thing to never forget about too, Jason, is the size of this marketplace. We talk about 500,000,000 patients and I know you hear from a lot of other companies in different industries about oversized SIMs and whatever. This is true. And if anything sort of shown, like I mentioned in my closing comments, that this market is as big as we talk about being as what you've seen from this business over the last year And in the adult segment of that part too, which is a big part of that 500,000,000 patients that we talk about.

Speaker 6

All right. That's all for Joe. And then Just looking at least relative to our model in the quarter, it looks like most of the outperformance or disproportionate amount came from the Americas. I'm sure that's U. S, but also maybe Brazil.

Speaker 6

And you've made some pretty strong comments in the past on what Brazil could do for your business in a pretty short window of time. So just wondering if you could update us here on where you're at with expansion in Brazil, maybe how much that mark in particular is contributing to sequential case growth?

Speaker 2

Yes, no statistics for it. Brazil continues to be strong. I think you know it's a big aesthetic market, one of the biggest aesthetics markets in the world. It parallels Iberia in a lot of ways as we how we have to go in there and move. We're primarily in the orthodontic segment there and not in the GP segment right now and how we Done it.

Speaker 2

And it's a different market that way because orthos play in a much more broader sense in that country than what we do here. But We have a very experienced team there. We funded it well. I feel good about our position from a product standpoint and iTero scanners. And it's a big market for us.

Speaker 2

And don't just think about Brazil too. Latin America in general has been a big expanding market for us. So Brazil leads because of the size, population and aesthetics we talked about. But overall, our LatAm market is extremely strong and we're well positioned there. Johnny, any thoughts in it?

Speaker 6

Thanks, guys.

Speaker 2

All right, Jason. Thanks.

Operator

Our next question comes from Erin Wright with Credit Suisse. Please go ahead.

Speaker 7

Okay, great. Sticking with that international topic, can you speak to the growth in the quarter in Asia Pac And what you're seeing across that market, are you still seeing some COVID related lingering headwinds there? And can

Operator

you speak to some

Speaker 7

of the competitive landscape dynamics as well? And then also your efforts in terms of expanding the consumer advertising effort across that geography as well. Thanks.

Speaker 3

Hey, Aaron, this is John. I can address the start of that. Look, APAC is an important region for us, huge market opportunity. We've invested as we've talked about With manufacturing and treatment planning in other places, we recently have added some advertising, additional advertising in APAC and we see great results where there's a lot of interest, a lot of awareness that it drives. People come to our website and look for doctors and so on, and we think that translates Very well.

Speaker 3

We're very happy with the quarter for Q2. You do have pockets of areas where there's COVID More of a COVID impact, Southeast Asia, parts of China, other areas that we're always mindful of. But when we look at the investments we're making, the return that we're getting From those investments, we feel really good about APAC.

Speaker 7

Okay. And then how should we be thinking about the quarterly Aggression of the gross margin from here and the run rate going forward, is there anything to call out in terms of mix or ASPs or Some of those seasonal dynamics you were talking about that we should be thinking about as we think about the 3rd and the 4th quarter gross margin trend? Thanks.

Speaker 3

Nothing of major note, Aaron, I mean, we've seen that as we drive utilization, have more coming through our factories, it's very productive for us. We're very mindful of the trade offs that affect our margin and you're seeing that come through. So as we look at some of the investments that we're making, how we're going to market, products that we have, how we view things, there's nothing that should be too different than what we've seen from a gross margin standpoint.

Speaker 7

Okay, great. Thank you.

Speaker 2

Thanks, Sarah.

Operator

Our next question comes from Jeff Johnson with Robert W. Baird and Co, please go ahead.

Speaker 8

Thank you. Good afternoon. Hey, Joe. How are you? A couple of questions here, I guess.

Speaker 8

1, on the seasonality, again, I hate to keep harping on that. But Typically by this point late July, you guys now know July numbers. You probably know pretty much what's lined up for August given cases that are in treatment planning phase right now. So are the seasonality comments driven by something you're seeing so far in the numbers? Is it something that you're just expecting could come in late in the quarter, is it focused on the adult side?

Speaker 8

Just kind of any more color there would be helpful as well.

Speaker 2

Hey, Jeff. It's just based on our experience with the season, I think you've been following our business long enough. 3rd quarter is a real transition quarter From a vacation standpoint, teams coming in here, European vacations, which are really big. And our comments are just reflecting what we're hearing from our customer base, our doctor bases, Not just in the United States, but all over the world. And we're just trying to share that with you.

Speaker 2

But at the same time, the guidance that we've taken up, you have to remember, we're at the Upper end of our growth modeling for the second half. And when you think about it, we had 2 real strong quarters last year, Jeff, 3rd and 4th quarter. So It shows a lot of confidence in what we see and what we feel.

Speaker 8

Yes, understood. And then on ASPs, John, maybe for you, It sounds like some of the rebating or some of the promotional activity, I guess, I should say maybe has stepped down just a little bit. Obviously, you were running some bigger trade in programs in that late last year and the early part of this year, is that an opportunity then for ASPs to float a little bit higher into the back half in next year? Or does other do other promotions pop up and just think about ASPs kind of straight lining from here? Thanks.

Speaker 3

Yes, I would say the latter. I mean, look, there's always promotions that we're running To drive that right utilization and you try to find that right mix. And what we talk about and I think everybody gets is it has to translate to gross margin we feel good about the gross margin that it's ultimately driving and our op margin that it brings to our bottom line. So there'll be some trade offs, but I don't expect too much of a change in ASP. And the way we've looked at it and just because some grow faster than others, You're looking at it from a comprehensive standpoint versus a non comprehensive standpoint, to be relatively stable.

Speaker 8

Yes, understood. Thanks guys.

Speaker 2

All right, Jeff.

Operator

Our next question comes from John Kreger with William Blair. Please go ahead.

Speaker 2

Hi, John.

Speaker 9

Hey, guys. Thanks much. Maybe just one more follow-up. I would assume the seasonality comment is mainly sort of one about adults, but curious if you've got any thoughts on how the teen season might Differed this year, is it shaping up to be sort of a normal year as we assume schools are open again or maybe more spread evenly across the second half?

Speaker 3

I think you look at it, John, just from the standpoint that there are unknowns around COVID, vacations and other things. COVID is one of them. Some There are places we hear some of the countries and regions schools going to open up earlier. Some are saying that it's later. So we're just trying to be mindful that there's going to be changes that happen to this and try to give as much information about that as possible.

Speaker 9

Great. Thanks, John. And then maybe one follow-up on ASP. It seemed like the year over year trend was different in comprehensive versus non comprehensive. Could So then when you think about that metric longer term, do you assume the trajectory is similar across those 2 buckets or not?

Speaker 3

Yes, the biggest change from last year to this year is really around the additional treatment that doctors were providing. So remember last year, they didn't have as many new patients coming in, but they were still keeping existing patients along in treatment. It doesn't count as a new case. It really just counts as additional revenue and therefore ASVs are higher as a result of that. Conversely, as now they focus more on Primary cases and new patients coming in, we see that shift.

Speaker 3

We saw that shift really started in Q3 of last year. It's kind of been progressed relatively steady from Q3 on. And that's kind of how we think of it. There's not a it's not a promotional change There's nothing of that nature. It's really more just on how we're recognizing revenue between a primary shipment and then a Additional treatment that Adaptive provides.

Speaker 9

Okay. It makes sense. Thank you.

Speaker 2

Thanks, John.

Operator

Our next question comes from Elizabeth Anderson with Evercore. Please go ahead.

Speaker 10

Hi, guys. Thanks so much for the questions. Hey, so my question is in terms of the Could you talk about how you saw volumes progressing maybe in the U. S. Across the 3 months?

Speaker 3

I think when we look at Elizabeth, it's John. We saw strength across our business. We're not going to get into kind of month by month, but I think what we saw and you saw in the print for Q2 very strong Across geographies, products and so on. And what we're seeing is a reflection of that with our guidance.

Speaker 10

Okay. That makes sense. And then turning to the cash flow, I appreciate the CapEx increase this year is largely a function of the new facility in Poland. Is that something that should continue on at that kind of pace going forward? Or do you see kind of all of that wrapped up in this year's And then we should go back to sort of the more normalized levels afterwards.

Speaker 3

Yes, I think what you'll see with kind of the convergence of what we have now, we have a lot of capacity that we're adding to meet the demand in the markets that we have and you have that unique event with Poland kind of going on from a land purchase building And equipment that goes in. So this year will be a little bit heavy from that standpoint. And then going forward, it should just be more about the Expansion and growth that way, but not as much as this year with the building as well.

Speaker 2

Elizabeth, I just Joe, you're thinking about we're talking about 200% growth rates, right? And We're talking about growth rates on the upper end of what our revenue model has been given to you guys. So it requires capacity in that kind of investment. And It's a good question. But like John said, we hit it hard this year, built some more capacity and this will lay in over time.

Speaker 11

Yes.

Speaker 10

No, that certainly makes sense, especially as you update build it ahead of

Speaker 3

the growth. So thank you.

Operator

Our next question comes from Liza Garcia with Wolfe Research. Please go ahead.

Speaker 11

Hi, guys. Can you hear me all right?

Speaker 10

Yes. Yes.

Speaker 11

So I guess just digging into kind of how you're thinking about the exoPAD expansion And with the Ibocar dividend, and kind of how you see the opportunity building there? You've mentioned a couple of things. But also should we View this kind of as like a first move for exocad and going forward, the strategy into more CADCAMs?

Speaker 2

Yes. You know, mine, it's a good question, right? When you think about we talk about the GP segment, we talk about ortho restorative. And I think most people, if you study this, you know that exocad is one of the few companies out there that actually offers a digital type of restorative platform For dentists all around the world, our vision for our business is we become a big part of restorative and saving enamel and moving teeth Before you actually do implants, you need to do different things. And that's what we think is the revolution of orthodontics because that wasn't a tool that was really used before.

Speaker 2

So ExoCAD and iTero plug in really well behind that. Never forget that our strategy is always about selling more Invisalign. That's what ExoCAD is about. That's what iTero is about too. But they also have to have credibility as units in those segments.

Speaker 2

And that's when we talk about what we're doing with exoCAD and Itero, we're expanding that technology, Always with the thought of how we can be more effective in OrthoRestorative. John actually runs the business. I was going to walk him over.

Speaker 3

No, I think you summarized it well. I mean, this is a Yes, it's been just over a year. We're very pleased with how the business stands as it stands alone and then the Technical and commercial integration that's been going on and we see more and more synergies and feel good about the digital platform that this helps us move forward. So More to come on this, but after a year, we're very pleased.

Speaker 11

Great. Awesome. And then I was just wondering if you're hearing any indications from your customers about staffing as a potential issue that's kind of limiting their availability anywhere. It Obviously, the report doesn't certainly seem that way, but channel checks have kind of indicated some more limited staffing.

Speaker 2

Yes. Hillman, this is Joe again. I think, I wouldn't call it a hindrance right now. They have to pay more to find these people. There is concern out there in the sense of How much people have to pay to bring them in, but we haven't had that as an excuse of doctors saying, I can't do more cases because I can't find staff.

Speaker 2

It's just harder to spend more time doing it.

Speaker 3

The one thing that you do hear and this is the reality when we talk about some of that seasonality, people take vacations, there's doctors on vacation as well as staff and patients. So They might fall into that bucket as well to limit some of that staff at their offices.

Speaker 6

Yes.

Speaker 11

Great. Thanks so much.

Operator

Our next question comes from Richard Newitter with SVB Leerink. Please go ahead.

Speaker 12

Hey, guys. It's Jamie on for Rich. Quick question for me. On teens, obviously, our checks, specifically within the ortho channel have been very bullish over the last couple of months. And now with it representing greater than a third of total case shift, is it fair to say now that teen adoption is finally hitting that inflection point in the U.

Speaker 12

S? And if not, And what are some of the things that you think still need to happen to really start to take on this sort of viewpoint?

Speaker 2

It's Joe. Look, this is not a tipping point as you referred to it. This is it's been a ground war actually. And that Ground Wars is basically started with product viability and obviously with Invisalign First and mandibular advancement and some of our other we've really opened up that segment and made it available to us too. Now the work is primarily with orthodontists to make them confident that they can service these teams, Not just clinically, but from a business standpoint also.

Speaker 2

That's why our programs like Adapt and different things we put into place. And remember, if the war here is not Against other clear aligner companies, it's about braces and fixed appliances and that's what we really have to break through and get done. And honestly, orthodontists just have to be comfortable not clinically, but also from a business standpoint. And I feel like we're making progress in educating teens and educating mom, but on the other end, Educating orthodontists to how they can properly do this clinically and also be efficient in their practices in doing it. And that's the groundwork part.

Speaker 2

I feel we're well positioned and obviously our numbers say we're making progress, but there is we're not declaring victory here at all.

Speaker 12

Got it. And then just one follow-up back to kind of some of the more pronounced summer seasonality. If I look back kind of through 2017 through 2019, it it seems like you guys have seen anywhere from flat to maybe mid single digit sequential improvement. Consensus is currently standing at Something that would imply a decline. So is there any reason to be thinking that it shouldn't at least fall within the bounds of a flat to mid single digit improvement versus What consensus is currently implying, which would be a decline?

Speaker 12

Just trying to get better calibration there.

Speaker 3

Yes, David, this is John. Look, we're trying to give you color to the second half, kind of because it's implied in our total year and you can kind of Defer what kind of infer what that means from Q3 and Q4, but just trying to give you as much color without giving quarterly guidance is all that has been.

Operator

Our next question comes from Michael Ryskin with Bank of America. Please go ahead.

Speaker 6

Hey, guys. Congrats on the quarter

Speaker 13

on the guide raise. I want to ask first on the I guess for John On the operating margin, especially on the non GAAP side, you had another really good quarter there and you bumped the guide a little bit, but you're still sort of Your outlook for the second half still implies a pretty decent step down in operating margins. I'm just wondering what's going on there? Is there any incremental spend that you're budgeting? And just in general, sort of expand on that, could you talk a little bit about consumer marketing spend?

Speaker 13

How are those costs trending? How is the return on that going?

Speaker 3

Yes, it's a good question. I mean, look, we're very pleased with our margin that we've seen through the first half. As you noted, very strong performance, a reflection of a lot of the investments that we made and we continue to make to help grow our business and we look at the second half as continuing these investments to expand from a sales Marketing standpoint, there's some the operating costs that we have to be able to grow our business like we have, it reflects those investments and we're trying to continue to position ourselves so that we continue momentum and be able to Start next year with that momentum. So it's really more of a reflection of that. And obviously, as we go through the second half, we'll update on what that means for margin.

Speaker 13

Okay. And then on the gross margin line, again, just on the you got the manufacturing facility in China, you're talking about Plant is pulling up in 2022. Could you give us an update, a reminder of sort of how we should think about progression there in terms of shifting So the manufacturing in there and how that should work its way through the gross margin lines of when do those plants reach more or less full capacity and sort of You worked through the ramp up there?

Speaker 3

Yes, you're right. When we go live, there is until you get that capacity up and we're really We know how to do that manufacturing. We've learned as we've gone through some of the China facility ramp up that will get applied to how we ramp up in Poland will move doctors over kind of country by country and ramp things up. That will happen in the first half next year. But very mindful of what it means from a margin standpoint and do everything we can to minimize that any efficiency that you have when you first start up and be able to get those facilities up and running at near 100% capacity.

Speaker 2

Yes. And one of the things that John knows better than me on this one, Michael, is that when we ramped up China, remember we started with a rental temporary facility It was not even close to scale and it just pounded our cost. But we just wanted to get in place and get the workflow done. We build a building next to the way that area was, That transitioned into it. So that was a pretty big bump that we took there.

Speaker 2

We're not anticipating, John, like the same.

Speaker 3

Right. And that would happen, Michael, when we Kind of quietly went live in Q2 of last year, with that new greenfield facility. And it's all about running that factory with a high utilization, having efficient Labor and kind of productivity there that we know how to drive. But there is some ramp up period, but we'll look to that in kind of the first half and then See improvement as we go into the second half.

Speaker 13

Okay. Fantastic. Thanks.

Speaker 2

Thanks, Mike.

Operator

Our next question comes from Ravi Misra with Berenberg Capital Markets. Please go ahead.

Speaker 14

Hi, Jim. How are you doing? Good

Speaker 3

morning, Bobby. Hi.

Speaker 14

So I guess I have two questions. One more on the R and D side and one on China. So just on the R and D, one of your competitors announced a new polymer. And I think one of the things that's actually turned up in our checks With Ortho's at least is that SmartTrak gives you an edge. Just curious on your view and whether that's kind of starting to have any sort of impact or is it too early and then how you plan to maybe position yourself to kind of keep ahead of the And then secondly, just around China, I guess it's another kind of competition question.

Speaker 14

With I guess your Largest but still relatively small competitor going public. How are you kind of viewing that market now with kind of another, I guess, well funded competitor out there in terms of the ability to grow the market or kind of go after a potential segment of that market, whether it's the More luxury focused patient or how are you kind of segmenting the population there? Thanks.

Speaker 2

Yes, Rob. On your first question on the new polymer, Remember, we do multilayer materials, so it's various polymers that you put together and we're balancing equation between elasticity And overall rigidity or tensile strength. And it's like our other competitors are starting to figure that piece out and see pieces of it. We have strong patents around SmartTrak and Obviously, improvement over time is a real important part about not just having the right materials, but having the right kind of system in place. And that's the treatment planning part that we talked about, 25 years of understanding how to really activate those aligners and make that plastic actually work through those algorithms.

Speaker 2

And we don't use the displacement methodology, which is basically build a line or that kind of leads things. It actually engages with these things in a different way. So I expect more companies to come out and work different polymers or whatever. We have a huge amount of experience with that, but don't forget about the entire The algorithms, how it works together, and how it works with attachments, the exactness of those attachments, where you put those attachments, how they're shaped, So a lot going on there. We feel good about our position and we'll continue to innovate in that space across all those spectrums, but there's nothing in the competitive marketplace that we are with it would change the trajectory of where we're investing right now.

Speaker 2

From a China competitive standpoint, obviously, Angel Lion, IPO, we watch that closely and Give some clarity to everybody in that marketplace as they IPO to what's going on. And I think you see they're strong in Tier 3 cities. They're strong with public hospitals in different areas. And Look, we I feel good about our position in China. Our manufacturing is strong.

Speaker 2

Our training centers there is strong. Our treatment planning is strong. It's close to accounts. We had good growth in the quarter overall, good sequential growth, good year on year growth. I like our position here.

Speaker 2

John, anything you

Speaker 3

want to add? Yes. I mean, just to add, in China, we've been competing in China with various companies, since we've been there. So it's nothing new really with The IPO, it's really more of a reflection of this underpenetrated market in China. China is a huge opportunity For Clear aligner business and so we feel very good about our positioning there.

Speaker 3

It's primarily cases are done with wires and bed rackets. And so this is less about share shifting amongst clear aligner and more about growth in the category.

Speaker 6

Thanks, Robbie. Thanks, Robbie.

Speaker 1

Yes. Well, listen, thank you everyone for joining us today. We really appreciate your time. We look forward to speaking to you at upcoming financial conferences and industry meetings, including the International Dental Show in Cologne, Germany September 22 through 25, we will be showcasing Align exocad innovations and a hybrid and multimedia exhibition space through physical and virtual experiences. We'll also be hosting an investor meeting in conjunction with our GP Summit in October in Las Vegas.

Speaker 1

In Nevada, we'll have that October 29, 30, so look for more information. And if you have any additional questions, please follow-up with our Investor Relations department. Thanks and have a great day.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Align Technology Q2 2021
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