Operator:

Greetings. Welcome to the Align Technology Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Shirley Stacy with Align Technology. You may begin.

Joe Hogan:

Thanks, Shirley. Good afternoon, and thanks for joining us on our call today. I'll provide an overview of our second quarter results and discuss a few highlights from our two operating segments, System and Services and Clear Aligners. John will provide more detail on our Q2 financial performance and comment on our views for the third quarter and for 2024 in total. Following that, I'll come back and summarize a few key points and open the call to questions. Overall, I’m pleased to report solid second quarter results. Total Q2 '24 revenues of $1,028.5 million were up 3.1% sequentially and 2.6% year-over-year, reflecting growth in both Clear Aligner volumes and Imaging Systems and CAD/CAM Services revenues. Q2 '24 total revenues were unfavorably impacted by foreign exchange of approximately $11.6 million or 1.1% sequentially and unfavorably impacted by approximately $18.1 million or 1.7% year-over-year. For Clear Aligners, Q2 '24 volumes increased 6.2% sequentially and 3.2% year-over-year, driven by growth from adult patients, and strong teen case starts across the regions, led by strength in Asia Pacific, EEMA, and Latin America. Our Q2 results also reflect a record number of doctors submitting cases, and record doctors shipped to for the quarter. Q2 '24 Clear Aligner ASPs were down sequentially and lower than anticipated in our second quarter outlook, due in part to greater impact of unfavorable foreign exchange across multiple currencies, especially the Japanese yen, Euro, and Brazilian real, as well as discounts, and product mix shift to lower ASP products. As a result, total Q2 revenues were slightly below the expected range for our Q2 quarterly revenues. Notwithstanding these factors, non-GAAP operating margin for the second quarter was 22.3%, up 2.5 points sequentially, and up 1.0 point year-over-year. For Imaging Systems and CAD/CAM Services, Q2 '24 revenues increased 9.2% sequentially and 16.1% year-over-year reflecting continued adoption of our next-generation iTero Lumina scanner, which made up the majority of our equipment sales, iTero Lumina wand upgrades, iTero Element scanner trade-ins, as well as increased iTero scanner leases. For Q2 '24, adult patient case starts were up 5% sequentially and 1% year-over-year, reflecting our highest number of adult shipments in 8 quarters, driven by strength in the GP channel, led by North America and APAC dentists. In teen and growing kids’ segment, over 216,000 teens and younger patients started treatment with Invisalign clear aligners during the second quarter, an increase of 8.8% sequentially and up 8% year-over-year, reflecting growth across regions, especially from Invisalign First in the EMEA and APAC regions. In Q2, the number of doctors submitting teen or younger patient case starts was up 8% year-over-year, led by continued strength from doctors treating young kids also known as "growing patients. The response from doctors and their patients to Invisalign Palatal Expander System continues to be positive. We believe that Invisalign Palatal Expander System is a better option for expanding a growing patient's narrow palate compared to traditional appliances used today. The Invisalign Palatal Expander System is currently available in the U.S., Canada, Australia, and New Zealand. We expect it to be available in other markets pending future applicable regulatory approval. Non-Case revenues include our Vivera retainers, which include retention aligners ordered through our Doctor Subscription Program or DSP, as well as clinical training and education accessories in eCommerce. Q2 Non-Case revenues were up 3.5% sequentially and up 5.1% year-over-year, primarily due to continued growth in retainers and DSP. For Q2, total Clear Aligner shipments include approximately 25,000 Invisalign DSP touchup cases, a record high quarter of 37% year-over-year. DSP continues to drive growth and is currently available in North America and certain EMEA countries. During the quarter, we extended DSP into more countries in Europe and we anticipate expanding into additional markets going forward. DSP is also now available in 14 stage touch up aligner offering across all markets where it's available. As a result, Touch-Up cases increased significantly in Q2. Q2 '24 Clear Aligner volume and DSO customers increased sequentially year-over-year reflecting growth across all regions. DSOs represent a large and growing opportunity to help drive adoption of digital technology across the dental industry. We have well-established relationships in many DSOs globally that recognize the benefits of digital workflows enabled by our portfolio of products and services that make up the digital platform. Including increased practice efficiency and profitability, as well as delivering a better patient experience from shorter cycle times and customer proximity. Smile Docs and Heartland Dental are two of our largest DSO partners. We are continuously exploring collaboration with the DSOs that can further the adoption of digital dentistry. Each DSO has a different strategy and business model, and our focus is working and encouraging DSOs aligned with our vision strategy and business model goals. Today, Invisalign is the most recognized orthodontic plan globally and Invisalign, Clear Aligner treatment is faster and more effective than traditional metal braces. Yet the underlying market opportunity to remains huge and untapped. We continue to invest in consumer marketing and demand creation initiatives that raise awareness and drive potential patients to Invisalign practices globally. In Q2, we had more than 17 billion impressions in 50 million visitors to our websites globally. Below are additional highlights from Q2 and more information is available in our Q2 '24 earnings webcast slides. To increase awareness and educate young adults, parents and teens about the benefits of Invisalign brand, we continue to invest and create campaigns in social media platforms such as TikTok, Instagram, U2, Snapchat, WeChat, [indiscernible] across the markets. Reaching young adults as well as teens and their parents also requires the right engagement through Invisalign Influencers and creator-centric campaign. In the Americas, our influence in social media campaigns, featured Olympic athletes such as Rebeca Andrade from Brazil, Andre De Grasse from Canada, Jordan Chiles from the United States and Paralympic athlete Lizzi Smith from the United States. To bolster T demand -- teen demand, we launched new activations with teen high school sports, social media platform, Over Time, including several programs focused on showcasing elite high school athletes across boys' football, girls' basketball, girls' soccer. We highlighted why they chose to transform their smile with Invisalign aligners and showcase their results. In the EMEA region, we partnered with influencers to reach consumers across social media platforms, including TikTok and Meta, and launched our global consumer campaigns for teens and parents. In APAC, we continue to invest in consumer advertising across the region and expanded our reach in Japan and India via meta and YouTube and partner with key social media influencers. Finally, adoption of my Invisalign consumer patient app continued to increase with over 4 million downloads to date and over 384,000 monthly active users and 8% year-over-year increase. Usage of our other digital tools also continued to increase. ClinCheck live update was used by almost 50,000 doctors on more than 692,000 cases, reducing time spent and modifying treatment plans by an average of 16.3%. Invisalign practice app is increasing in its adoption with 85,000 doctors who actively are using the app and 5.9 million photographs were uploaded in Q2 via the Invisalign practice app. Year-over-year growth in Q2 system and services revenue were up 16.1%, reflect higher scanner ASPs and non-system revenues driven by a terra luminal wand upgrades increased service revenues in a larger basis, scanner sold. On a sequential basis, Q2 systems and services revenues were up 9.2%, reflecting higher scanner volumes, higher scanner ASPs and higher non-system revenues driven by a iTero Lumina terra wand luminal wand upgrades. The iTero Lumina is new multi direct capture technology replaces the confocal imaging technology in earlier models and has a 3x wider field of capture and a 50% smaller and 45% lighter wand, delivering faster scanning speed, higher accuracy, superior visualization, and a more comfortable scanning experience. Lumina is currently available with orthodontic workflows as a new standalone scanner or as a wand upgrade from iTera element 5D Plus scanner. During the second quarter, we had a record number of competitive trade-ins demonstrating the continued success of the iTera Luminous Scanner in the marketplace. We're also seeing a halo effect with Invisalign scans. We're pleased to see more doctors coming into the digital ecosystem with an increase in first time Invisalign case submitters as well as return of lapse submitters. Overall, Q2 we're very pleased with the continued uptake of iTero Lumina Scanner with ortho workflow and response from customers. We're looking forward to a limited market release for the restorative software on Lumina in Q4, followed by full commercialization in Q1 '25. Today we introduced the iTero design suite, offering doctors an intuitive way to facilitate designs for 3D printing of models, bite splints, and restore restorations and practice. This software innovation is designed to help doctors increase their practice efficiencies and elevate patient experiences by shortening the time to treatment through an intuitive way to design for in-practice 3D printing. The Align digital platform provides an innovative portfolio of customer-focused technologies that enable seamless end-to-end workflows for dental professionals. iTero Design Suite is now available through an early access program. Doctors using an iTero scanner can submit their interest via their scanner, or my iTero portal. Software is expected to be available later this year in selected markets. With that, I'll turn it over to John.

Joe Hogan:

Thanks, John. In summary, I'm pleased with our overall performance for Q2 and the growth we delivered across the business for clear aligner volumes as well as strong revenues from scanners and services. Notwithstanding the impact of unfavorable foreign exchange on our revenues, we believe the end markets are stable overall and we're committed to supporting our doctor customers in the future of digital innovation. Our purpose is to transform smiles and change lives with the goal of being the standard of care and orthodontics with Invisalign Clear Align of treatment. Clinically, we believe that we can treat the vast majority of orthodontic cases today. From the simplest to the most complex clinical efficacy is no longer a question. We now focus on the treatment experience for patients and on efficiency and growth for our doctor customers. The orthodontic case start market is vastly underpenetrated and there are millions of consumers who would benefit from digital orthodontics. We continue to evolve to better meet the needs of doctors, potential patients who increasingly seek convenient, elevated digital experiences. Our digital platform of integrated technologies, software and services has helped improve orthodontic treatment from millions by delivering seamless workflows and dental practices on mobile devices and through remote monitoring, and are designed to help doctors and patients realize the benefits of a truly seamless end-to-end digital workflows and patient experiences. But the journey from analog to digital has proven difficult for practices. The orthodontic practice of the future requires full digital transformation to truly realize the promise of digital. And there is no other med tech company in the world that can help practices meet this challenge. With that, I thank you for your time today. We look forward to sharing our continued progress as we move the industry forward through digital orthodontics. Now I'll turn the call over to the operator for your questions. Operator?

Michael Cherny:

Good afternoon. Thank you for taking all the question. Maybe if I can just dive in a little bit on the guidance change and some of the moving pieces. In particular, I want to get a sense from you of what you view as within your control versus outside. Obviously, FX is something that management can't control, but you think about the guidance in particular on the ASP side, how do you think about the flow through of what isn't within your control on mix? Is there something you do on promotion? Is there anything else that can come from a pricing competition that you should be worried about? Just want to dive a little bit more into that number given that it seems to be the biggest fulcrum point relative to the guidance change.

Michael Cherny:

Okay. Thank you.

Operator:

Thank you. And our next question comes from the line of Elizabeth Anderson from Evercore ISI.

John Morici:

Yes. Hi, Elizabeth. Yes, you're right. The Lumina restorative that we expected to launch in the fourth quarter, now the full launch in -- into next year. That revenue was expected for this year. So that's part of the reasoning for taking down our overall guidance, in addition to the FX as I said on the previous question. And then your question on teen, look, we're pleased with our teen growth. We saw good over 8% growth on a quarter-over-quarter basis, 8% growth on a year-over-year basis. We saw good adoption in many places around the world. And it's a further reflection of the various products that we have, the adoption that doctors have. A lot of new doctors coming into the ecosystem to get trained and then actually become customers of ours. So we're pleased with the progress that we're seeing within teen.

John Morici:

Yes, We're not getting it directly, but its less than a 1%, slightly less than a percentage of the total.

Operator:

Thank you. And our next question comes from the line of Jon Block from Stifel. Your question please.

John Morici:

Yes, Jon, when you look at mix that we have, we see doctors utilizing DSP more and more as a record amount of DSP that we had in a quarter that's at a lower ASP. We saw a lot of GP growth. We talked about adult cases being up, and the best volumes that we've seen in several quarters, and many times that's lower stage products, that we end up seeing come through. And so when we see the ASP, it's just a reflection of the different products that are being sold and those doctors are taking those up, at that. But you also know, and we've talked about where margins in many cases are better at those lower stage products, and we end up seeing this as a benefit to be able to see show up in gross margins and also off margins.

John Morici:

Yes, Clear Aligner revenue down a little bit for the total year because of the ASPs that we spoke about not necessarily due to any volume changes. Like you said, we are pleased with the Q2 volume that we have. But that’s how we’ve look at the change. Mostly the FX for the total year as we've described, and then some mix, but then the rest of it due to iTero changes from this year to next year.

John Morici:

Yes, no, it's a good question. And so as we looked at and as we talk about some of the -- I know ASP gets a focus, but really when you look at the margin that we get on all of these products is as they go to some of the lower stage products, we end up with a better margin. Our cost to serve is lower, which shows up in gross margin and flows its way to op margin. And I think the rest of it as you saw with this quarter from an OpEx standpoint and how we think about the levers that we could pull or not pull, we're very mindful of that in this environment and want to be able to deliver as much volume and as much top line as we can, but be very mindful of the operating profit that we need to deliver.

Joe Hogan:

Hey Jeff.

Joe Hogan:

Hey Jeff, Joe. First of all, we're pleased with that. It's good to see a utilization go up. It's also great to see the doctors go up too. And obviously there's a strong concerted effort. We talk about that underserved marketplace out there and we know there's still a lot of doctors to train and there's still doctors do a lot more cases. So it's a big focus for the business. When you ask that question, are we loser in fewer or gaining few? There's always a mix and a change in those kinds of things, Jeff. But overall you can see here that we're gaining, it's not saying that we don't lose some docs sometimes, but you know, we often bring them back too. The whole story with what we've been through as competitors have entered the marketplaces, sometimes we'll lose some doctors, they often come back and one of the things about our business too, sometimes it takes 18 months for doctors to figure out if those competitive cases are actually going to work. And obviously I think we’re -- we're making good progress in the sense of convincing doctors to move ahead with us. And this growth in doctors and utilization occurred across the globe, which is great. It wasn't like it just came out of one region.

John Morici:

Hey Jeff, it's a good question. We have a lot of faith in Emory. He's been here for so long and he's the only guy that's ever scaled, aligners to the point, that he has. And so it's really fun to have him in this role because he gives us great feedback in a sense of where we are. Jeff, the best I can say what we've talked about with the analyst is we're looking at 2 to 3 years on this scale. And don't think of it as a linear line. This is one where you have to do a lot of equipment work at first to get the efficiencies, to have this equipment work 24/7. And then secondly, this is a brand new resin [ph], it's never been sourced before. And so finding the source of the resin, making sure you have the reactor capacity, all those things take time. So I look at over the next year, we do a lot of that groundwork and then you'll start to see products and different things that will roll from that. So, but it's best to fix in your mind that it's a 2 to 3 year kind of a rollup.

John Morici:

Okay.

Brandon Vazquez:

Hi everyone. Thanks for taking the question. I'll ask two upfront because it's kind of guidance related. One a little near-term, which is basically, I think if you do the sequentials and the implied numbers on the guidance that you've given us, there's maybe like a high single digits revenue increase going into Q4. I think, correct me if I'm wrong, but that's kind of like pre-COVID levels of seasonality, back when the business was a little more normal. So the question near-term being, given the uncertainty in the market, what kind of gives you the confidence that you guys can kind of return normal seasonality within this year? And then the follow-up to that on kind of a long-term guidance question is like, okay, we look with [indiscernible] three years out, what's kind of the growth expectations of this business sort of growth algorithm? Any color you can give us around that, assuming that, we're, it seems like we're stuck in somewhat of a an uncertain end market stable, but not exactly where you want it. So talk about the opportunity to accelerate if even possible, in an end market like this over the couple plus three plus years. Thank you.

Operator:

Thank you. [Operator Instructions] Our next question comes from the line of Jason Bednar from Piper Sandler. Your question please?

Joe Hogan:

Hey, Jason,

John Morici:

Yes, Jason, I can take that on, on the Q3. Some of those specifics, certainly we look at last year, we look at the 2022, you know, you got into those COVID years, they're tough to call and then you have to jump before COVID. So now you're talking almost 5 years ago. So, you look at what you see at the time knowing that most recently you have, we know we have Europe, has a summer kind of shutdown, comes back into September. We want to be able to see in September that they do come back. USS is in team season, China to get into the teen season as well. And we want to see how that plays out. So we call based on based on what we expect, both from a volume standpoint and we are really trying to give the foreign exchange that we see, that started the quarter, in July, where that FX is and not make an assumption as to whether things are going to get better or worse. We want to put that out there and really try to give you more of the underlying performance for the business. Joe, you want to talk about purchase?

Jason Bednar:

Okay, great. Then just for my follow-up, I'm going to pack a few in here. Maybe bigger picture, if we step back and look at some of the recent developments. I know there's a lot of initiatives, different initiatives, marketing programs, menu expansion, customer incentives, so on and so forth. Those all help contribute to expanding that utilization line, improving doctor productivity. You've got the Costco relationship that's been discussed. We uncovered what looks to be one of the larger changes to your advantage program in at least a few years. So I'm curious how you'd have us think about these in the broader context of your commercial efforts. Would you consider things like the Costco and Advantage changes, either are both more impactful than what you typically do? Have you seen any change maybe in doc behavior, just in response to these advantage changes? And then what's the right way to think about each of these influencing that ASP line that's now coming to focus more significantly with today's results? Thank you.

Jason Bednar:

Thank you.

Michael Ryskin:

Hey, thanks for taking the question, guys. Joe or John, I want to follow-up on a point that you touched on a couple times already in terms of the ASPs. You talked about part of it is the mix shift and a lot of it is how your customers want to buy, whether that's different products within portfolio, whether or DSP, things like that. But what I want to get at is, are you concerned by that trend itself at all? Is that, that customers want the lower products? I guess that gives you the option to still meet them in the air and that still drives the volume, but is that something that you expected. This shift down? As you say, the market's still very unpenetrated. It's a big untapped market, so you'd think that you wouldn't be seeing the demand elasticity type of price that you are. So is this temporary because of the current macro environment and consumer sensitivity, or does it say something deeper that the rest of the market that's out there really doesn't exist at that, 1,300 plus ASP maybe it's lower and lower and lower.

Michael Ryskin:

Okay. And then much quicker follow-up hopefully, sorry if I missed it, but did you call up why the Lumina restorative was pushed out to 1Q '25? Was this commercial decision or something on the development side?

Michael Ryskin:

Okay. Thanks. Makes sense.

Erin Wright:

Thanks for taking my question. So did you see any recent changes, for instance, in the adult case volume dynamics throughout the quarter? And just what are you seeing so far in the third quarter in terms of adult cases? I guess, has anything changed in terms of your view on the macro environment and for the remainder of the year? And I hate to belabor this, but also for the Americas too, but on the macro question, are you generally expecting stability in your guidance or are you anticipating a range of outcomes from a consumer and macro environment standpoint for the remainder of the year?

John Morici:

And that adult piece we saw growth. We saw highest quarter in many quarters. So we're pleased with it. I think it's a reflection of our GP business, growing GPs, growing with DSOs and so on being able to, to get some of that volume through. Like Joe said, it's more of a stability that we're seeing, but we're pleased with that adult growth. And some of that contributes to some of that lower ASP product. It's great if that's how doctors want to buy to be able to treat those adults, we're happy to sell it to them. And as Joe said, it -- it's a better margin for us.

Joe Hogan:

It's Joe again, Erin. China performed the way we wanted China to perform, just as we predicted. Overall, I mean, the market is challenging. I think that Tier 3 and 4 cities are actually challenged more than the private and one and twos. But overall there's no surprise we have a good team there. Juno [ph] is a great leader for us there and we like the results and we're looking forward to a good team quarter there, which is third quarter is always the biggest quarter for China.

Joe Hogan:

You're welcome.

Shirley Stacy:

Thank you, operator, and thank you everyone for joining us on the call today. We look forward to speaking to you at upcoming financial conferences and industry events. If you have any questions, please follow-up with our investor relations team. Have a great day.

Operator:

Greetings. Welcome to the Align First Quarter 2024 Earnings Call. [Operator Instructions] Please note, this conference is being recorded.

Shirley Stacy:

Good afternoon, and thank you for joining us.

Joseph Hogan:

Thanks, Shirley. Good afternoon, and thanks for joining us on our call today.

Joseph Hogan:

Thanks, John.

Operator:

[Operator Instructions] Our first question comes from Elizabeth Anderson with Evercore ISI.

Joseph Hogan:

Elizabeth, I'll start off and have John jump in on anything. First of all, we describe the business right now as stable. The same things that we talked about as we came out of the fourth quarter, and we see that stability broadly around the globe. And you saw in our script that we just read to, that it's good from an adult standpoint and also a teen standpoint, too, which, again, led to that kind of stability that we talk about.

Joseph Hogan:

And Elizabeth, last thing on your SmileDirectClub comment, them not being advertising like they were before or whatever, we can't attribute any part of the demand equation up or down as part of that. And obviously, that was more pronounced in the United States than it was anywhere else in the world, but I can't attribute any change in the marketplace because of them not advertising at this point in time.

Brandon Vazquez:

I wanted to focus for a second on the -- on the teen side, you have the Palatal Expander out there now getting great reviews, and it seems like it closes, if I'm understanding the numbers correctly, maybe 20% of that market that you haven't been able to hit before. This is such a big opportunity. I'm curious if you can just reflect on like how does commercialization within teens look in the next couple of years now that you have kind of a broader and more fuller portfolio here compared to the prior couple of years? And what does that mean for growth rates within that teen section and adoption within teen that's underpenetrated relative to teens as we look forward the next couple of years?

Jonathan Block:

Hoping to ask 2, maybe just the first one, throughout the quarter, there was sort of like an obsession or a big focus from investors on month-to-month trends. There was talk about February strength, March weakness. I don't think if anyone really knew if it was the consumer or the calendar or both. So maybe you guys can talk a little bit about how it played out for you guys, elaborate on February and March? And as much as you can, just touch on April here for the first 2 to 3 weeks. And then I'll ask my follow-up.

Jonathan Block:

Okay. And then I'll just shift gears. John, I might stick with you. I believe the wording is slightly above the 2023 OM, which I think is 21.4% unchanged. Despite the higher revenues, the midpoint going from roughly 5% to 7%. So can you talk about where that extra spend is going? Do we see the returns on that this year? Or will that aid and give you some more tailwinds into 2025?

John Morici:

I think that latter point is how I would look at it, Jon. We're making investments. We make investments throughout the year. We get the shorter longer-term investments that we make different returns on whether they're short or long term. But what we see is a stable environment, continued investments in go-to-market activities, we have new products coming. So that helps us accelerate with things that we'll have on the iTero side, as well as IPE and others that Joe talked about, where we really get the approval later in the year. So it's about a stable environment, making investments into that environment and then executing on our growth strategies, and that should give us the benefits that you described in the second half.

Jeffrey Johnson:

John, maybe following up on Jon's question there and just a little finer point on the guidance itself. You've taken that guidance from mid-single digits to 6 to 8 scanner and CAD/CAM services came in obviously strongly in the double digits, upper teens. Should we think about kind of that double digits, maybe not in the upper teens, but double digits is kind of where the scanner and services continues this year? And your Clear Aligner revenue guidance kind of still in the mid-single digits. I think last quarter, we were talking about both those segments being mid-single-digit growers. It seems like to me now, maybe the raise here is being driven more by the scanner and CAD/CAM services. And as Joe calls the market stable, then maybe the Clear Aligner revenue still kind of expected to be in that mid-ish single digits. Is that a fair kind of way to look at guidance?

Jeffrey Johnson:

Yes, that's helpful. And then one other follow-up. I think it's been asked in the past maybe at an Analyst Day or something. I don't remember if you've given a clear answer. But it's something I keep getting asked here more recently, and that's a percentage of your patient base of maybe orthodontic cases that get financed through some sort of third-party patient financing company. We have seen in areas like full arch implants, some of the aesthetic procedures outside of dental, where lending standards have gone up, FICO scores have gone from the 500 to 700, something like that to qualify for patient financing in this cost of capital and tougher capital environment. So what percentage -- do you know a percentage or round about of what cases get financed? And if those lending standards have changed at all and put an incremental pressure on patients here more recently?

John Morici:

I look at that as more stable. I think there was a lot of things. If you go back to last year, people are really getting a bit of sticker shock in terms of the higher interest rates, when they came to try to go into treatment. I think people are past that.

Operator:

Our next question comes from Michael Cherny with Leerink Partners.

Shirley Stacy:

Yes, we can hear you fine.

John Morici:

Yes. I think we have a core business that we're running. And obviously, there's a certain amount of investment that you have to be able to grow around sales, sales and marketing and the go-to-market activities that we have.

Operator:

Our next question comes from Jason Bednar with Piper Sandler.

Joseph Hogan:

Jason, on the first part is, we talk about the stable environment that we've seen that stability of it. We read and I read, what's going on there with the consumer investment, some concerns, particularly in the luxury goods or what's going on out there.

Jason Bednar:

All right. Very helpful, Joe and John. And maybe one follow-up here to maybe a multi-partner on teen. So bear with me. But this might be a nuanced look. It seems like a lot of emphasis here just recently in product development and marketing that's really trying to tap into that much younger market, that Phase I opportunity. IPE fits in there, your new marketing branding plans and emphasis there. There seems to be some benefits for younger patients with Lumina. So it's really -- it seems intentional, but wondering if you could bifurcate for us, how your Invisalign business is performing in this younger patient population relative to the teen as a whole? Where does your penetration sit in those younger patients versus the broader teen channel? And maybe what kind of outsized growth you're expecting from this part of the channel as we look out over the near to intermediate term?

Jason Bednar:

Any sense penetration-wise or maybe where you're at relative to the broader teen market?

Shirley Stacy:

The only thing that -- I mean if you've tracked us for a while, you know that our average age of teen patients gets younger and younger, I think we're 14 now versus 15 plus before. So I mean that's a reflection of just being able to go after those younger patients with First.

Nathan Rich:

Great. I wanted to go back to the guidance. I know it's kind of been touched on a few different times. But I wanted to ask on the Clear Aligner revenue outlook. It looks like you're raising the outlook for the full year by about 1%. I guess could you maybe just touch on what changed specifically with respect to that outlook? It sounds like maybe it's expectations around IPE and DSP versus market improvement. But I'd be curious, any color you could share there? And maybe anything on teen versus adult within the updated guidance would be great.

Nathan Rich:

Okay. That's helpful. And then, John, maybe just sticking with you. The 2Q operating margin, I know up slightly sequentially, but down year-over-year. And I think historically, it's been a little bit variable, but you've seen more of a step-up in the second quarter than I think what the guidance implies. Anything to call out with respect to FX? Or I think you mentioned some manufacturing cost spend, but just anything there that we should keep in mind as it regards the margin cadence?

Operator:

Our next question comes from Erin Wright with Morgan Stanley.

Operator:

[Operator Instructions] Our next question comes from Michael Ryskin with Bank of America.

Michael Ryskin:

Okay. And if I could squeeze in a follow-up if there's time. Again, also impressed by the DSP touch-up progress. You called it out in the deck. You got some additional launches later this year. You got the 14-stage touch-up aligner offering you're talking about. Any way you can start framing in terms of would you incorporate that into guidance at some point in terms of where you think that can go in terms of volumes and revenues or any update longer term, how you see DSP and touch up evolving over time?

Shirley Stacy:

Operator, we can take one more question.

Kevin Caliendo:

I have 2 questions. So the first one is on Heartland. Can you talk a little bit about the benefits of the Heartland investment operationally? And also Heartland is -- my understanding is a pretty profitable business and now with 2 separate investments there, how does their profits or how does the accounting work for that from your perspective at this point? .

John Morici:

I can start with the guidance part of that, Kevin. Look, we use a lot of factors to look at where our guidance is. So we're using data from Q1 and the most recent information. But it goes back to the stability that we've seen. You can see it in a lot of the surveys and other things that a lot of people do, but what we see is that stability, coupled with what we're trying to do to go to market to drive the initiatives we have and the new products that we have. So that's a key part of what we factor in into our guidance. No change from what we normally do. This is how we've come together in terms of a guidance standpoint.

Operator:

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.

Operator:

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

Shirley Stacy:

Good afternoon, and thank you for joining us. I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO; and John Morici, CFO. We issued fourth quarter and full year 2023 financial results today via Business Wire, which is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately 1 month. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events and product outlook. These forward-looking statements are only predictions and involve risks and uncertainties that are described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission available on our website and at sec.gov. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statements. We have posted historical financial statements, including the corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our fourth quarter and full year 2023 conference call slides on our website under quarterly results. Please refer to these files for more detailed information. With that, I'll turn the call over to Align Technology President and CEO, Joe Hogan. Joe?

John Morici:

Thanks, Joe. Now for our Q4 financial results. Total revenues for the fourth quarter were $956.7 million, down 0.4% from the prior quarter and up 6.1% from the corresponding quarter a year ago. On a constant currency basis, Q4 '23 revenues were impacted by unfavorable foreign exchange of approximately $12.8 million or approximately 1.3% sequentially and were favorably impacted by approximately $13.8 million year-over-year or approximately 1.5%. For Clear Aligners, Q4 revenues of $781.9 million were down 1.6% sequentially, primarily from lower volumes. On a year-over-year basis, Q4 Clear Aligner revenues were up 6.9% and primarily due to higher ASPs and non-case revenues slightly offset by lower volumes. For Q4, Invisalign ASPs for comprehensive treatment were up sequentially and up year-over-year. On a sequential basis, ASPs reflect higher additional aligners, partially offset by the unfavorable impact from foreign exchange, higher sales credits and higher discounts. On a year-over-year basis, the increase in comprehensive ASPs reflect higher additional aligners, price increases and favorable impact from foreign exchange partially offset by higher discounts in product mix to lower ASP products. For Q4, ASPs for noncomprehensive treatment were down sequentially and up year-over-year. On a sequential basis, the decline in ASPs reflect the unfavorable impact from foreign exchange, a product mix shift to lower ASP products and higher net revenue deferrals, partially offset by price increases and lower discounts. On a year-over-year basis, the increase in ASPs reflect price increases, the impact from favorable foreign exchange and higher additional aligners, partially offset by a product mix shift to lower ASP products and higher discounts. Last quarter, we announced about a 5% global price increase for some Invisalign products across most markets effective January 1, 2024. Invisalign Comprehensive Three and Three product is available in North America and certain markets in EMEA and APAC, most recently launching in China, Korea, Hong Kong and Taiwan. We are pleased with the continued adoption of the Invisalign Comprehensive Three and Three product and anticipate it will continue to increase, providing doctors the flexibility they want and allowing us to recognize more revenue upfront with deferred revenue being recognized over a shorter period compared to our traditional Invisalign comprehensive product. Q4 '23 Clear Aligner revenues were impacted by unfavorable foreign exchange of approximately $10.7 million or approximately 1.4% sequentially. On a year-over-year basis, Clear Aligner revenues were favorably impacted by foreign exchange of approximately $12 million or approximately 1.6%. Clear Aligner deferred revenues on the balance sheet increased $14.9 million or 1.2% sequentially and $74.6 million or up 6.1% year-over-year and will be recognized as the additional aligners are shipped. Q4 '23 Systems and Services revenues of $174.8 million were up 5.8% sequentially primarily due to higher ASPs and an increase in CAD/CAM and services revenue, partially offset by lower volumes and were up 2.9% year-over-year, primarily due to higher services revenues from our larger base of scanners sold and increased nonsystem revenues related to our CPO and leasing rental programs mostly offset by lower ASPs and scanner volume. CAD/CAM and services revenues for Q4 represent approximately 50% of our Systems and Services business. Q4 '23 Systems and Services revenues were unfavorably impacted by foreign exchange of approximately $2.1 million or approximately 1.2% sequential. On a year-over-year basis, Systems and Services revenue were favorably impacted by foreign exchange of approximately $1.9 million or approximately 1.1%. Systems and Services deferred revenues on the balance sheet were down $4.3 million or 1.6% sequentially and down $13.1 million or 4.8% year-over-year, primarily due to the recognition of services revenue which is recognized ratably over the service period. As our scanner portfolio expands and we introduce new products, we increased the opportunities for customers to upgrade, make trade-ins and purchase certified preowned scanners in certain markets. Developing new capital equipment opportunities to meet the digital transformation 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. Fourth quarter overall gross margin was 70%, up 0.9 points sequentially and up 1.5 points year-over-year. Q4 non-GAAP gross margin was 70.5% up 0.9 points sequentially and up 1.2 points year-over-year. Overall, gross margin was unfavorably impacted by foreign exchange by approximately 0.4 points sequentially and favorably impacted by approximately 0.4 points on a year-over-year basis. Clear Aligner gross margin for the fourth quarter was 71.1% up 0.4 points sequentially primarily due to lower manufacturing spend, partially offset by higher freight costs. Clear Aligner gross margin for the fourth quarter was up 0.3 points year-over-year, primarily due to higher ASPs and favorable foreign exchange, partially offset by higher manufacturing spend and freight costs. Systems and Services gross margin for the fourth quarter was 64.8%, up 3.8 points sequentially due to higher ASPs, partially offset by higher service and freight costs. Systems and Services gross margin for the fourth quarter was up 6 points year-over-year due to improved manufacturing efficiencies and favorable foreign exchange, partially offset by lower ASPs. Before I go into the details, I want to note that during Q4 '23, we incurred a total of $14 million of restructuring and other charges, primarily related to post-employment benefits. Q4 operating expenses were $498 million, roughly flat sequentially and down 1.4 points year-over-year. On a sequential basis, operating expenses were up slightly due -- primarily due to restructuring and other charges, offset by lower employee compensation. Year-over-year operating expenses decreased by $7.1 million primarily due to controlled spend on advertising and marketing as part of our efforts to proactively manage costs, partially offset by employee-related costs and slightly higher restructuring charges. On a non-GAAP basis, excluding stock-based compensation, restructuring and other charges and amortization of acquired intangibles related to certain acquisitions, operating expenses were $446.7 million, down 2.5% sequentially and down 2.8% year-over-year. Our fourth quarter operating income of $171.5 million resulted in an operating margin of 17.9%, up 0.6 points sequentially and up 5.4 points year-over-year. Operating margin was unfavorably impacted by approximately 0.6 points sequentially primarily due to foreign exchange. The year-over-year increase in operating margin is primarily attributed to operating leverage and proactively managing our costs as well as favorable impact from foreign exchange by approximately 0.6 points. On a non-GAAP basis, which excludes stock-based compensation, restructuring and other charges, the amortization of intangibles related to certain acquisition, operating margin for the fourth quarter was 23.8%, up 2 points sequentially and up 5.5 points year-over-year. Interest and other income and expense net for the fourth quarter was an income of $1.3 million compared to a loss of $4.2 million in the third quarter and income of $2.7 million in Q4 2022, primarily driven by favorable foreign exchange. The GAAP effective tax rate for the fourth quarter was 28.3%, higher than the third quarter effective tax rate of 25.1% and lower than the fourth quarter effective tax rate of 63.8% in the prior year. The fourth quarter GAAP effective tax rate was higher than the third quarter effective tax rate primarily due to onetime benefit related to tax guidance issued in Q3, partially offset by lower U.S. taxes on foreign earnings in Q4. As a reminder, in Q4 2022, we changed our methodology for the computation of our non-GAAP effective tax rate to a long-term projected tax rate and have given effect to the new methodology from January 1, 2022. Our non-GAAP effective tax rate for the fourth quarter was 20%, reflecting the change in our methodology. Fourth quarter net income per share was $1.64, up sequentially $0.06 and up $1.10 compared to the prior year. Our EPS was unfavorably impacted by $0.07 on a sequential basis and favorably impacted by $0.08 on a year-over-year basis due to foreign exchange. On a non-GAAP basis, net income per diluted share was $2.42 for the fourth quarter up $0.28 sequentially and up $0.69 year-over-year. Moving on to the balance sheet. As of December 31, 2023, cash, cash equivalents and short and long term marketable securities were $980.8 million, down sequentially $321.2 million and down $60.8 million year-over-year. Of our $980.8 million balance, $196.1 million was held in the U.S. and $784.7 million was held by our international entities. In October 2023, we purchased approximately 1 million shares of our common stock at an average price of $190.56 per share through a $250 million Accelerated Share Repurchase. And in November and December 2023, we purchased approximately 466,000 shares of our common stock at an average price of $214.81 per share through a $100 million open market purchase, both under Align's current $1 billion stock repurchase program. We have $650 million remaining available for repurchase of our common stock under this stock repurchase program. Q4 accounts receivable balance was $903.4 million, slightly down sequentially. Our overall days sales outstanding was 85 days, flat sequentially and year-over-year. Cash flow from operations for the fourth quarter was $46.9 million. Capital expenditures for the fourth quarter were $33.4 million, primarily related to our continued investments to increase aligner manufacturing capacity in facilities. Free cash flow, defined as cash flow from operations less capital expenditures, amounted to $13.5 million. Now turning to our outlook. Assuming no circumstances occur beyond our control, we provide the following framework for Q1 and fiscal 2024. For Q1 2024, we expect our worldwide revenues to be in the range of $960 million to $980 million, up slightly from Q4 of 2023. We expect Clear Aligner volume and ASPs to be up slightly sequentially. We expect Systems and Services revenue to be down slightly sequentially, although less than the historical seasonal decline, given the launch of the iTero Lumina for ortho workflows in Q1 2024. We expect our Q1 2024 GAAP operating margin and non-GAAP operating margin to be slightly above Q1 2023 GAAP operating margin and non-GAAP operating margin, respectively. For full year, we expect fiscal 2024 total revenues to be up mid-single digits over 2023. We expect fiscal 2024 Clear Aligner and Systems and Services revenues to grow year-over-year in the same approximate range as our 2024 total revenues. We expect fiscal 2024 Clear Aligner ASPs to be up slightly year-over-year primarily due to price increases and favorable foreign exchange, partially offset by a higher mix of noncomprehensive products, which have lower ASPs. We expect fiscal 2024 GAAP operating margin and non-GAAP operating margin to be slightly above the 2023 GAAP operating margin and non-GAAP operating margin, respectively. We expect our investments in capital expenditures for the fiscal 2024 to be approximately $100 million. Capital expenditures are expected to primarily relate to building construction and improvements as well as manufacturing capacity in support of our continued expansion. In summary, I am pleased with our fourth quarter and fiscal 2023 results, and I am especially proud of our continued focused execution of our product road map and innovation pipeline. We are committed to delivering on our strategic growth drivers of international expansion, patient demand, orthodontist utilization and GP dentist treatment to extend our leadership in digital orthodontics and dentistry. I believe that the next wave of innovation that we are introducing into the market will further differentiate Align and allow us to continue to increase our share of the large untapped market opportunity of 22 million annual orthodontic case starts as well as an additional 600 million consumers who could benefit from a healthy, beautiful smile using Invisalign Clear Aligners. With that, I'll turn it back to Joe for final comments. Joe?

Operator:

[Operator Instructions]. Our first question comes from Elizabeth Anderson with Evercore ISI.

John Morici:

Yes. Elizabeth, this is John. You haven't framed the right way. We're looking at the segments up mid-single digits and then ASPs because of the price increase. We have some offset due to some of the lower-stage products that we have, including the DSP touch-ups and so on, that you would expect then a little bit lower of ASP impact year-over-year.

Joseph Hogan:

Elizabeth, it's Joe. We felt good about China last year. But remember, we had year-over-year comparisons that were really favorable because of the COVID shuts down over there last year. But overall, as we exited the year, we felt good about our performance there, and we feel good about as we move into 2024 about our competitive position there in -- a China market that I think is a little more predictable because it's not the overhead that we've seen with COVID over the last, really, several years.

John Morici:

Yes. So we wanted to give to prior year because in that prior year, when you start the year, you have certain expenses that you incur right at the beginning, payroll, taxes and other things that you incur initially some of the investments that you make that you then get leverage on as you go through the year. So it's similar to how we position things from last year in 2023.

Jeffrey Johnson:

Can you hear me out there?

Jeffrey Johnson:

John, maybe I want to -- I'll follow up on Elizabeth's margin question there beyond just the 1Q. Let's say, you hit your guidance this year on operating margin is up nominally from 2023 level. It'd be 3 years in a row kind of in that low to mid-21% range. I think pre-COVID you were up in the 25% range or so. What's it going to take to get those margins moving back towards those pre-COVID. You've taken price increases 2 years in a row. It feels like your R&D should be coming down a little bit. Obviously, with Cubicure and that, I know you're continuing to invest aggressively, but IPE is out, Lumina now out, things like that. So just help us understand when could we start to see a path back towards getting those margins maybe up a few points from where they've settled in the last few years?

Jeffrey Johnson:

All right. Fair enough. And then, Joe, I think we've talked for many years now how iTero is carved out such a commanding, strong competitive position. You've sold a ton of iTeros over the last 5, 6 years or so. They're all probably getting, I don't know, close to their end of their useful life or so. Lumina for the first time feels like that kind of product with a better form factor, especially things like that, that could really cause some of these docs to say, I got to get rid of this big iTero and go back down to this much smaller one, and things like that, just things that would actually matter to the docs, and I'm sure the technology does this, too, I don't want to just put it on the size. But just thinking there, is this the kind of product that can finally kick off that multiyear upgrade strategy or path in iTero that we've kind of been waiting to see?

Jeffrey Johnson:

And if you switch out that wand from the 5 to the Lumina, there is a fee there, right? It's not like, hey, you bought this knowing that you could always upgrade at no charge to Lumina?

Jeffrey Johnson:

I like to hear that. God bless capitalism.

Jonathan Block:

So Joe, maybe this one's for you. Video 1Q '24 IPE some markets today, but more in the common IPE should have longer term with team, docs might take a little bit of a wait-and-see approach. You talked about the new scanner. In your opinion, like is innovation are we seeing that in the '24 guide? Or is that more of like a ramp in the '25? And maybe even to take that a step further, John, for you, is there a way to sort of quantify out of that mid-single-digit revenue growth, what can you attribute to these new products coming on board in '24? I'm just trying to think about the impact of '24, is this more the ramp or the slope in the '25 for the innovation hitting?

Jonathan Block:

And any way to quantify what's in there from the current guide or no? Is that just too difficult to tease out?

Jonathan Block:

Okay. Okay. So second one is maybe a multipart. But just first on the CapEx, $100 million. I mean I was really surprised on how low that number was for this year. It's $400 million in '21, $300 million in '22 million, and I was maybe even more surprised when I think about the direct fabrication initiatives. So I know the slides say hoping to print Invisalign Clear Aligner "next couple of years". Do we still think retainers 2H '24, 1H '25? When do we feel like you proved it out, so to say? And do we start to see gross margin benefits from this as early as next year, turning accretive in 2025. And then admittedly just a jump to another question. For the guidance, can you just help us what's embedded in there? And I bring that up because we've seen this big move in U.S. consumer confidence. Europe still seems very choppy. So when we tie back to your guidance for the year, what are you extrapolating out, if you would, for the current macro?

Joseph Hogan:

Jon, your question about the ramp up, the margin piece or part of that, what's that mean in 2025 or whatever. Look, we feel confident, and as you know from our discussions and our analyst presentation last year is 3D printing is foundationally, it can be less expensive as we scale. And so I mean, we'll start to see that come through as we scale that. But we need time to scale this. No one's ever had this polymer before that has a scale. No one's ever used the Cubicure system to the degree that we need to use it. Now we did this with 3D systems years ago because we basically scaled those systems through our team and team knows how to do that. I just can't tell you specifically within those in the next 1 to 3 years, with this being the first year, exactly when that really hits that hyperbolic side.

Operator:

Our next question comes from Brandon Vazquez with William Blair.

John Morici:

I would characterize it, Brandon, this is John, that both teen and adult are positive on a year-over-year basis, expect maybe adults to grow faster as we've seen compared to -- teens grow faster than adults as we've seen in the past, but I would expect both of them to be up and show our numbers that way.

Joseph Hogan:

Brandon, Joe again. On the Lumina side, remember, our restorative scanner for GPs comes out in the third quarter. But as like John indicated, we indicated, we feel we can sell that into the market now with the capabilities it has, but that will ramp in -- that will probably be more hinged to the regulatory approvals we have to get around the world. Right now, as I mentioned, we only have the United States and Canada and ANZ. Secondly, on IPE, it's the same thing is we're regulatory constrained. We still have to go through Europe. And as I mentioned, IPE will come out in the second quarter in Australia and also. And as we gave that, obviously, we'll be scaling IPE too and understanding the dynamics around that. So it's more of a ramp, as I mentioned a few calls ago than anything.

Jason Bednar:

I'm going to pile on here on the guidance, just to focus there first. You mentioned noncomprehensive mix as being an offsetting factor to ASPs. I know you've got that DSP factor. I had thought maybe originally you were signaling adults growing better than teens, but doesn't seem like that's the case just given your comments there to Brandon. But I guess, regardless on adults, are you seeing this market getting its footing back, it sounds like it, but if you are, what's giving you the confidence? Or what are you seeing that kind of the day-to-day or month-to-month that's showing adults are coming back into the office for treatment. And then sorry to load a few in here, but should we expect this faster noncomprehensive mix also to have gross margin benefits for the year as well? I think it typically does, but I don't think we've gotten kind of a gross margin cadence outlook for '24.

John Morici:

And on the noncomprehensive and gross margin questions and related to that. Look, as we have the mix that shifts through and you might have an ASP lower on some of the non-comp DSP and others that fall into that. Those are our highest gross margin products from a rate standpoint. So they're helpful for us as a business. It's really what that customer wants for him or her to run their practice and that's how we balance things out. But overall, we expect that we would see benefits in gross margin just like we're talking about op margin year-over-year benefits, we should see a benefit as well in gross margin.

Joseph Hogan:

You can always say that at Align, there's no single variable equations. And this is another one. The Teen Guarantee, we think is some of it, obviously, our portfolio and how we put that together, our DSP programs, the uniqueness of Invisalign First. All those things really help. And from an adult standpoint, with the firmer economic platform I talked about, I just think there's more confidence out there that we're starting to see lead through.

Michael Ryskin:

I want to start with DSP kind of where you left off really successful, obviously, and you had great growth year-over-year for the whole year. But it's kind of moved in sort of like a step function. If I just look at the numbers, 6,000, 7,000, 9,000 and then you're kind of like an 11,000, 12,000 range. Now you're in the 18,000, 19,000, 20,000 range. Is there another step function coming next year? Is there -- could you dig into a little bit into what's driving that? And just sort of where do you see that going over the next couple of years?

Michael Ryskin:

Okay. And then maybe a follow-up on a few questions that were asked on Cubicure and Direct 3D printing earlier. Really exciting technology that you unveiled late last year, and definitely see the opportunity. But could you help walk us through the road map a little bit sort of like what should we be looking for as sort of goal post 6 months out, a year out, 2 years out, just to sort of track progress and see how it -- see how it's progressing?

Michael Ryskin:

Okay. Maybe if I could just tweak that a little bit. Is there -- just help us understand, is there anything in terms of -- when you talk about scalability of the resin and the polymer, if you're looking at comprehensive, noncomprehensive, you talked about retainers and being able to put those. Is there anything in terms of your portfolio that makes some products more amenable or would be amenable earlier than others? Or is this just going to be all or nothing?

Operator:

Our next question comes from Nathan Rich with Goldman Sachs.

John Morici:

Nate, this is John. We're looking at, like we said, this year, you're kind of in that mid-single digits. We do have Lumina, which helps, but there's also unknowns about the macro economy. We were very pleased with what we saw in the fourth quarter with doctors buying and actually doing better than what we had really guided to. So we're pleased with the performance of Q4, but we just want to make sure that as we ramp up Lumina that we're properly positioned there, and we'll update as we go along.

John Morici:

There is some of that in Q1. We're ramping that up. So it's not a big, huge splash where there's a lot of expenses and kind of hits all in 1 quarter. But there is some ramp up, but that's factored into our guidance. So when we say that we expect the year-over-year in the first quarter to be slightly up, it's factored in -- those expenses are factored in.

Unidentified Analyst:

You mentioned at the end of the call, some of the DTC customers that you are tailoring some of the offerings to. I guess, was this material at all in the quarter? Maybe it's not large enough at this point, but any sort of contributions in 2024 as we think about picking up some of that business? And then also, DSO relationships, has there been any changes there in terms of the relationships on that front? How would you characterize those at this point? Are you seeing any greater traction there? Do some of these new products really move the needle on some of those relationships or conversations you're having?

Operator:

Our next question comes from Brandon Couillard with Jefferies.

Joseph Hogan:

Yes. I can't -- I really wouldn't break it out between Americas and International because we felt good about the geographies in general as you went across the world for especially latter half of the fourth quarter of last year. As we go into this year, as I talk about, we're looking at, I think, a stable economic platform. Some of the data that you cited would support that overall. And we feel good about our new products. We think we can play offense. And that's what we're focused on right now.

John Morici:

Things that related to like tax payments and things. It's just some timing as things go through the year. But we feel great. I mean, it's a great model. It generates a lot of cash. It gives us a lot of flexibility, and we were able to use that cash, that $350 million buyback that we did last quarter.

Shirley Stacy:

Thank you, everyone. We appreciate you joining us today. We look forward to speaking with you at upcoming financial conferences and at industry meetings such as Chicago Midwinter. If you have any questions or follow-up, please contact our Investor Relations. Thanks, and have a great day.

Operator:

Welcome to Align Technology, Third Quarter 2023 Earnings Call. [Operator Instructions] Please note that this conference call is being recorded. I would now like to turn the conference over to your host, Shirley Stacy, with Align Technologies. You may begin.

Joseph Hogan:

Thanks, Shirley. Good afternoon and thanks for joining us. On our call today I'll provide an overview of our third quarter results and discuss a few highlights from our two operating segments, Systems and Services and Clear Liners. Jon will provide more detail on our Q3 financial performance and comment on our views for the remainder of the year. Following that, we'll come back and summarize a few key points and we'll take questions. Our third quarter results reflect lower than expected demand in a more difficult macro environment than we experienced in the first half of 2023. Dental practices and industry research firms have reported deteriorating trends, including decreased patient visits and increased patient cancellations, along with fewer orthodontic case starts overall, especially among adult patients. The September Gauge report, which reflect more than 1200 North American Orthopactices shows deceleration for orthodontic treatment, and new orthodontic patient appointments were down 8.7% year over year, and ortho case starts were down 6.9% year over year, the biggest decrease in over a year. Despite these headwinds, total Q3 worldwide revenues of 960 million were up 7.8% year over year, with growth across all regions. For Q3, we had record clear liner shipments to teenage and younger patients, which increased 10% sequentially, and 8.4% year over year, driven by continued strength from iInvisalign First. Q3 year over year revenue growth also reflects improvement in APAC, offset by more pronounced summer seasonality in EMEA and North America. Our Q3 systems and services revenues were up 4.9% year over year despite continued challenges for capital equipment, primarily due to higher iTero scanner volumes in the Americas and APAC regions, reflecting certified preowned or what we call CPO sales, scanner, leasing and rental programs, as well as increased services revenue. Q3 systems and services revenues were down sequentially, primarily due to a weaker capital equipment cycle, as well as lower non-systems revenues. This was partially offset by higher scanner volumes in the Americas, reflecting an increased mix of iTero 5D plus scanners, including more trade in trade ups for DSO customer in Q3. Q3 non-case revenues were up 13.5% year over year, primarily due to continued growth from Vivera retainers and increased adoption of Invisalign Doctor Subscription Program, or DSP, our monthly subscription based clear liner program, which includes retainers, low stage touchup and clear liner treatment. For Q3, we shipped over 19,000 DSP touchup cases, primarily in North America, an increase of more than 70% year over year from Q3 '22. DSP continues to be well received by our customers and is currently available in the US, Canada, Iberia and the Nordics. We are excited about the DSP is proving helpful to doctors and their patients. We're continuing to expand the program in EMEA and with certain DSO partners in Q4. For Q3, total clear aligner volumes were down 3.3% sequentially and up 2.3% year over year, primarily reflecting weaker than expected demand for orthodontic treatment, especially for adult patients. As I said earlier, despite soft consumer trends, our teen and younger patient business was strong across all regions, up both sequentially and year over year, primarily due to continued adoption of invisalign first for kids as young as six years old. In terms of invisalign submitters, the total number of doctors shipped for Q3 increased sequentially to approximately 85.2 thousand doctors, the highest number in two years, driven by the Americas and APAC regions. From a channel perspective, orthodontist submitters were up year over year, especially from doctors submitting teenage cases, offset by fewer GP dentists year over year, particularly in the Americas. On a geographic basis, Q3 clear aligner volumes reflect a sequential increase in invisalign shipments from the APAC and Latin American regions, as well as North American Invisalign teenage cases, this is offset by lower volume and more pronounced softness from summer seasonality in EMEA and North America, primarily invisalign adult cases. For the America's invisalign case volume, Q3 '23 was down sequentially, primarily due to lower invisalign adult shipments in the GP channel and slightly down year over year. Q3 '23 clear aligner volumes reflect increased submitters in the Ortho channel, with an increase in teen and younger case starts driven by momentum from invisalign first. This is reflected in the September Gauge data, which shows an invisalign orthostart performed better than wires and brackets and other clear liners. In North America, adoption of invisalign comprehensive three and three product drove sequential volume growth in Q3 '23. Invisalign DSP touchup cases in North America also drove growth sequentially year over year. For a EMEA [ph] Q3 Three clear liner volumes were down sequentially, primarily from the impact of Q3 summer seasonality when doctors offices are closed for summer vacations and more consumers are traveling. This was partially offset by sequential growth in Italy, Benelux, Turkey and the Middle East. Year over year clear liner volumes were up reflecting continued adoption of invisalign moderate, the comprehensive three and three product, as well as an increase in Teen Case starts, driven primarily by Invisalign first and our new Invisalign Teen Case packs. For APAC Q3'23 Clear Aligner volumes were up sequentially and up year over year reflecting improving trends in China as well as other key markets like India, Taiwan, Korea, Japan and Thailand. Q3 APAC results also reflected increased invisalign submitters and higher utilization, especially for teen patients driven by growth from invisalign first in the Orthodontic channel during our typically strong teen season in China. Q3 APAC results also reflect growth in a GP channel with increased invisalign submitters and higher utilization sequentially and year over year. During Q3, we continue the rollout of Invisalign comprehensive three and three product in APAC most recently launched in China. Invisalign comprehensive three and three is also available in Hong Kong, Korea, Taiwan and India. We are pleased with the adoption of the three and three product in APAC, where the majority of cases treated are comprehensive, allowing our doctor customers more flexibility within the invisalign product portfolio. During the quarter, we also shipped to a record number of doctors in APAC, increasing both sequentially and year over year. Invisalign is the most trusted brand in the orthodontic industry globally, and it's important that we continue to create demand for invisalign clear aligners, especially given the macroeconomic pressures on doctors and their patients. In Q3- three, we delivered 11.1 billion impressions and had 27.7 million visits to our websites globally. To increase awareness and educate young adults, parents and teens about the benefits of the invisalign brand, we continue to invest and create campaigns in top media platforms such as TikTok, Instagram, YouTube, Snapchat, WeChat and Dillion across markets. The underlying market opportunity for clear liner of treatment, especially for teens and kids, remains huge and significantly underpenetrated. We know invisalign clear liner of treatment is faster and more effective than Braces [ph] yet the vast majority of orthodontic cases are still treated using brackets and wires. Differentiation is key to increasing invisalign share of the orthodontic case starts, especially among teens and their parents. We are continuing to differentiate through novel campaigns such as our new Invis is Drama Free campaign ., which uses humor to juxtapose the significant benefits of invisalign treatment over metal braces. Similarly, to differentiate invisalign treatment for adults, we launched new campaigns globally using powerful patient stories that share how important a smile is and how invisalign treatment increases self confidence that transforms lives. Reaching young adults as well as teens and their parents also requires the right engagement through invisalign influencers and creator centric campaigns, which delivered 5.8 billion impressions in the Americas in Q3. Creators such as Michael Simoneau, Jalen Hall, NFL player Darren Warren and also Leilani Green showed their results and why they chose to transform their smiles with invisalign aligners. In the EMEA [ph] region, we partnered with Influencers to reach consumers across social media platforms including TikTok and Meta, and launched our Global Consumer Campaign for teens and parents of teens, highlighting the benefits of invisalign treatment versus braces. In Germany, we continue to see positive engagement with our patient testimonial campaigns launched in the previous quarter. Our consumer campaigns delivered more than 1.4 billion media impressions and 6.9 million visitors to our website. We continue to invest in consumer advertising across the APAC region, resulting in more than 3.9 billion impressions and 11.9 million visitors to our websites in the quarter. We expanded our reach in Japan and India via Meta and YouTube, and partnered with key Influencers to reach consumers across social media. We saw increased brand interest from consumers, as evidenced by an over 800% increase in unique visitors to our website in India and 135% increase in Japan. Finally, digital tools such as My Invisalign Consumer and Patient app continue to increase with 3.4 million downloads to date and over 367,000 monthly active users, representing a 19% year over year growth. With that, I'll now turn the call over to John.

Joseph Hogan:

Thanks, John. While our third quarter results and fourth quarter outlook reflect weaker consumer sentiment and increased headwinds including foreign exchange, Align is in a unique position to continue driving the digital revolution in the dental industry to help doctors transform and grow their practices with invisalign clear aligners, Itero Scanners and Align digital platform. We are very excited about the recent innovations developed to further revolutionize digital treatment planning for Orthodontics and also restore to dentistry by providing doctors with greater flexibility, real time treatment plan modification capabilities, and digital solutions to help improve practice productivity and patient experience, which are even more important to our customers in the current environment. This includes clincheck live update for 3D controls invisalign practice App, invisalign personal plan or IPP, Invisalign Smile Architect, Itero exocad [ph] connector Invisalign Outcome Simulator pro and invisalign virtual Care AI software. These digital tools are continuing to gain adoption and help doctors gain efficiencies. In Q3 Clincheck Live Update was used by 41,000 doctors on more than 560,000 cases, reducing time spent and modifying treatment by 21%. Invisalign Practice app is now actively used by about 87,000 doctors, with over 5.2 million photos uploaded during the quarter via the Practice app. In addition, we will launch Invisalign Pallet expander or IPE system in Canada this quarter. IP is our first direct printed orthodontic device that provides a safe, comfortable, and clinically effective alternative to metal paddled, expanders and boosts our market opportunity in the teen market by addressing a portion of cases we couldn't otherwise treat without IPE. In summary, we're committed to balancing our investments in near and long term growth drivers while delivering improved operating margin as we navigate one of the most challenging operating environments in recent history with increasing macroeconomic pressure on doctors and their patients, we have an enormous opportunity to continue driving adoption of digital orthodontics and restorative dentistry and a responsibility to optimize our investments for the current environment. Before turning the call over for questions, I'd like to address the war in the Middle East and our Itero scanner business. The situation continues to evolve and is very fluid. We are monitoring developments closely. Our singular focus at this stage is on the safety and security of our employees and their families and our doctors and their staff and patients. Align offices and scanner manufacturing facility in Israel are currently open and operating. While we hope the situation will improve, we're preparing mitigation plans to ensure business continuity and we'll update our customers and other stakeholders as needed. Now I'll turn the call back over to the operator for questions.

Joseph Hogan:

Hi, Jason.

Shirley Stacy:

Operator, you want to go to the next question?

Shirley Stacy:

And we'll come back.

Brandon Vazquez:

Hey, everyone, thanks for taking the question. On the first one, maybe can we just start a little bit? It sounds like macro, and given the data that you guys were talking about is probably getting a little worse into the end of the year. Maybe just talk about how that kind of trended through the quarter, how we're trending now. I think what a lot of us are trying to get our head around is what's the direction of macro in the dental space going into the end of the year and into 2024, especially as you look at kind of the consumer and then CapEx on scanners. So how are you guys seeing that from your end right now?

Brandon Vazquez:

Okay. And then maybe as a follow up on the teen side, it sounds like the Ortho channel, based off the market data you have, is that teens are declining year over year. But you guys, or at least sequentially, you guys are up both, it looks like. So are you guys taking share within the teen market? It's a little bit of a funny dynamic because I think earlier this year, as the Ortho channel got a little weaker, they were going to wires and brackets. But it seems like now you're taking share. How durable is that and what are you guys kind of seeing that's driving that in the underlying market? Thanks.

Operator:

Thank you. One moment for our next question. And Jason Bednar from Piper Sandler. Your line is open.

Operator:

Jason, we're still not hearing you. Shall I move on? Yes, please. Certainly. One moment for our next question. And our next question comes from the line of Jeff Johnson from Baird. Your question, please.

Jon Block:

Hey, guys, can you hear me okay?

Jon Block:

All right, so far so good. Maybe a couple of questions. I'll start right now, you just seem highly tethered to the consumer. But in '24, you've got some incrementals, right? You just launched IP in Canada. You've got remote monitoring. We think maybe you have a new scanner. So just like your thoughts on the ability for the company to manufacture more of your own growth in 2024, and any commitment to grow revenues year over year in '24. And where I'm going with that is even the revised guidance you'll grow year over year in 2H '23. But if I annualize your 4Q number and just sort of run rate that you arguably land down year over year with call it a more dynamic set of innovation. So not asking for a number, but clearly things are moving around. And how do we think about what that means again, to manufacture your own growth in '24 and any commitment to have positive revenue growth in '24?

Jon Block:

Okay, that was very helpful. And then maybe just this might build on Brandon's question earlier, but when you guys guide, you've got almost half the quarter in the bag. So clearly things changed, notably in the last seven weeks of the third quarter. I know you guys called out Gage's September data. Joe, you referenced the October what was the 3Q deviation? I mean seems like it was largely North America. And EMEA, did APAC perform as expected, if you could answer that. And then I guess where I'm struggling is I think we all know it's not a robust consumer out there and that narrative around soft landing or not, if that holds true, but it doesn't seem like things changed all that dramatically in the last seven weeks. And so anything you can give Joe to elaborate, because clearly the exit rate in the quarter was very different than the way things started. Thank you.

Jon Block:

Thanks, guys.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Elizabeth Anderson from Evercore ISI your question, please.

John Morici:

Hey, Elizabeth, this is John. So as we go through our planning process, like we do every year, we're prioritizing investments that we can continue to invest to be able to help grow the business. So we look at some R&D and some of the investments we make. We have a lot of new products coming to market, as we've talked about at Investor Day. We want to preserve that flow of products. We want to make sure we're properly reaching our customers so we prioritize some of the sales and go to market activities that we have around that. But we're looking at all parts of the business to say, okay, what can we adjust? What can we make adjustments to still deliver on our priorities that we have as a business to help try to grow with the means that we've seen, but then also deliver the profitability and being able to see this margin accretion. We've seen that all year as we've gone through. And essentially what we're calling for in the fourth quarter is the continuation of that margin accretion. And that's just through a combination of just looking at those investments and making sure that we properly invest for the future.

John Morici:

Back to know we're producing over there right now. I don't give you this. It's a reasonable amount of capacity. I've had other businesses in Israel at times like this, too. Not this bad. But in those situations, I feel like where it is now, we can manage it. As we talked about in the script, if the things get worse, the war over there. We can't guarantee what we have. But we have a terrific team there, very dedicated team. They're working both sides of the angle right now. We're bringing in materials. We're converting those materials, we're shipping those out. So the business is operating fine right now, but we have to just wait in the upcoming weeks and see what develops on their homeland.

Operator:

Yeah, thank you. One moment for our next question. And our next question comes from the line of Aaron Wright from Morgan Stanley. Your question, please.

Joseph Hogan:

As far as the teenage patients, again, we're really pleased with the growth that we saw in teens, and it's a very important teen season. I think the teens perform extremely well. We saw strength across every geography. We saw in Europe. We saw in North America. We also saw it in China. I think our portfolio helps us a lot invisalign first. We led with that. Remember, those are patients that are anywhere between six and ten years old. We really have terrific results in those areas, but also with permanent dentition. We saw some good growth, too. So overall, I feel like it's a strong indication in the sense that we're hitting the dot, in the sense of where we want to with those specific consumers, and through the advertising programs that I talked about and also through our digital platform and then the specific products, like invisalign first and then IPE that rolls into Canada. And then more broadly as we move into 2024.

Aaron Wright:

Okay. Thank you.

Shirley Stacy:

That's strange. We certainly will follow up with both Jeff and Jason. Operator, do you mind just going to the next question, please?

Nathan Rich:

Great, thank you. Can you hear me okay?

Nathan Rich:

Okay, great. Joe, you mentioned the focus on delivering improved operating margins and you guided to non GAAP margins being up sequentially in the fourth quarter despite the reduction in the revenue guidance. I guess as we think about the business going forward, should we think about that four Q margin as a good base level for the business even in an uncertain demand environment? And are there additional actions you can take on the cost side to give yourself some additional cushion for margins going forward?

John Morici:

So we'll see the benefit that we've seen all year to be able to see that operating margin improvement. But as Joe said, we're prioritizing our investments. We look at this time as we finalize our plan for next year. But we have got a lot of technology coming and we want to make sure that we're properly invested there as well as being able to deliver like we can on an margin basis.

Joseph Hogan:

I think when you look at things, Nathan, like we said, teen showed up well in the third quarter. We're pleased with that. Seasonally comes down in the fourth quarter. And based on what we saw in September and so far in October, I think you would expect to see adults down as well.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Brandon Couillard from Jeffries. Your question, please.

Joseph Hogan:

Remember, third quarter is a big teen quarter, but adults are obviously a large component of that. We saw that adult phenomenon in North America, but we saw it across each geography.

John Morici:

When we talked about down sequentially on Op margin, that was on a GAAP basis. We have some of the restructuring and other things that include we expect sequential improvement on a non-GAAP basis from Q3 to Q4. And we didn't give specific gross margin guidance, but we're working to try to make sure that we work on our gross margin as well. But right now we've kind of given the guidance down to our margin.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Mike Ryskin from Bank of America. Your question, please.

Joseph Hogan:

First of all, when you go back to 2020 that you referenced, and we did power through that personally, what I looked at that is I looked at that as not an economic issue. That was obviously a pandemic kind of an issue and I think I anticipated it have a clear beginning and a clear end. And so in that sense, I think it's easier to make that decision, whether that's right or wrong, with that kind of a thought process in mind. In this case, we're seeing unprecedented change from an economic standpoint. We're seeing consumer sentiment down. I mean, I'll have to go through all the economic data. You probably know this better than me, so there's a lot of uncertainty there. But I don't want to be misinterpreted that we're going to disadvantage this company in a rebound. No way. We're going to make sure that we're responsible in the sense of the resources and the restructuring that John talked about, too. We're going to make sure that we're well positioned in the key areas, too, that if we have a rebound, we'll be able to respond with the right kind of capacity and the right kind of product. So I feel like we're balancing that well right now.

Joseph Hogan:

Mike, I appreciate the question, but as far as price goes, we wouldn't make an announcement until our doctors really know in that sense, and we're still working through 2024.

Operator:

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Shirley Stacy for any further remarks.

Operator:

Thank you. Ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.+

Operator:

Greetings, welcome to the Align Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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.

Joseph Hogan:

Thanks, Shirley. Good afternoon, and thanks for joining us. On our call today, I'll provide an overview of our second quarter results and discuss a few highlights from our two operating segments, system services and clear aligners. John will provide more detail on our Q2 financial performance and comment on our views for the third quarter and 2023 overall. Following that, I'll come back and summarize a few key points, and we'll open the call to questions. 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 million annual orthodontic case starts, 195,000 teens and kids started treatment with Invisalign clear aligners during the second quarter. An increase of 7% sequentially and 10% year-over-year, reflecting the highest annual growth rate in the teen segment since 2021. For Systems & Services, second quarter revenues of $169.5 million were up 10.5% sequentially and down very slightly 1% year-over-year. For Q2, sequential increases in systems and services revenues, reflects increased scanner volumes across the regions and higher services and non-system revenues, reflecting increased sales of certified pre-owned or what we call CPO scanners and higher subscription revenues. 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 $832.7 million up 5.4% sequentially and 4.3% year-over-year. Q2 sequential revenue growth rate is consistent with our historical three year average and reflects growth across all regions. Q2 non-case revenues at $80 million were up 6.2% sequentially and 18% year-over-year, reflecting continued growth from Vivera 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. DSP has been successful in addressing an important and growing opportunity for experienced Invisalign doctors. It is our first subscription-based clear aligner program that enables doctors to reach new patients and provide them with a better overall experience. DSP enables doctors flexibilities to treat simple touch-up cases or 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 we'll launch DSP in France and the United Kingdom in the second half of this year. We have also extended DSP to DSO partners who recognize the value of our Invisalign subscription aligner put model. Over the past two years, our DSP subscription program has continued to ramp and in Q2 drove strong volume growth in touch-up cases typically five to 10 stage cases of aligners. For Q2 '23, we shipped over 18,000 DSP touch-up cases in North America, up from 15,500 in Q1 '23 and more than double the case volume in Q2 '22 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, specified in my remarks, our case volumes and metrics do not include DSP and touch up cases. 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, were 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 three and three 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. Q2 North American ortho utilization was up both sequentially and year-over-year as noted in our Q2 '23 earnings slides. For EMEA, Q2 clear aligner volumes were up sequentially and year-over-year, reflecting growth across the region and continued adoption of Invisalign Moderate, Invisalign Comprehensive three and three products as well as an increase in teen case starts, which grew sequentially and year-over-year driven by Invisalign First and our new Invisalign Teen case packs. On a sequential basis, clear aligner growth was led by Iberia, Italy, DACH, and 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 team season in Q3. Q2 APAC results also reflect growth in the GP channel with increased Invisalign submitters and higher utilization sequentially and year-over-year. During Q2, we continued to roll out the Invisalign Comprehensive three and three product in APAC, where it is now available in Hong Kong, Korea, Taiwan, and India. We plan to launch Invisalign three and three in China in Q3. We are also pleased with the additional adoption of three and three 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 a 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, while 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 of teens and younger patients in exploring the essential aspect shaping today's digitally driven orthodontic practices. Teen 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 teen-specific sales and marketing programs and product features unique to the Invisalign system. 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. TNK 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 the 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 and year-over-year across all regions and continues to drive adoption of Invisalign treatment among young patients. Invisalign First aligners are designed for Phase 1 treatment, typically in growing children six 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 and our DST 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 $10.3 billion impressions and had 30.9 million visits to our website in Q2 '23. To increase awareness and educate young adults, parents teams 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 teens and their parents through our influencer and creator-centric campaigns partnering with leading smile squad creators, including Marshall Martin, Rally Shaw, and Jeremy Lin. Each of these creators shared their personal experiences with Invisalign treatment and why they chose to transform their smile with Invisalign aligners. Additionally, in the United States, we work closely with athletes over time, a high school sports social media platform that showcases the benefits of Invisalign treatment. Brand interest remained strong throughout the quarter with 9.2 million consumers visiting our websites in the Americas region, representing 17% growth year-on-year. In EMEA region, we partnered with new influencers to reach consumers across social media platforms, including TikTok and Meta. In Germany, we launched new testimonial campaigns highlighting the stories of 70 young adults and teens who share why they chose Invisalign treatment and how it impacted their lives. Our consumer campaigns delivered more than 1.7 billion media impressions and 9.7 million visitors to our website. We continue to invest in consumer advertising across the APAC region, resulting in more than 12 million visitors to our websites and over $4.8 billion impression. We expanded our region in Japan and India via TikTok, Meta and YouTube. We partner with key influencers like [indiscernible]. We saw increased brand interest in consumers as evidenced by 270% year-over-year increase in unique visitors to our website in India and a 46% year-over-year increase in Japan. Adoption of My Invisalign consumer and patient apps continued to increase with 3.1 million downloads to date and over 350,000 monthly active users, a 28% year-over-year growth. Uses 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 and modifying treatment by 20%. Invisalign practice app is increasing in adoption with 88,000 doctors who are actively using this app and 5.1 million photos were uploaded in Q2 via the Invisalign practice set. With that, I'll turn the call over to John.

Joseph Hogan:

At our continued growth despite the economic slowdown in uncertain environment. 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 aligned 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 3D 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 two minutes. Improving practice productivity while also improving the quality of treatment plans. 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, equips doctor with a next generation remote monitoring solution that has new artificial intelligence assisted capabilities to streamline their workflows. Cowen being computed tomography or CVCT, enables doctors to visualize the patient's roots as part of the digital treatment planning process. Invisalign Outcome Simulator Pro, expand Align's existing Invisalign outcome simulator technology and adds the benefit of the company's ClinCheck in-face visualization tool that combines a photo of a patient's face, with their 3D treatment simulation, creating a truly personalized view of how their new smile will look. Itero-exocad Connector integrates iTero intraoral camera and NIRI images with exocad DentalCAD 3.1 software, and 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 a 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 September 6, where we'll 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. Operator?

Jeffrey Johnson:

Thank you. Good afternoon guys. Hey Joe, congrats on a nice bounce back quarter here. I wanted to start really on the teen market. Obviously, that's where we all focus long-term on the business. But that 9.7% year-over-year growth, when I look back last year, it was your first quarter in a long time of negative year-over-year growth in teens. So you had a bit of an easy comp there, although, obviously, '21 was a fantastic year. So I guess I'm trying to figure out in this economy, when I think about comps from '21 that were so tough, when I think about competition that's out there, where do you think that 9%, 10% teen growth is relative to where you expect to be normalized? Are we still expecting a nice improvement of this over the next few years back to kind of mid, upper teens, something like that? I just would like to get your views on that.

Jeffrey Johnson:

That's helpful. Thank you. And then just would like an update maybe on China. Obviously, third quarter tends to be a big teen season there, but we're also seeing 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? And just remind us how bad were things in third quarter last year in China, we just kind of lose track of the COVID shutdowns and all that, but should third quarter 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.

Jeffrey Johnson:

Thank you.

Operator:

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

Jonathan Block:

Good afternoon. Hi, 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. At the end of the prepared remarks, that was really helpful. You laid out a handful of innovations. 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., maybe next three to 12 months before some of those longer-term aspirations come into play on direct printing? And then I'll ask my follow-up.

Jonathan Block:

Okay. That's helpful. And then maybe as my second question, sort of one of those famous two partners. 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 the price increase on the 3x3 and the comprehensive. 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 cases, I'm packing 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 of the upside. And 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 do you see maybe the better-than-expected results specific to those international regions? Thanks guys.

Joseph Hogan:

Jon, 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, I mean like I mentioned in my script, had Iberia did well. U.K. did well. The Nordic side, we just introduced DSP and different things. We're excited about those areas, too. So -- and then the teen growth there overall across those geographies was good. So I mean, it's just -- I think just good strong performance. And then when you think about the EMEA economy, too, Jon, I mean last year there was a lot of uncertainty with the Ukraine situation that hasn't gotten any better, but Europeans and the European countries, I think have solidified their economies around that. And just 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. Japan actually was very strong for us, too, along with Korea, in different parts of Asia, as I mentioned. So it's still broadly really good improvements in both of those regions by country and also specifically in that teen segment that I mentioned. So we're seeing good improvement Jon, from a sequential standpoint.

Operator:

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

John Morici:

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 second quarter. 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 in indices that help us with that. As far as adult versus teen, as we said, 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 Q3, and we expect that to continue. And adults important for us, too. 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 be able to help 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.

John Morici:

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 had 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 at Investor Day in September, 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 in all cases where we see -- we've seen the DSP program, it drives incremental volume for us. 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.

John Morici:

Thanks, Nate.

Joseph Hogan:

Hi, Brandon.

John Morici:

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 going to lab or other ways of making the Aligners 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 DSPs, 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 -- it would have helped us by about 1.5 points on an overall basis. So we reported our volumes up about 0.9%. And 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. There's no additional liners or anything else. So we recognize all the revenue as soon as we ship without additional aligners related to that.

Joseph Hogan:

Other clarification on your question was whether you put DSP or not, we were up year-over-year in our numbers.

Joseph Hogan:

So sequentially not sure -- go ahead.

Joseph Hogan:

Hey Brandon, 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 their challenge. They feel like on a 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 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. I can say Invisalign First seems to be an exception to that. In the sense of how Phase I 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 I with Invisalign First than we thought before. 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, obviously six months faster than a normal kind of a treatment, much easier for patients. We know all those things. When you ask what the biggest issues are, they're not basically clinical anymore. It's about workflow, workflow and confidence in orthodontic practice.

Elizabeth Anderson:

Hi guys. Congrats on the quarter and thanks so much for the question. One, this -- don't take this as a complete because I'm very happy that we have full-year guide. What I was -- 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.

John Morici:

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

Joseph Hogan:

Elizabeth, I'd say our sales practices are consistent and dynamic in the same way, consistent in the sense of the number of salespeople we have, how we train those salespeople, how they go to market. We obviously offer 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 the Invisalign sales force and overlaps in some areas. But I might be missing your question, but there's no, I'd say, material changes going on from a sales as salespeople, a number of salespeople standpoint and specifically the way we approach the market.

Operator:

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

John Morici:

Well, I think what we see is in terms of our Q2 to Q3 guide, that is more of a typical seasonality flat to slightly up from Q2 to Q3. So that's -- 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 that reflects that.

Joseph Hogan:

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

Shirley Stacy:

Yes, sorry. Is there one more question?

Joseph Hogan:

Hi, Jason.

John Morici:

Yes, Jason, you're right. We don't give that level of detail, but we saw more doctors that we ship to in APAC related to China, as you said, and we saw it in other regions as well. So we are 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.

John Morici:

Yes, we saw improvement for North America as well.

John Morici:

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 guidance standpoint as well. But without getting into months by country and region and so on, it gets a little difficult 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.

John Morici:

Thanks, Jason.

Brandon Couillard:

Hey thanks guys.

Brandon Couillard:

You mentioned scanner ASPs as a bad guy in terms of 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.

Brandon Couillard:

Great. And John, you mentioned freight costs coming down year-over-year as 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 about gross margins in the second half of the year relative to 2Q base?

Brandon Couillard:

Very good. Thank you.

Shirley Stacy:

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, Align is 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. Thanks, and have a great day.

Operator:

Greetings, welcome to the Align First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I'll now turn the conference over to your host, Shirley Stacy, with Align Technology. You may begin.

Joe Hogan:

Thanks, Shirley. Good afternoon, and thanks for joining us. On our call today, I'll provide an overview of our first quarter results and discuss a few highlights from our two operating segments, Systems and Services and Clear Aligners. John will provide more detail on our Q1 financial performance and comment on our views for the second quarter in 2023. Following that, I'll come back and summarize a few key points and open the call to questions. Overall, I'm please report better than expected first quarter revenues and earnings. The sequential increase in first quarter revenues of 943 million reflects stability across all regions for Clear Aligner business and favorable average selling price for the Clear Aligner and Systems and Services segments. Q1 sequential growth reflects an increase in non-case revenues, which also increased year-over-year driven by continued growth from our Invisalign Doctor subscription program the Vivera Retainers. And the team segment, which represents the largest portion of the 21 million annual orthodontic case starts 182,000 teens and kids started treatment with Invisalign Clear Aligners during the first quarter, increasing both sequentially and year-over-year, which is encouraging as we head into the important summer season for teens and kids. Overall, remain confident in our large underpenetrated market opportunity globally. And our ability to deliver digital products and technology that are helping doctors transform smiles and change lives for millions of people. Processes and services in Q1 revenues of 153.3 million were down 9.7% sequentially, and 6.2% year-over-year. As expected Q1 systems and services revenues decreased sequentially consistent with seasonal capital equipment cycles compared to Q4. For Q1 system and services revenues were sequentially lower primarily in the Americas and APAC regions, offset somewhat by an increase in EMEA. For non-system scanner revenues Q1 was up sequentially in year-over-year, reflecting increased scanner rentals, upgrades and certified pre-owned or CPO leasing programs to one CPO sales and food initial shipments of leasing units to desktop metal, who's supplying iTero element flex scanners to desktop labs. One of the largest lab networks in the United States serving general dentists. On a year-over-year basis Q1 services revenues increased primarily due to higher subscription revenues resulting from the large number of iTero scanners in the field. We also had higher non-systems revenues related to our scanner leasing and rental programs previously mentioned. The Q1 total Clear Aligner of revenues of 789.8 million was up sequentially and down year-over-year. Q1 sequential revenue growth reflects increases across the regions driven by price increases favorable foreign exchange and more additional liners. Q1 non-case revenues were up sequentially and year-over-year, reflecting continued growth from DSP, Vivera Retainers in commerce sales, which include everything from a liner cases to whitening and cleaning products. DSP has been very successful and enabling doctors to purchase aligners on a subscription basis, giving them flexibility to treat simple touch up cases, or offer their patients a superior flexible and convenient retention solution. We introduce DSP in North America during the pandemic, and are continuing to expand DSP offerings in the main region. The contribution of DSP to non-case revenues is important to understand, especially the impact overall Clear Aligner volumes. While we don't report the number of DSP, Clear Aligners shipped, and we don't include them in our total Clear Aligner volumes, if we were to calculate an equivalent case shipment for touch up patients, using our DSP aligners, we estimate those cases would increase approximately 25% sequentially. Q1 call total Clear Aligner volumes of 575.4,000 were down slightly sequentially reflecting stability across regions, and improvements in consumer confidence, as well as the easing of COVID restrictions recently in China. For the Americas Q1 Clear Aligner volumes were up slightly sequentially reflecting higher orthodontic cases, especially teen case starts with growth in both Invisalign Teen case packs and Invisalign First treatment for kids as young as six, offset primarily by a decrease in adult patients from the GP dental channel. Based on the most recent gauge practice analysis tool that collects and consolidates data from approximately 700 ortho practices in North America, overall, new patient flow and adult exams were lower this period while teens outpaced adults. During this period, wires and brackets cases continue to grow ahead of Clear Aligners, although at a slower rate than in recent quarters. And Invisalign cases outpaced other Clear Aligner brands. The gauge report also included a few data points regarding no shows which are exam schedule, which we believe may provide insight into consumer sentiment and macro conditions. Regarding no shows, over the last 12 months, there's been a large increase in the number of patient no shows. However, that rate appears to be stabilized. Conversely, over the last 12 months, future exams scheduled were negative year-over-year, but the rate has steadily improved in the most recent months covered by the report, which we believe may be a good gauge for consumer optimism. For EMEA, Q1 Clear Aligner volumes include strong adoption of Invisalign moderate across the region in both the adult and team segments. Invisalign Moderate Package's a 20-stage treatment option designed for patients whose treatment goals fall between the existing Invisalign Light and Invisalign comprehensive packages. For APAC, Q1 Clear Aligner volumes reflect improvement in China and continued growth in markets like Japan, Korea and India with positive year-over-year growth, including teams. Teen 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 prices through teen specific sales and marketing programs and product features, including Invisalign First for kids as young as six, which is up sequentially across all markets. For Q1, total Clear Aligner cases for teenagers were up sequentially and year-over-year, reflecting improving trends across the regions. On a sequential basis, growth was driven by increased submitters in the APAC and Americas region. On a year-over-year basis, teen case starts were up in EMEA region by reflecting increased utilization and the recent introduction of Invisalign moderate across the region, which outpaced the year-over-year growth rate of Invisalign First, which also continues to perform very well across markets. Invisalign First was also up sequentially and year-over-year across all regions. Invisalign First is designed to treat a broad range of -- issues in growing children from simple to complex. And because Invisalign First is removable, it's easier for kids to brush and flows. There's also no discomfort from rubbing braces or poking fires for metal braces. These benefits, along with positive compliance experience, may also contribute to continued momentum for Invisalign First. In fact, the majority of surveyed Invisalign orthodontists agreed that their young patients are highly compliant with Invisalign First treatment. Understanding that younger kids are highly compliant and Invisalign First provides an opportunity to sort of overall practice growth. The Q1 Clear Aligner volume from dental service organizations, or DSO customers continue to outpace non-DSO customers. Q1 Clear Aligner volume from DSO customers increased sequentially, reflecting growth in the Americas region. DSOs make up approximately 20% of the dental market and represent one of the most important channels for digital orthodontics and restorative dentistry. Through their network of doctors and systematic approach to clinical education and practice management, DSOs are uniquely positioned to drive adoption of new technologies and tools that increase practice efficiency and profitability and deliver a better patient experience. We have well-established relationships with many DSOs, especially in the United States, with DSOs such as Smile Docs and Heartland Dental. And we are continuously exploring collaboration with others that drive adoption of digital dentistry. Each DSO has a different strategy and business model. And our focus is working with them and encouraging DSOs align with our vision, strategy and business model goals. One of the most digitally minded DSOs is Heartland Dental. And today, we announced a $75 million equity investment in Heartland. Heartland is a multidisciplinary DSO with GDP and ortho practices across the U.S. Their growth strategy includes Heartland's de novo dental practices, which feature modern technology, are located in areas with strong community need for dentistry, where Heartland provides practices with opportunities for mentorship, leadership training and continuing education. In the last three years, Heartland opened 188 state-of-the-art de novo practices across the United States and are planning to continue investing through more de novo openings. We have a shared sense of purpose with Heartland. Their mission is to help doctors and their teams deliver the highest quality digital dental care to the communities they serve. The ban creation remains an important strategic growth driver, and we continue to invest in consumer marketing programs that create awareness of the Invisalign system and that drive demand to Invisalign practices. In Q1 '23, we delivered 7.8 billion impressions and had 22.1 million visits to our websites and continue to invest in top media platforms such as TikTok, Snapchat, Instagram and YouTube across markets. For more details on our programs and key Q1 performance metrics, please see our presentation slides on our website. We're also developing digital tools and apps for consumers, patients and for doctors. The Q1 adoption of the My Invisalign consumer and patient app continue to increase with 3.1 million plus downloads to date and over 350,000 monthly active users, representing 28% year-over-year growth. Usage of our other digital tools includes ClinCheck, Live Update, which is used by 38,000 doctors to reduce time, spent modifying treatment plans of up to 13% and Invisalign practice app with 58,000 doctors actively using this feature and uploading more than 5.1 million photos to date. Finally, in addition to our focus on consumer marketing and digital tools, we're committed to driving excellent treatment and align innovation through industry and align hosted clinical education events. Our team has just participated in the annual AAO conference, which took place in Chicago, where we engaged with a broad range of orthodontists. In March, we participated in IDS in Cologne, Germany, one of the largest dental shows in the world focused on digital dentistry and the technologies shaping the industry. Earlier in the quarter, we hosted the second align's symposium on the digital practice, a smaller align event from the most engaged in experience Invisalign orthodontists in the world. It was an amazing opportunity to come together with long-term global partners and thought leaders in orthodontics to see how we are driving the digital transformation of dentistry together. By our participation in each of these events and opportunities, we continue to reinforce the importance of peer-to-peer clinical education and our investments in the orthodontic specialty. We are grateful for all of our customers, GP, orthodontists, corporate practices but we know that the orthodontic specialty leads the way in adoption of digital orthodontics. We are excited about the future we see them in the orthodontic profession. Align abruptly supports the orthodontic profession through education, grants and continued innovation. Our educational pathway was created to support recent graduates, and we career doctors at critical career transition points. As a result of schooling and early career initiatives, graduates will be educated on digital dentistry and digital orthodontics, connected with and supported by colleagues more experienced ortho experts in the Align team and engaged with Align Digital Platform. Align supports doctors throughout all stages of their career, from educating facilities at dental schools and orthodontic programs to education for residents. Early to mid-career providers and more seasoned professionals looking to expand their clinical capabilities and practices. Align is expanding its global footprint of education centers to provide a forum for hands-on learning and continued development in key cities across our regions. We are also focused on continuing to innovate in digital dentistry, scaling capacity to manage the millions of digital requests, patient scans and orders flowing through our systems, while also using technologies like AI and machine learning to increase efficiencies, speed treatment planning and quickly deliver products so patients can begin to pass to transforming their smiles. In the next one to two or three years, Align believes our newest technologies and innovations will revolutionize our existing offerings in the ways in which doctors and their patients experience orthodontic treatment. Together with our customers, we are developing the future of digital dentistry and digital orthodontics not just the technology that drive treatment, but the models reshaping how we interact with customers and deliver treatment experiences for their patients. We look forward to sharing more with you in the coming months. With that, I'll now turn it over to John.

Joe Hogan:

Thanks, John. In closing, we're pleased with our first quarter results that reflected an environment of continued stability for our doctor customers. However, degrees of uncertainty remain from market to market. We're confident in our durable competitive advantage as we continue to transform the orthodontic industry, bringing digital dentistry and clear line of treatment to more doctors and the patients they serve, driven by our strategic initiatives of international expansion, orthodontist utilization, general dentist treatment and patient demand and conversion. We will continue to focus on the next phase of new platform innovations in scanning, software and direct 3D printing while prioritizing the needs of our customers for the ultimate benefit of their patients. We are a purpose-driven organization with a tireless commitment to transform more smiles and change more lives. We're the only digital orthodontic company in the world today with the scale and reach to address the 500 million potential people that could benefit from teeth straightening within the line system. Thank you for your time today. We look forward to updating you on our next earnings call. Now, I'll turn the call over to the operator for questions.

Jason Bednar:

I wanted to start first maybe with the 2Q outlook. You're pointing to a sequential uplift in cases in the quarter. I think that's consistent with what we typically see in a normal year from first quarter to second quarter. I think it's normally a 5% to 10% uplift. So maybe a good sign if we're continuing to move back towards normal, I'm not sure if you're willing to touch a typical pattern there, Joe or John, just to comment on the second quarter. But regardless, can you elaborate maybe on the rhythm of activity you're seeing in the U.S. or international markets that contributing to the visibility today and calling for those improved case volumes in the second quarter?

Jason Bednar:

Okay. All right. Understood. Maybe to follow up and press a little bit more on maybe on the utilization side. Could you talk about maybe the puts and takes around some of the utilization metrics you're putting up here in the quarter and as we think forward in the future. It seems like that ortho channel is seeing some good uplift. The first sequential improvement we've seen in over a year. international utilization did tick lower, but I'm wondering if there's a dynamic plan out there where some of your China doctors are coming back online and starting to do cases, but not yet fully back up to normal. So maybe just curious if you could unpack what you're seeing with utilization in those two channels, the North American ortho channel, your international customer base.

Operator:

Our next question comes from Elizabeth Anderson from Evercore ISI. Your line is open.

John Morici:

I think, Elizabeth, I'll take the kind of the margin piece. This is John. We'll see improvements as we produce more product, sell more product. We talked about that being sequentially up from a volume standpoint and utilize our facilities, whether it's clear liner or on the Systems and Services side. So that's definitely a help. And in particular, with some of the improvements that we're seeing with higher utilization in Poland, as that plant continues to ramp up, will -- we see improvements in gross margin that way.

Operator:

Our next question comes from Jon Block from Stifel. Your line is open.

John Morici:

John, this is John. So I would say in specific, as we said in China, we saw improvement in China. I mean it went from January with a lot of the COVID cases and February was better than January and March was better than February. We saw that. And then as Joe described, we've seen stability in a lot of the other markets where there's puts and takes, but overall, more stability throughout the quarter. And that's what kind of got us to our overall volume numbers.

John Morici:

Yes. Thanks, Jon. Yes, on China, we didn't specifically guide for China in Q1, and it played out as we described there, but that's what we saw in China, which adds to what Joe was talking about just that stability that we saw there that we haven't seen in three years or so. On ASPs, you're right. We expect it to be slightly up over Q1. It's getting that full quarter of price change and so on the price increase we have and kind of taking the FX where it's at right now so slightly up compared to what we saw in Q1.

Jeff Johnson:

Following up on John's question, I think he was trying to get up the same thing. But look, I mean, revenue in 1Q came in clearly ahead of what you guys were talking about. 2Q is at least being guided above the street, which I say encouraging. You're talking about stability throughout the quarter. So I guess I'm trying to understand why isn't that translating to slightly better margins? I think your margin number in the 1Q was spot on with us. It was above the street right on what we were thinking, but your full year guidance is staying the same. And it sounds like you feel a little better about the end markets. You're definitely translating that to better revenue. I would just think even with fixed cost leverage, maybe we would have seen a little bit better margin in the 1Q and a little bit more optimistic outlook for the year.

Jeff Johnson:

Okay. And then maybe a follow-up. I just want to make sure on DSP. I think I know the answer to this. I don't want to expose my -- pay if it is that. But I know there's commercial product in there. I know obviously, there's -- there do any cases get captured within DSP? Obviously, as DSP is growing nicely, the 575,000 cases you did this quarter, the 598,000 cases you did last year in the first quarter. If we subtracted out DSP or if that didn't exist, would those case volumes be different at all, is the down 3%, 4% year-over-year being impacted at all by more things moving to DSP? Just want to understand the impact that has as we look at these reported global case volumes.

Shirley Stacy:

But Jeff, just to make sure we're talking kind of apples-to-apples, you asked if you stripped out those cases from our reported case volumes, they're not counted in the case volume is the point, and that was the comments that John made on the script about the implied impact of DSP revenue growth because those aren't counted in case shipments.

John Morici:

Yes. We haven't broken that out, Jeff, within DSP. But you're right. The year-over-year case volume change would not have been down by as much. It would have been more -- it would have been adjusted because DSP is growing, and there's more cases that kind of get trapped within there. But as Shirley said, we don't report those DSP cases. They're not there. They just show up in our other revenue.

Brandon Vazquez:

I think first, I just wanted to focus kind of on the adult side. The cases were down quarter-over-quarter. Those are the cases a little more exposed to the macro side. But you are also guiding to sequential improvements in volumes going forward. So just kind of curious if you can talk about that dynamic. Is team quarter-over-quarter growth enough to kind of offset that? Are you expecting adults to also improve -- just kind of any dynamics around that would be helpful?

Brandon Vazquez:

Okay. And then maybe I'll take us a step away from kind of the near-term stuff and just talk a higher-level strategy on the DSOs. It looks like you guys are having good progress there. Can you talk about -- are there any kind of like fundamental differences of going to that market? Any commercial strategy differences? Are there potential margin benefits because you're kind of dealing with one large organization that sells to bigger accounts, anything you can call out there for us?

Operator:

Our next question comes from Nathan Rich from Goldman Sachs. Your line is open.

Joe Hogan:

Well, I think we're coming out of a complete blackness, okay, when you get it. So Nave's really hard to pull a signal out of all that noise, except for we had a reasonable quarter, and you can see we're predicting that in the second quarter for China. That's kind of as far as I want to go. When you think about China itself, from a consumer standpoint, you have to look at the private institution. You have to look at the public hospitals. And again, that data isn't clear enough for us in the sense of what the sustainability is on that piece. So we're just being cautious. I don't think China is going to revert back into a COVID kind of a shutdown. I think we all know that. But that economy is somewhat questionable right now in the sense of how fast it will rebound and what direction it rebounds in We're just being cautious in the sense of how we're going to forecast

John Morici:

Well, I think first off, the three and three, it's a great product that our customers want and they're utilizing and so we're happy to see in the markets that we've released good adoption started in January for us, and we saw it progressively increase as we went through -- in through the quarter. So every month got better. And it really gives doctors more options in terms of how they want to purchase our product. As I said in my remarks, many of our doctors -- most of our doctors don't do more than two refinements. So this is a product that's perfect for them, allows them to treat patients the way they can. And then from a revenue recognition standpoint, it -- because we don't have -- we have pretty much a defined number of aligners only up to three refinement. And it's over a three-year period. So we're able to recognize revenue over a shorter period of time and the adoption of this as well as other factors are in the overall Q2 guide.

Michael Ryskin:

I want to follow up on an earlier question regarding what you saw in adult versus teens, recognize your point on adults being a little bit more consumer exposed and maybe some of that is a little bit more macro driven. But just wondering, anything you can comment to in terms of how that progressed through the quarter? Or any difference you're seeing U.S. versus Europe versus EMEA, just given anything on progression there? I think with that? Just to sort of that back to your comments on stability, it would be really helpful to bridge that.

Michael Ryskin:

Okay. All right. That's helpful. And then on the ASP front, again, I know you guys just talked about the price hike for a while and you discussed some of the factors that led to the ASPs in 1Q and sort of out for 2Q. I'm just wondering, we've always sort of debated price elasticity or demand elasticity as it relates to price. I know there's a lot of going on that earlier this year. Just wondering if now that you've got a full quarter under your belt any additional learnings on price sensitivity in the market, ability to take more price through another price hikes. So what are your thoughts on that a couple of months in.

Operator:

Our next question comes from Erin Wright from Morgan Stanley. Your line is open.

Joe Hogan:

Erin, it's Joe. I'll take them. On the DSO side, I don't see a conflict of all. We have DSOs that really want to address digital dentistry through digital orthodontics and we're excited about our -- obviously, our digital footprint and what we can offer from a platform standpoint. And so Heartland is helping the lead on the GP side in that sense, and I mentioned the Smile docs on the ortho side is there, too. So again, I don't expect this to be an issue within any of our accounts because we will engage with them and to help them on a demand equation if they want to be as aggressive and inconsistent and this implementation is what Heartland has been and which our docs have been, too. So -- and I don't see a conflict of interest at all. When I hear that term, my hair goes up in the year. I don't see anything that's conflicting at all. I think this is completely in line with what we believe in. We want to drive digital orthodontics as fast as we possibly can. And those DSOs and frankly, not just DSOs, just we have several doctors that have multiple practices that we engage with to try to expand those practices with them because we know they've committed to digital orthodontics and can drive those things forward. So I'd look at this as a positive statement that we're ready to engage and invest with our partners that share our vision. And then secondly, on the scanner business, I think you look at what happened between fourth quarter and first quarter. I think you have to take that in context. Fourth quarter is always a big capital equipment cycle. And first quarter is lower. This wasn't much different when you look at the numbers. When you look at our overall services business through that business because we have such a broad installed base that held up very well. So as I look at the scanner marketplace and where we stand today, I believe we have the largest installed base out there. We monetize that well from a services standpoint, we work with those accounts. When you look at our NPS scores of customers that use iTero, significantly higher customer satisfaction than ones that don't and try to use PVS impressions or something else, too. So when I look at our technology versus technology from competitors, I feel we lead, and we'll continue to lead in the marketplace. So our iTero scanner is critical for us going forward. It's a key part of our digital platform. Don't look at the fourth quarter and first quarter as any kind of a signal to say that we're losing momentum in that business. We always see that difference between fourth quarter and first quarter. John, you add anything? You...

Operator:

Our final question today comes from Kevin Caliendo from UBS. Your line is open.

Joe Hogan:

Kevin, I'll take the first one. John is our expert in accounting here. I'll let them take the next one. So on Heartland, look, we don't give individual numbers like this, but you can guess Heartland is the biggest DSO in the world, and they're very effective DSO in that sense. And this is a meaningful investment, and we're seeing meaningful growth with those guys. And I think we're trying to model something, I think, of us a model. It's a good relationship and has a good trajectory from a growth standpoint. John accounting?

Joe Hogan:

Kevin, also just -- as John talking and thinking of my comment to you is your comment might have inferred something like a quid pro quo or something like that. There's nothing like that. There's no piece of that. We have a joint vision in the sense of how we can move digital orthodontics through the general dentistry, and we share that, and we're helping to invest in that so we can drive it forward. But there's no give and take in that sense. Appreciate your questions.

Joe Hogan:

Follow up. Yes.

John Morici:

Yes. We're not at the -- we're just not giving that case growth numbers, we just kind of wanted to talk sequentially, but you would expect, as we've kind of said from Q1 to Q2, we would expect overall volumes to increase sequentially as you get into teens and others, it's going to vary by region. But if you're talking specifically the U.S., you start to get into more of a teen season basis, and that's the expectation for our overall numbers.

Operator:

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

Operator:

Greetings, welcome to the Align Fourth Quarter and 2022 Earnings Call. [Operator Instructions]. 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.

Joseph Hogan:

Thanks, Shirley. Good afternoon, and thanks for joining us. On our call today, I'll provide an overview of our fourth quarter results and discuss a few highlights from our 2 operating segments, Systems and Services and Clear Aligners. John will provide more detail on our Q4 financial performance and comment on our views for 2023. Following that, I'll come back and summarize a few key points and open the call to questions. You'll note that we have shortened our formal remarks in order to leave more time for Q&A. Overall, I'm pleased to report fourth quarter results that reflect a more stable environment for doctors and their patients than the recent quarters, especially in the Americas and EMEA regions, as well as parts of APAC. For Q4, trends in consumer interest for orthodontic treatment, patient traffic in doctors' practices and iTero scanner demos improved. However, the unfavorable effect of foreign exchange on our fourth quarter and full year 2022 results reduced our revenues and margins significantly. Despite the large impact of unfavorable foreign exchange, Q4 revenues of $901.5 million, increased sequentially from Q3, reflecting growth in Systems and Services as well as a slight increase in Clear Aligner shipments. This is the first quarter in a year that our total revenues and Clear Aligner volumes increased sequentially. As we move through 2023 and hopeful that we'll see continued stability in an improving operating environment, but remind everyone that the macroeconomic situation remains fragile. Regardless, we are confident in our large untapped market opportunity for digital orthodontics and restorative dentistry. We anticipate 2023 will be an exciting year for new innovation at Align, and we'll begin to commercialize one of the largest new product and technology cycles in our 25-year history. The Q4 Systems and Services revenue of $169.9 million were up 7.8% sequentially and down 21.3% year-over-year. On a constant currency basis, Q4 Systems and Services revenues were impacted by unfavorable foreign exchange of approximately $2.7 million or 1.5% sequentially and approximately $11.2 million or 6.2% year-over-year. For Q4, Systems and Services revenues increased sequentially, driven by growth in the Americas and EMEA regions, reflecting continued sales of intraoral scanners, especially the iTero 5D. Q4 sequential growth also reflects continued growth of our scanner rental programs as well as initial deployment of a certified preowned, what we call CPO scanner leasing rental program with desktop metal, that I'll describe in more detail shortly. We continue to develop new capital equipment opportunities to meet the digital transformation needs of our customers, and DSO partners, which is a natural progression for our equipment business with a large and growing base of scanners sold. As our scanner portfolio expands and we introduce new products, we increased the opportunities for customers to upgrade to make trade-ins to provide refurbished scanners for emerging markets. We expect to continue rolling out programs such as leasing and rental offerings that help customers in the current macroeconomic environment by leveraging our balance sheet and selling the way our customers want to buy. On a year-over-year basis, Q4 services revenues increased primarily due to increased subscription revenue, resulting in a larger number of field scanners. We also had higher non-case systems revenues related to our scanner leasing rental programs previously mentioned. To help accelerate the adoption of digital orthodontics and restorative dentistry, in Q4, we announced a strategic collaboration with Desktop Metal to supply iTero Element Flex scanners to Desktop Labs, one of the largest lab networks in the U.S. serving general dentists. The iTero Element Flex is now the preferred restorative scanner for desktop labs and will connect dentists directly to a suite of offerings from desktop labs that simplifies the digital design and manufacture restorations with both traditional and digital technologies. Our collaboration with Desktop Metal reflects our commitment to a relationship we expect will evolve and expand to being advanced restorative workflows to market. We see significant opportunities to enable dentists to use scan data directly order restorative services or printed ready digital files from Desktop Labs that can be used for 3D printing in their offices. In addition to iTero scanners, we're also excited about extending the benefits of the Align Digital Platform, including the Invisalign System and Exocad software to Desktop Labs' customers as well. For Q4, total Clear Aligner revenues of $731.7 million were down slightly, 0.2% sequentially and down 10.3% year-over-year. On a constant currency basis, for Q4 Clear Aligner revenues were impacted by unfavorable foreign exchange of $13.4 million or 1.8% sequentially and $56.4 million or 7.2% year-over-year. Q4 total Clear Aligner volumes of $583,000 was up slightly sequentially, reflecting growth in the Americas and EMEA regions, offset by lower APAC volumes primarily in China. For the Americas, Q4 Clear Aligner volumes were down slightly sequentially, reflecting lower ortho cases, especially teen starts as compared to the typical higher teen season in Q3. Offset primarily by an increase in adult patients from the GP dentist channel. For Q4, Clear Aligner volume from DSO customers continue to outpace non-DSO customers. For EMEA, Q4 Clear Aligner volume increased sequentially in all markets and across products, especially recently launched Invisalign Moderate, iGO Plus and iGO Express, which enabled GP dentists to treat a broader range of cases, mild-to-moderate types of malocclusions and can easily be integrated in a wide range of restorative treatments in a dental practice. EMEA had a strong sequential growth in the teen market segment with continued demand for Invisalign Teen case packs, which are available in France and Iberia as well as Invisalign's first treatment for kids as young as 6 years old. APAC, Q4 Clear Aligner volumes were lower sequentially due primarily to China, which continues to be impacted by COVID. In Q4, ongoing COVID restrictions and lockdowns in China persisted throughout the quarter. Outside of China, APAC volumes increased sequentially led by Japan, Taiwan, India and Southeast Asia markets. On a year-over-year basis, Q4 Clear Aligner case volumes reflected increased shipments led by Korea, India, Japan, Taiwan and Vietnam. While the easing of COVID restrictions in China and the more recent downward trend in COVID infection rates are encouraging, many uncertainties remain, including the lingering impacts from COVID across the population and the time and effort needed to restore consumer confidence. For the other non-case revenues, which include retention products such as our Vivera Retainers, clinical training and education, accessories, e-commerce, and a new subscription programs such as our DSP, fourth quarter revenues were down slightly sequentially and up double digits year-over-year. For retention and e-commerce products, Q4 revenues were relatively unchanged from Q3. We are pleased with our subscription-based programs like DSP, which increased sequentially and year-over-year and expect to continue expanding DSP offerings in other regions. For Q4, the total number of new Invisalign trained doctors decreased sequentially due primarily to fourth quarter being a seasonally slower period for clinical education with holidays, et cetera, as well as fewer trainings in China and Brazil. This was offset by somewhat significantly higher numbers of new Invisalign doctors trained in EMEA. Teen 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, including Invisalign First for kids, as young as 6, which was up sequentially across all markets. For Q4, total Clear Aligner teen cases were down sequentially due primarily to the impact of COVID in China as well as seasonally fewer team starts in North America as compared to Q3. According to the December gauge report, which tracks approximately 1,000 orthos in the United States and Canada, new patient exams for teens slowed in Q4, while new patient exams for adults improved slightly. A smaller pool of potential teen patients may put pressure on traditional orthos and cause them to go between clear aligners and wires and brackets, especially those practices that have failed to understand the significant benefits of adopting more efficient digital workflows, believing metal braces are more profitable. In EMEA, Q4 was a record quarter for teen case starts. On a year-over-year basis, Q4 teen case starts were relatively unchanged. For Q4, Invisalign First increased year-over-year and was strong across all regions. Invisalign First Clear Aligner treatment is designed for predictive results and a positive experience while addressing the unique needs of growing children from as young as 6 to treat Phase I. For the full year, Invisalign Clear aligner shipments for teens and young kids was approximately 733,000 cases, our teen case mix overall was a record 31% of Invisalign cases shipped for the year. Finally, in Q4, the total number of doctors shipped was 82, 900 doctors, a slight decrease due primarily to the impact of COVID in China and off our Q3 '22 high point, which included a major DSO onboarding in North America. For the full year 2023, we also shipped to the highest cumulative number of Invisalign trained doctors over 124,000 doctors, reinforcing our commitment to doctor-directed care for Clear Aligner treatment to achieve the safest and best possible clinical treatment outcomes for patients. With that, I'll now turn the call over to John.

Joseph Hogan:

Thanks, John. In closing, we're pleased with our fourth quarter results and the improved trends in sequential growth we saw in the Americas and EMEA regions and parts of APAC that reflect a more stable environment for doctors and their patients. While still very early and many uncertainties remain, we're hopeful that we'll see continued stability across the business and regions, especially in China. As we continue to work through these challenges, we're confident in our ability to focus on our customers and deliver key technology and innovation that furthers our leadership position in digital orthodontics and restorative dentistry. We are balancing investments to deliver shareholder value through transformative digital orthodontic solutions unique to Align. Align is a purpose-driven business, and we are committed to helping doctors transform smiles and change lives of millions of people around the world. Over the last year, we have flooded our customer base with a lot of new technology that represents one of the largest new product cycles in our history. But there is still a great deal of room for innovation. In the next 1 to 3 years, you should expect to see new platforms from us that will continue to revolutionize doctors' practices and patients' expectations for doctor-led treatment. And scanning, making it simpler and faster. In software, saving both doctors and patients more time with improved clinical outcomes. In direct 3D printing, an evolution in both product and material science. These 3 platforms will give doctors tools only dreamt of before with a singular focus to make the Invisalign system the standard of orthodontic and restorative care, and we couldn't be more excited about it. Thank you for your time today. We look forward to updating you on our next earnings call. Now I'll turn the call back over to the operator for questions. Operator?

Jason Bednar:

Joe and John, congrats on seeing the stability return to the business. Maybe I'll start with that point. If you could talk about maybe what's changed versus, say, 3 to 6 months ago, the adult part of the market still sounds maybe a little sluggish, but you also saw that sequential improvement. Teens are holding in. Could you maybe speak to the visibility you have today versus where you sat last summer or in the fall? What has led to the greater confidence in demand forecasting?

Jason Bednar:

Okay. No, that's helpful. It definitely sounds more macro related than anything else. But that's helpful. And then maybe, Joe, I wanted to pick up on one point you mentioned regarding the bracket and wire piece. It sure seems like maybe a profit motivated decision for docs, maybe shortsighted, but still profit motivated as they focus on the cost of brackets and wires versus that Clear Aligner lab fee. Maybe what do you think it's going to take to reverse that trend back to Clear Aligners picking up meaningful share I guess, especially with teens, do market volumes need to come back in a bigger way to convince doctors to free up more chair time with Clear Aligners? Or is there something you can do on your end to really stimulate that shift back towards Invisalign?

Shirley Stacy:

Appreciate it. Next question, please.

Jeffrey Johnson:

Joe, I just want to ask a couple of questions here. I guess, one, just on the Clear Aligner volume guidance for 1Q. It sounds like it's because China, incrementally weaker stability in Americas and the EMEA, you kind of had that in the press release. You got some hedging words in there about primarily due to weakness in China and some stability in the Americas and EMEA. I mean, should we be thinking at this point that your Americas and the EMEA are kind of a baseline here? And I know, obviously, macro can change from here, but assuming that macro change away, are we kind of at a baseline level now in absolute volumes for Americas and the EMEA? And do you think China, could it be a recovery play throughout this year? Are you seeing any early signs of some pickup in some of those big dental hospitals or the new adult standard product there or anything?

Jeffrey Johnson:

Understood. And I'm sure there's going to be a lot more questions here on the short-term things. I don't want to look or ask you about the Desktop Metal deal, though. On that, right now, is it all for kind of milling using iTero to connect to the lab there for milling and/or 3D printing of just restorations. Are you guys doing any early work with them on 3D printing of Clear Aligners? And just kind of again kind of update us maybe with your most recent thoughts on when we might start seeing 3D printing of the aligners in the office and kind of your competitive advantages you think you can -- as Align carve out in that kind of setting?

Jeffrey Johnson:

Even in that first case to try to seal the deal and really lock that patient in as a pain customer?

Operator:

Our next question comes from Elizabeth Anderson with Evercore.

John Morici:

Yes, I think what we always look at, Elizabeth, this is John. We're always looking at trying to find the right return on investment. So as you see some of the markets stabilize and start to come back that we see, that's where we'll continue to make investments. And as we see volumes come back, we'll invest even more. Like we talked about some of the stability in Americas and EMEA. So we'll also look at trying to find the right return on investment. And as those markets stabilize and come back, you'll see us continue to invest in there. And as we said, last year, we kind of had to pair some of that back based on the conditions. And ideally, we could be in a better situation where we can make additional investments this year.

Joseph Hogan:

Elizabeth, it's Joe. Could you restate that question? I didn't quite get the entire question.

Joseph Hogan:

Yes, that's a good question. When you think about it, we have -- we're an elective procedure, right? And so someone is going to go to an orthodontist on a procedure like this to have teeth straighten. With the GP dentist, there is patient traffic there constantly with cleaning and restorations and different things. And so just it's an area right now where -- since it's not just elective procedures there, we feel GPs are just seeing more patients than an ortho would when you compare period to period.

Jonathan Block:

Maybe for the first one, John or Joe, can you just talk about the 5.5% price increase for 2023? The 1Q guidance is lower cases, lower scanner and services but revs flat. So clearly, ASP benefits. And I think you realized the 5.5%, the doc stays on comprehensive or goes to 3 x 3. But how do we think about what flows to realized ASP, John, is that sort of a, I don't know, a plus 2% or 3% from the 4Q '22 levels when we think about 1Q '23 and into the balance of '23?

Jonathan Block:

I'm sorry, I know it was to clarify. That was just 2% to 3% sequential, John, correct from the 4Q to 1Q?

Jonathan Block:

Okay. And sorry, the second question, just on the op margin, I think you said 18% non-GAAP for 1Q greater than 20% for the year. I'll just sort of load up a modeling question here. Do we think about a sequential improvement for each of the quarters throughout 2023? And then -- that might be for John. And Joe for you. Just talk to us on how you're comfortable on that OM guide, when you still have a lot of moving parts with the economy, you've got what's going on in China? I think you framed it as a fragile environment. How do you get comfortable with that OM guide there's enough wiggle room, I suppose, in the OpEx where you feel you could titrate spend accordingly?

Joseph Hogan:

And John, on the OM guide and the confidence is related to what we see right now and what we think is some macro trends that are much more stable than what we've experienced before. So from that, we understand our costs, and we know what we have give and take. And John and I watch it closely and we obviously manage it as a percentage of the total revenues are 2. So revenues have to adjust. We have to adjust to. But again, I think we know what the levers are in this business. And within the context of stability, we feel we can manage to the numbers that we've given.

Nathan Rich:

Joe, I just wanted to kind of follow up on your comments about starting to commercialize. Obviously, product and technology cycle that you seem very excited about in that sort of ortho and restorative vision. I guess could you maybe just kind of help crystallize that for us in terms of how that kind of come to market in 2023 and the kind of type of investment that the company needs to make to kind of go after that opportunity?

Nathan Rich:

Okay. Great. And then just a quick clarification. On the adult side, cases were up 7% sequentially and it sounds like you saw a modest improvement in North America. I think that was the case in APAC as well. I guess I didn't hear reference to adult as you're talking about EMEA. I guess, was the -- kind of adult dynamic kind of more in -- when thinking about the Western economy is more in North America. Just curious if you also saw the same thing play out in EMEA as well?

Operator:

Our next question comes from Kevin Caliendo with UBS.

Joseph Hogan:

I mean, doctors both on the orthodontic side and on the GP side. I mean, obviously, you're right about that. And obviously, we expand a lot globally, too. So everything you said is true. I'll just give you one word on your questions on China. China is China is like -- it's down. We ship the thousands of doctors in China, we can't ship to right now. And that's the answer to your question since why it's gone down. There's no systemic overall issue in the sense of us being penetrated to the point that we can't buy more doctors, it's just we can't escape the downdraft of China right now.

Kevin Caliendo:

Can I ask a quick follow-up? You talk about the need to see consumer demand signals improving. And how far ahead can you actually see that? Meaning -- is it -- is there something in ordering and planning? Like can you see 3 months ahead or 6 months ahead in terms of you're starting to see demand increase? Or is it really real time, like we've made -- we're starting to see an inflection point? I guess it gets to the point of like what do you need to see in terms of consumer demand? How far forward can you look before you can really feel comfortable that there's been an inflection plan?

Shirley Stacy:

Next question please.

Brandon Vazquez:

I wanted to ask one to kind of go back to a couple of us, who are trying to get at. You guided to a full year op margin above 20%, and you're a little bit below that now, of course, probably transient. The question being, do you need sequential improvements in sales to then drive the sequential improvements in op margins through the year? Like how should we be thinking about that? Or are you prepared to kind of deliver that 20% even if let's say, were just stable through the rest of the year rather than improving?

Shirley Stacy:

Next question please.

Erin Wright:

Great. Just a follow-up to that last question, just to clarify, I understand you're not giving the full year guidance from a volume perspective. But if you do continue to see the environment is what you're saying sustained where it is today or get slightly better? You are in a position to grow volume year-over-year in 2023. And then just a separate question on subscription offerings, particularly in retainers. And I'm curious how that's resonating with customers today as another revenue driver for the practice. And when do you think that, that will be material in terms of contribution?

Joseph Hogan:

It's Joe, on the DSP program, originally, that was targeted primarily at retainers or orthodontists because a lot of orthodontists are making their own retainers in the back room and picking up for wires and brackets. And so we signed up, we also obviously do the touch-up cases with that too is 10 aligners less. That's worked out well. And we -- I think what you're referring to in the end is that's a subscription program to the doctor but we also have a subscription program we offer from the doctor through the patients, and we're implementing that now. There's a lot of enthusiasm from our doctors about that because it becomes a reoccurring revenue stream for them that they haven't many of them haven't tapped into before. And so we feel good about that. And we'll be working closely with our doctors to implement that more fully this year.

Operator:

Absolutely. The next question comes from Michael Ryskin with Bank of America.

John Morici:

So Michael, this is John. On tax rate for the non-GAAP tax rate assumed 20% going forward.

Shirley Stacy:

Well, thank you, everyone. We appreciate your time today. This concludes our conference call. We look forward to speaking to you at upcoming financial conferences and industry meetings, including Chicago Midwinter, IDS and AAO. If you have any follow-up questions, please contact our Investor Relations line. Have a great day.

Operator:

Greetings. Welcome to the Align Q3 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference will be recorded. I would now like to turn the conference over to our host, Shirley Stacy, with Align Technology. You may begin.

Joe Hogan:

Thanks, Shirley. Good afternoon, and thanks for joining us. On our call today, I'll provide an overview of our Q3 results and discuss the performance of our two operating segments, System and Services and Clear Aligners. John will provide more detail on our financial performance and our view for the remainder of the year. Following that, I'll come back, summarize a few key points and open the call to questions. Our third quarter results reflect the continued macroeconomic uncertainty and weaker consumer confidence as well as significant impact from unfavorable foreign exchange rates across currencies that affect our operations. On a constant currency basis, total Q3 revenues were reduced by $25 million or 2.7% sequentially and $57.4 million or 6.1% year-over-year, one of the largest quarterly foreign exchange impacts in our history. We remain confident in the execution of our strategic growth drivers despite the continuing economic headwinds. In Q3, we reached our 14 millionth Invisalign patient milestone during the quarter, which includes nearly 4 million teenagers and kids as young as six years old, who have been treated with Invisalign clear aligners. In Q3, teen case starts of 200,000 were up 13% sequentially and just off slightly compared to Q3 '21 a year ago when a record 206,000 teenagers started Invisalign treatment. We're also excited to be launching significantly new products and technologies that further enhance the Align Digital platform. Leading the digital transformation are the practice of dentistry, during the quarter we also began to commercialize ClinCheck live update software, Invisalign Practice App, Invisalign Personal Plan, Invisalign Smile Architect, the Invisalign Outcome Simulator Pro with in-face visualization, Cone Beam Computed Tomography integration with ClinCheck software Invisalign, virtual AI software and iTero-exocad Connector. These technology advancements represent an important expansion of our digital platform that we believe will help our doctor customers increase treatment efficiency and deliver superior clinical outcomes and patient experiences, positioning us to drive growth when the market inevitably rebounds. We'll be showcasing these innovations next month at the Invisalign Ortho Summit Las Vegas, the premier education and networking experience for Invisalign practices with the most peer-to-peer presentations of any Invisalign education event. Through Q3, Systems and Services, interest in our iTero scanners was good with increased product demos across the regions. Doctors are increasingly recognizing the substantial benefits of intraoral scanning and end-to-end digital workflows with the iTero scanner and imaging systems. At the same time, increasing inflation, rising interest rates and less patient traffic and dental practices are lengthening sales cycles and conversion time. For Q3, System and Services revenues of $157.5 million were down sequentially year-over-year. On a constant currency basis, unfavorable foreign exchange reduced Q3 '22 systems and services revenues by approximately $4.1 million or 2.5% sequentially and approximately $9.9 million or 5.9% year-over-year. For Q3, scanner services year-over-year revenue growth was strong across all regions, particularly due to increased subscription revenue driven by growth of the installed base of iTero scanners. Year-over-year growth also reflects increased sales of iTero warrants lease and continued growth of our scanner leasing rental programs. We continue to work closely with our doctor customers to support their practice growth and digital transformation goals. This includes understanding different ways to enable them to navigate to more uncertain economic environment. Over the past year, we've had good success rolling out new leasing programs in Latin America and certified pre-owned or CPO, as we call it, options in India and North America. We're also looking at new opportunities on the capital equipment side for our DSO partners. This is a natural progression in an equipment business with a large and growing installed base. As we introduce new products, there are more opportunities for customers to upgrade to make trade-ins and to provide refurbished scanners for emerging markets, too. We expect to continue to roll out programs that are especially helpful for customers in the current macroeconomic environment. It's selling the way doctors and customers want to do business and leveraging our balance sheet. We're still early. We're pleased with the contribution of margin accretion we're seeing. For our Clear Aligner segment, macroeconomic uncertainty and waiting consumer confidence continues to impact the dental market overall, making for a challenging operating environment across the board. For Q3, third-party reports indicate there are fewer new patient visits, less traffic flow and lower orthodontic case starts overall. Our Clear Aligner volumes further reflect the underlying orthodontic market trends and a shift away from adults toward teens in Q3. Q3 Clear Aligner revenues were down 8.2% sequentially and down 12.5% year-over-year compared to Q3 '21 year-over-year revenue growth rates of plus 35%. On a constant currency basis, Q3 '22 Clear Aligner revenues were reduced by unfavorable foreign exchange of approximately $21 million or approximately 2.8% sequentially and approximately $47.4 million or approximately 6.1% year-over-year. For the quarter, Q3 Aligner volumes reflect a sequential increase in Invisalign shipments from Asia-Pacific and Latin America as well as North America Invisalign teen cases offset by lower volume in EMEA and North America, primarily Invisalign adult cases. For Q3, Invisalign First for kids as young as 6 grew year-over-year and was strong across all regions. On a trailing 12-month basis, as of Q3, Invisalign Clear Aligner shipments for teens and young kids using Invisalign First up year-over-year to over 734,000 cases. For Q3, the total number of new Invisalign trained doctors increased sequentially 8.5% driven by North America and Asia-Pacific. In terms of Invisalign submitters, the total number of doctors shipped to for Q3 increased sequentially to 84,400 doctors, the second highest number this year, driven by Asia-Pacific and the Americas. From a channel perspective, ortho submitters were slightly year-over-year up especially from doctors submitting teen cases, offsetting -- offset by a few GP dentists year-over-year, especially in EMEA. For other non-case revenues, which include retention products such as Vivera retainers, clinical training and education, accessories, e-commerce and our new subscription programs such as our DSP, Q3 revenues were up both sequentially and year-over-year. This reflects strong growth in retainers sequentially and year-over-year growth across all regions, driven by more submitters. In U.S., revenues for our doctor subscription program increased sequentially and year-over-year. I'm very pleased to see continued momentum in non-case revenues driven by subscription-based programs that we expect to continue to expanding across the business. Now let's turn to the specifics around the third quarter results, starting with the Americas. The Q3 Invisalign case volumes for Americas was down sequentially single-digit percentages and primarily due to lower Invisalign bulk shipments. The environment remains challenging and feedback from our customers indicates consumer financing and patient no shows affecting their practices in Q3, especially with adult patients. Q3 Invisalign volume also reflects increased case submissions from orthodontic channel and sequential growth in the teen segment. For Q3, teen patients were most resilient, reflecting continued momentum in younger patients with Invisalign First as well as the new Invisalign Teen Case Pack. During Q3, Invisalign Teen Case Packs grew both sequentially and year-over-year. As a reminder, Invisalign Teen Case Pack, a new subscription program that enables orthodontists to buy Clear Aligners and packs in advance. They also include exclusive practice development benefits with the Invisalign brand and require an incremental volume commitment from doctors. Teen case packs are currently available in the U.S., Canada and France, and we expect to be expanded more in EMEA region. Turning to our international business for Q3, Invisalign Clear Aligner volume was down very slightly sequentially, 1.4%, with strong sequential growth for APAC, offset by lower volume in EMEA. For EMEA, Q3 operating environment was challenging. Inflation in the Eurozone is more than 10% and global macroeconomic factors weighed on consumer sentiment and purchasing decisions, especially for adult patients, which compounded the impact of Q3 summer seasonality. Similar to the Americas, doctors in EMEA also reported increased appointment cancellations and the impact of less patients financing their purchases. EMEA teen patients also resilient in Q3 increased sequentially in Iberia as well as France, where we introduced Teen case packs during the quarter. In APAC, Q3 sequential growth was led by China, Japan and ANZ despite ongoing COVID restrictions and lockdowns in parts of China and Japan. On a year-over-year basis, Invisalign case volumes reflected increased shipments across almost all markets, led by Taiwan, Thailand, India and Korea, driven by increased submitters. In Q3, APAC sequential growth also reflects strong demand from our expanded Invisalign Clear Aligner product portfolio in China. Recall in late April, Q2, we introduced two new products that better serve the expanding market in China. Invisalign Adult and Invisalign Standard Clear Aligners leverage our proven technology while broadening our appeal to more consumer segments. Q3 was the first full quarter offering these new products that provide doctors and patients in China with broader clinical and affordable options for moderate-to-complex adult cases. Finally, I'm pleased to share that the Invisalign system was recently awarded the Gold Design Award for 2022, making it the first orthodontic appliance to win the prestigious award in Japan. In the judge's assessment of the Invisalign system, they emphasized that the opportunity for teeth straightening is high in Japan and cited the barrier to adoption by Japanese consumers is resistance to metal braces and praised the Invisalign system as an orthodontic solution that can improve the quality of life during treatment. We certainly recognize the importance of the Japanese market for digital orthodontics and is one of the reasons we opened our first office in Tokyo nearly 15 years ago and established treatment planning operations in Yokohama a few years ago. Turning to new innovations. We continue to deliver our technology road map. As I mentioned earlier, during the quarter, we began to commercialize several new products and services that we previously announced would come to market in the second half of 2022. These technology advancements illustrate our commitment to continuous innovation in digital orthodontics, and we remain excited about the transformational projects that we're working on as we continue to drive the evolution of our industry. No other dental company has the experience, including over 14 million patients treated to date to lead the transformation of the practice of dentistry. Our consumer marketing focus on educating consumers about the Invisalign system and driving that demand to Invisalign doctor's offices ultimately capitalize on the massive market opportunity to transform 500 million smiles globally. In Q3, we built on our successful Invis Is media campaign and continued our launch of the Invis Is trauma free targeted at teens and Invis Is when everything clicks targeted at adults. Our teen campaign, Invis is trauma free highlights the benefits of Invisalign while humorously juxtaposing them with the significant trade-offs involved with using braces. Our Invis Is when everything clicks campaign showcases Invisalign treatment transforming smiles and the resulting confidence it gifts young adults. During Q3, we had over 4.3 billion impressions delivered in 14 million business to our website, a 1.6% year-over-year increase as a result of rightsizing our media investments. We're also rightsizing our consumer media investments across all core EMEA markets, impacting the impressions and unique visits. In U.S., we continued our influencer and creator-centric campaigns, partnering with leading smile squad creators like Olympic Gold Medalist, Suni Lee, Michael Lee, Josh Richards and Marsai Martin. Each of these creators share their personal experience of Invisalign treatment and why they chose to transform their smile with Invisalign aligners. Most recently, Suni Lee shared her positive experience with Invisalign in major media programming include Good Morning America, people.com, resulting in over 93 million impressions. We continue to invest in consumer advertising across APAC region, resulting in a 72% year-over-year increase in impressions and 29% year-over-year increase in unique visitors. Our ongoing campaigns were omnipresent across the top social media platforms such as TikTok, Snapchat, Instagram, and YouTube to increase the awareness of the Invisalign brand with young adults and teens. In Q3, we launched a global plot on the Roblox platform within the popular game, Livetopia, creating a fun experience for players to learn about the benefits of Invisalign treatment. To date, we had over 5.9 million impressions delivered in over 2.6 million unique visitors on the game experience. Adoption of My Invisalign Consumer and Patient app continues to increase with 2.2 million downloads to date. Usage of our key digital tools also continued to increase. Live update was used by 41,000 doctors or more than 395,000 cases, reduced time spent in modifying treatment by 18% and Invisalign Practice app has downloaded 314,000 times to date. Further, we received more than 110,000 patient photos in our virtual care capability to date, providing rich global data to leverage our AI capabilities and improve our services for doctors and patients. The investments that we make to drive patient demand and conversion to support our doctor customers is unparalleled in our industry, leveraging the global recognition of the Invisalign system. No other dental company equals our brand strength today. For more details on our consumer marketing programs, please see our Q3 '22 earnings and conference slides. Turning to exocad. Overall, I'm very pleased with our progress with the exocad business and its leadership and restorative dentistry. In addition to the iTero-exocad Connector, I mentioned previously, during the quarter, we also introduced iTero NIRI, NIRI is near infrared technology intraoral camera images and are now automatically imported into dental CAD when designing restorations, enabling technicians to visualize the internal and external tooth structure and optimize the process of margin line tracing. The new xSnap module is a model attachment for a printable 3D articulated system, featuring a spherical head, which allows a precisely executed movement. And Ivoclar's Ivotion Denture System, a complete workflow for digital production of high-quality removable dentures is now available on exocad. Together, the iTero and exocad product portfolios help accelerate the digital transformation of dental practices by facilitating the way doctors and labs collaborate to deliver better care for their patients. As part of the Align Digital platform, the integration of iTero's digital scanning and exocad's complete software solution delivers seamless end-to-end digital workflows from diagnosis to treatment, planning and then fabrication. Customers are already utilizing the automated workflows, unlocking efficiencies and productivities, which are more important than ever in the current economic climate. With the recent integration of iTero NIRI and intraoral camera images unique to iTero Element 5D imaging systems and exocad Rijeka software release, Align is redefining restorative visualization and treatment planning for the doctors and labs. We are committed to continuing innovating in the dental industry to drive efficiency and clinical excellence for the benefit of our customers and their patients. With that, I'll now turn it over to John.

Joe Hogan:

Thanks, John. As we continue to navigate a macroeconomic uncertainty, weaker consumer confidence and the lingering impacts of COVID-19 shutdowns primarily in China and Japan, we remain focused on our strategic initiatives as well as the incredible market opportunity for digital dentistry and our products. We believe our unwavering drive to transform smiles and change lives for millions of people around the world is on one other clear aligner company can match and positions us to better address this market opportunity. Regardless of the operating environment, we are committed to balancing investments to drive growth and long-term strategic priorities that will transform the practice of dentistry and strengthen our business. These are uncertain times. Every business is being impacted by macroeconomic environmental uncertainty. In addition, as a multinational company based in the United States with roughly half of our sales outside the country, the negative impact from unfavorable foreign exchange has been like anything I've ever seen in my career. We will continue to invest in digital solutions and demand creation to help doctors and their patients. We are committed to doctor-directed care and transforming the industry together while working through these global macro economic challenges. Thank you for your time today. We look forward to updating you on our next earnings call. Now I'll turn the call over to the operator for questions. Operator?

Jason Bednar:

Joe, from what we've seen and heard in the market, I think it goes without saying that monthly demand has just been quite choppy here in the U.S. I think July and September were pretty darn soft, August, maybe not as weak, but still not great. I guess, did you see a similar level of uneven demand when we look outside the U.S. and I guess is there anything you'd call out geographically or in any of your channels that was maybe less bad than what you were prepared for three months ago?

Jason Bednar:

Maybe Joe or John, just on the margin topic, you are backing away from that 20% margin floor commentary that you had given previously. Fully understanding part of this is FX related. But maybe can you talk about how much of it's tied to the decremental impact from lower volumes. And then you fully understand this is a tough macro environment to forecast. But a lot of investors right now are really trying to get comfortable with how defensible margins and profitability are as we look out to 2023, which I hope it's not, but it could very well be another tough year for the business just given the global macro environment we're in. So just -- are you willing to provide any guardrails around what we can consider for 2023 margins? Or maybe talk about how much flexibility you have in the P&L to offset pressures from lower volumes?

John Morici:

So on a constant currency basis, we expect to be at that 20% or above. It's just like Joe said, it's pretty dramatic to see the FX changes that we have. As noted in the comments, we said it going to affect the year by 2 to 3 points. So there's no -- there's a commitment to that margin, and we're investing based on volume that we see and other priorities that we have on R&D and go-to-market activities and so on. But it's just that FX piece that we're calling out. But on a constant currency basis, we feel that that number of 20% still holds from earlier.

Brandon Velasquez:

I wanted to go -- I'd like to go back for a second kind of to the monthly progression just to -- I think what might be helpful to kind of understand underlying market dynamics and maybe you can tease it out a little bit in Americas versus international. Just -- what were you seeing through the quarter where you -- did you exit the quarter and go into Q4? Were things stabilizing? Were they getting better? Were they getting worse? Any kind of color you can give us around what the situation is like as we go forward from Q3?

Brandon Velasquez:

I mean that's how we saw it. Okay. And then internationally, you guys sound pretty excited about kind of the new product launches within China, specifically offering that new maybe lower-tier product. Can you just talk a little bit about what you're seeing there? How strong has the recovery been in China? How much of that recovery has come from really opening up the product portfolio there? And how should that kind of continue going forward?

John Morici:

And it's about market expansion there. We're selling to more doctors than we've sold to in the past with these products. So we're really trying to capture more of that market, as Joe said, into Tier 3, Tier 4 cities, and we saw good uptake from that. And it's something that we know to go to the market and be able to reach these potential customers. These are the types of products that we need. .

Operator:

Our next question comes from John Block with Stifel.

John Morici:

Yes, I think you've hit the major pieces, John. When you look at it majority was FX. We saw the dollar strengthening, that obviously hits our numbers. And then you look at the other parts, we do have a higher proportion of teen in the third quarter, and that's a help. We also have things that we've done like we answered on the previous call about mix in China and expansion out, and there's offsets to that. But it's primarily FX and then you have some mix. But from a discounting standpoint, or other things, there was really no overall change to how we've done stuff. It's primarily the FX piece and the mix.

John Block:

So maybe just quickly on that last point, Joe. Question on B would be, you don't really think any cases are being pulled out of the case volume number into DSP that's actually having an incremental negative impact to '22? Do you think those are just truly largely incremental. That was 1B, just to be clear.

John Block:

And then the last question, and it's just where I struggle the most. I think sort of who cares, but my view on teen versus how you guys have positioned it with all due respect. And I get the teen 2Q to 3Q had a good sequential growth rate, but the 1Q to 3Q because 2Q was weak, was actually below trend on a four-year average throwing out 2020. And Joe, just -- if we can go down that road a little bit more, teen case volumes were still down 3% year-over-year. This whole story is about taking maybe 200 bps of share every year in this market. What do you think overall teen case volume was globally if you guys were down 3%? And maybe just really the questions about market share gains and if you still feel like you've got the momentum there or if that has slowed as of late and what can reaccelerate it?

Operator:

Our next question comes from Brandon Couillard with Jefferies.

Joe Hogan:

Ben, it's Joe. Look, first of all, what I protect with my life here are our direct salespeople and also our technology and our engineering team and what we focus on. And so we've made sure that we continue to reinforce those. There's just other parts of our business, too, that we rightsized. I mean, obviously, this business is used to growing 20%, 30%. And so we kind of came into the year with that mindset. We quickly realized it wasn't. And so we've taken actions in order to do that. But you see that throughout the business. Don't forget, we also have really strong productivity programs and manufacturing and all, that really help us during these times. Emory and his team do a terrific job, they help to drive that. John will give you another insight in a sense of how we're managing OpEx across the business.

Brandon Couillard:

And then John, just one follow-up. Can you help me just kind of understand what's going on with the inventory line and why that continues to grow year-over-year and sequentially. Is there something tied to the new European fab facility that may be driving that? And what we should expect on that line in the next few quarters?

Operator:

Our next question comes from Jeff Johnson with Baird. Your line is open.

Joe Hogan:

Jeff, it's a fair question. I'd first take it to Europe. I mean Europe was down substantially for us, too. So I don't think we've got a clear signal out of there because of the economics and in general. I mean we did fairly well in -- from a European standpoint. But third quarter in Europe is never a particularly strong quarter. We're going to pull a signal out of -- you look at the United States, you go to Gaidge Data. And you'll see that inside Gaidge Data aligners were down but Invisalign was actually above what the generic aligners are reported in Gaidge data, which says we continue to do well with our teen portfolio and what we do. . You see wires and brackets cases actually expanded. But what that is, is you see if they're doing more -- fewer adults -- and you know how orthos have held on to teens for a long time, you get a mix phenomenon there where it looks like they're doing more wires and brackets, but they're not. They're just doing fewer adults, and they mix down in that sense. So -- and then move over to Asia, I've always felt good about Asia is different by country. But the COVID overlay in Japan in particular, but also China. I thought the teen case volume was still reasonable. But it's still hard to pull a signal out of a lot of noise with the COVID shutdowns in all of those countries. So again, just like in John's question, Jeff, is I do feel great about our portfolio. I feel good about how we're positioning the product. I think the teen packs are a way to sell the way doctors want to commit in this area, I think we'll continue to get strong there. The future of those teen cases, there's no question it's digital. It's just how we approach it, the products we launch and convincing doctors more and more that teens will use these and showing them the results that we're seeing all over the world.

John Morici:

Well, on the doctor shipped to, what we've done is consolidate them together to a total. And what we saw, if you looked at international versus domestic, they're both up. And the numbers that we had. This is actually our second highest ever from a shipped to standpoint. But we decided to consolidate those together without giving too much more details on that. But they're both up.

John Morici:

Yes. Yes.

John Morici:

Yes, yes, correct. .

Operator:

Our next question comes from Elizabeth Anderson with Evercore ISI.

John Morici:

Yes, I can start with that. It's obviously a strategy that we have. We've got great equipment, great products, and we want to be able to get those to our customers in a way that they want to buy. Sometimes those doctors of ours don't necessarily want to purchase it outright. They want to try other things. And so we've tested in certain markets, just alternatives, kind of the rental model and so on. And we see good uptake. We see them these doctors now wanting to get a scanner to be able to digitize their practice. So it's really at early stage right now, Elizabeth, but it is something that when we think about how we want to go to market, we want to offer alternatives such as leasing or expanding rental or other parts of our business are going to see the certified preowned where you have upgrades and other things that happen as we have a larger and larger installed base, we're going to get some of that equipment back. We want to be able to have a mechanism to be able to use that equipment, use it in other places, and give our customers alternatives, both in terms of the equipment that they can purchase from us and then how they purchase and use that equipment from a financing or maybe leasing or rental options. And we think that they'll end up using our equipment more and more. And then we know that helps from a digital standpoint when they use their equipment and then they'll end up using more Invisalign. So it all kind of works from an ecosystem standpoint.

Joe Hogan:

Elizabeth, it's Joe. We want to defend R&D. Very important part of the business. You can see the programs are rolling out. The programs we're rolling out, we didn't do them this year, right? Some of these are 3-year old programs that we've been working on. And so I don't want to stop the momentum on those. I mean obviously, we'll take any steps here to preserve the cash flow and integrity of this business that we have to do. But our front lines are our sales organization and technology. And before we go anywhere near those, we want to make sure we do everything we can, the right size of business in other areas.

Joe Hogan:

Kind of anticipating that question is, we're not seeing any major change, I'd say, from the momentum that we saw in the second quarter. .

Joe Hogan:

I'm sorry, third quarter. That's right, a little bit...

Erin Wright:

So how should we think about underlying ASPs going forward, excluding the FX dynamics from here just given some of the mix dynamics you noted. And FX is FX, and that's understandable. But if we do continue to see what we're seeing in terms of the macro environment, what do we think about in terms of trough margins from here? And do you see an opportunity for a sort of recovery near term? Or any sort of margin expansion? Anything you can give us on that front would be helpful.

Erin Wright:

And then just going back to Elizabeth's question on the quarterly cadence. Just in the teen market, in particular, what are you seeing in terms of typical seasonality there? And did you see some of that momentum continuing here into the fourth quarter in that particular segment? Or how should we be thinking about the quarter-to-quarter cadence given -- relative to what you typically see from a seasonal standpoint. .

Operator:

Our next question comes from Nathan Rich from Goldman Sachs. Your line is now open.

John Morici:

I wouldn't take that. I think when we're talking about for the full year, we're kind of looking at kind of that on a constant currency basis, that 20%. And I think you have impacts with Poland startup and some other things in the quarter that are impacting that. But when we look at the 20% and what we were calling earlier in the year, we were thinking about that less about the quarters, but on a -- more on a total year basis on a constant currency basis.

John Morici:

That's the way to look at it, Nate. It's -- we're kind of looking at -- as best as we can call it now, we're kind of using the latest FX rates that you have now. It's up to predict what's going to happen in the next 2 months. But if you took kind of currently and kind of what we've done throughout the year and then use the current FX rates, we think that's a 2- to 3-point impact. And without that FX rates, we -- our GAAP numbers would have been at the 20%, like we called.

Joe Hogan:

Yes, Nathan, I think what we gave you is basically data that we receive from the marketplace. It's what we're hearing from orthodontists and dentists in general in treatment. We don't have any quantification to say so many patients were seeking funding, they didn't get it or there's so many losses in that sense. That's pretty much listed as the reasons why patients have refused treatment or thinking about treatment in the financial considerations of it. John, would you?

Joe Hogan:

And the other part of your question, Nick, about how do we help accounts. We watch payments. We try to help in that sense at times. We try to drive direct Invisalign docs to do a lot of Invisalign. And obviously, our advertising is extremely important to them. So we have our whole lead program to help them drive those things. We just want to be as close to our customers as possible because they're feeling what we feel. And we have strong relationships with many of them, and they're part of the family here. And we work it country by country, doctor by doctor, region by region to see how we can help. .

Operator:

Our final question comes from Kevin Caliendo with UBS.

Joe Hogan:

Kevin, it's Joe. Look, I think we can sit here and tell you, I think we're in pretty volatile economic times. I can't tell you what the dollar is going to be in 3 months. I don't know what's going to happen in Europe. I don't know how bad COVID hits China. I don't know what it does in Japan. So I know exactly what you're asking for and every investor is asking for. And we'd give you that data if we thought we had it, but we are in such a volatile time right now. We're just working this thing from month to month. As I mentioned, as we go into the fourth quarter, obviously, there's a rhythm between teens and adults from the third quarter to the fourth quarter. What I mentioned from a continuation standpoint is we haven't seen much of a change between the third and the fourth right now as we move into it. That's about as well as I can tell you of what we're seeing and what we're experiencing, trying to forecast what's going to happen toward the end of the quarter, next quarter, I can't do that. I don't think anybody here can.

Joe Hogan:

It's a growth business, Kevin. If we had good economic times here, I can tell you, we'd be having a much different conversation. So the challenge with this business is how are we responsible on cost and obviously, a challenged demand environment [indiscernible] this company very strong because when this market comes back, you just go back in history and take a look, it comes back and it comes back hard. And we've got to make sure that we're in a good position to be able to field that when it does occur. So you'll see us be, what I call, fiscally responsible, but we'll continue to make sure that we invest and make as many changes as we can around different areas of OpEx, but to protect those key areas where our customer interface and the development of our technology. And actually, the operations capacity we need in this business when this thing does bring back. And that's not just in manufacturing aligners. That's in being able to service customers across the board. So you'll see us balance that well as we should do from a leadership standpoint.

Operator:

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.

Operator:

Greetings. Welcome to the Align Q2 2022 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference will be recorded. I will now turn the conference over to your host, Shirley Stacy with Align Technology. You may begin

Joe Hogan:

Thanks, Shirley. Good afternoon, and thanks for joining us. On our call today, I'll provide an overview of our Q2 results and discuss the performance of our two operating segments, Systems and Services and Clear Aligners. John will provide more detail on our financial performance and our view for the remainder of the year. Following that, I'll come back and summarize a few key points and open the call to questions. I'm pleased to report solid second quarter results with top line revenues relatively unchanged from Q1, and operating margin of approximately 20%, despite unfavorable foreign exchange. The underlying market for orthodontics continues to be impacted by macroeconomic environment factors and lingering effects of COVID-19 variants in certain markets. Notwithstanding, these headwinds, we've remained focused on achieving our strategic initiatives, including opening new offices in the Middle East and Africa and our new manufacturing facility in Poland, launching new solutions to better support the way our customers want to do business, such as a doctor subscription program, and teen case packs, and announcing new products and innovation to help our doctors and their patients. These new innovations are revolutionizing the digital treatment planning and helping to drive the evolution of digital orthodontics and comprehensive dentistry. Align is well-positioned to withstand the current market conditions to lead the digital revolution in orthodontics and dentistry as the environment and growth trends improve. For System and Services, Q2 revenues were up 4.7% sequentially and up slightly year-over-year compared to Q2 2021 year-over-year growth of 215%. Q2 Services and Systems revenues increased sequentially driven by scanner volume growth in the Americas and APAC, partially offset by lower volume in EMEA, and unfavorable impact of foreign exchange. The iTero Element 5D imaging system continues to represent the majority of our scanner volume as doctors recognize the benefits of going digital. In APAC, the iTero entry-level Flex scanner offering was up sequentially in Q2, reflecting increased adoption. I'm also pleased with sequentially increasing services revenues in Q2, reflecting growth from the installed base. Services revenues represent approximately 40% of our Systems and Services business. For our Clear Aligner segment, Q2 revenues were down slightly sequentially and down 5.1% year-over-year compared to our Q2 2021 record year-over-year revenue growth of 182%. For the quarter, Q2 Clear Aligner volumes reflect sequential growth across the Americas and parts of EMEA, partially offset by China and UK Q2 Invisalign case starts for teens and younger patients was 177.3000 up slightly sequentially and down 2.1% year-over-year compared last year when our Teen case shipment growth rate was an all-time high. For Q2, Invisalign First for kids as young as six years old, grew year-over-year and was strong across all regions. During Q2, we introduced Invisalign Teen Packs in the US and Canada and France. Teen Packs, our new subscription program, which enables orthodontists to buy clear aligners and packs in advance, similar to the way they buy wires and brackets today. Our Teen Case Pack simplified the ordering process and make the billing more predictable for doctors. Teen Case Packs also include exclusive practice development benefits with the Invisalign brand and requires an incremental volume commitment from doctors. To date, enrollment has been encouraging with early adoptions highest among doctors who have not historically used Invisalign aligners to treat their teen patients. For other non-case revenues, which include retention products such as Vivera Retainers, clinical training and education, accessories, e-commerce and our new subscription programs such as our DSP revenues, were up both sequentially and year-over-year. For retainers, Q2 shipments had strong momentum with sequential and year-over-year growth across all regions driven by both submitters and utilization. Momentum in our doctor subscription program continued and Q2 revenues increased over 60% sequentially. Now let's turn to the specifics around our second quarter results, starting with the Americas. For the Americas region, Q2 Invisalign case volumes were up sequentially, reflecting increased submissions from the orthodontic channel and increased utilization from the GP channel. From a product standpoint, Q2 sequential Invisalign case growth reflects increases in both comprehensive and non-comprehensive products, including Invisalign First and Invisalign Moderate. Q2 also benefited from increased utilization in the DSO channel. Our international Clear Aligners, Q2 Invisalign case volumes were down 1.7% sequentially, primarily as a result of the headwinds described previously. For EMEA, Q2 Invisalign case volumes were down slightly primarily reflecting a slight increase in Iberia and Italy, offset primarily by slightly lower sequential volumes in the UK and France. For Q2, expansion market shipments declined sequentially. Q2 Invisalign teen patients increased sequentially driven by an increase in the number of doctors submitting teen cases. Turning to APAC. Invisalign case volumes were down slightly, reflecting a full quarter effect of continued lockdowns in China. For Q2, Taiwan, Hong Kong, Japan and India performed well during the quarter. On a year-over-year basis, Invisalign case shipments growth was strong in Japan, India, Taiwan, Thailand and Korea. The APAC teen case volume increased year-over-year, primarily driven by increased doctor submitters. Turning to new innovations. The Align Digital Platform is an integrated suite of proprietary technologies and services delivered as a seamless end-to-end solution to customers that connects all users, doctors, labs patients and consumers to transform smiles, and change lives. Our technology advancements help our doctor customers deliver superior clinical outcomes, treatment efficiency and also superior patient experience. In Q2, we introduced Invisalign Outcome Simulator Pro and Cone Beam being Computed Tomography systems, integration for ClinCheck software, building on several new innovations announced last quarter that we'll begin rolling out across the regions in August. Invisalign Outcome Simulator Pro, the next-generation patient communication tool that empowers doctors to help patients visualize their potential new smile after Invisalign treatment. Use in-phase visualization in 3D dentition view, all done chairside in minutes. Cone Beam Computed Tomography systems, or what we call CBCT, integration for ClinCheck software is designed to deliver a complete view of a patient's roots, crown and jawbone. CBCT integration for ClinCheck software enables doctors to confidently deliver a more informed Invisalign clear liner treatment plan or a wide range of cases. The user-friendly interface makes easy for doctors to see their patients root, crown and jawbone and one automatically digitally fused 3D model. This allows doctors to tailor their treatment plan based on their experience and their patients' needs. CBCT integration for ClinCheck software gives doctors the control and confidence to expand treatment planning to a broad range of mal inclusions, including surgical, restorative, expansion, extraction as well as teen cases with impacted or unterrupted team. While it's still early in the commercialization of these new products, initial feedback from doctors is encouraging. We are excited to begin scaling them across our customer base in the second half of 2022. Also, during the quarter, we awarded 11 new research grants, totaling $275,000 to universities around the world. Through our annual research awards program, we help advance orthodontic and dental research, furthering our commitment to the future of digital orthodontics and restorative dentistry. Our consumer marketing is focused on educating consumers about the Invisalign system, and driving that demand to Invisalign doctors offices, ultimately capitalizing on the massive market opportunity to transform 500 million smiles. For Q2, we had over 16.2 million visits to our websites, a 15% year-over-year increase, and delivered over 6.3 billion impressions. Both metrics were lower versus Q1 as we chose to rightsize our size and media spend in Q2, given the macroeconomic environment. During the quarter, we built on our successful “Invis Is” multimedia campaign and launched in the US the next evolution with two new campaigns, “Invis Is” trauma-free, targeted at teens, and Invis Is when everything clicks, targeted at adults. Our Invis Is trauma-free campaign highlights the benefits of Invisalign treatment, while numerously juxtaposing teams with the significant hassles involved with using braces. Our Invis Is when everything clicks campaign showcases Invisalign treatment, transforming smiles and the resulting confidence it gives the young adults. Both campaigns will be rolled out to markets around the world in Q3. About some of our consumer patient app My Invisalign continued to increase with 1.8 million downloads to date. Uses of our four digital tools continues to increase, for example, Invisalign virtual appointment tool was used over 12,000 times, and our insurance verification feature was used 36,000 times in Q2. Further, we received more than 91,000 patient photos in our virtual care feature globally, which continues to provide us with rich data to leverage our artificial intelligence capabilities and improve our services for doctors and patients. Additional consumer demand metrics are included in our Q2 earnings slides posted on our website. We are pleased with our Q2 Systems and Services revenues, which were up 5% sequentially and up 1% year-over-year. Q2 sequential growth primarily reflects higher scanner volumes in the Americas and APAC, and increased subscriptions. Year-over-year results primarily reflect increased scanner revenues in the Americas, offset by lower volume in APAC and EMEA. Growth of our iTero scanner installed base is driving an increase in services revenue. On a year-over-year basis, Systems and Services growth reflects increased service revenues from our largest scanner installed base, higher subscription revenues and increased sales of scanner once leased. The number of intraoral digital scans used for Invisalign case submissions in Q2 reflect continued adoption of our digital scanners and our larger installed base. Total worldwide intraoral digital scan submitted to start an Invisalign case in Q2 increased 88.4% from 82.2% in Q2 of last year. International intraoral digital scans for Invisalign case submissions increased 84.4%, up from 76.2% in Q2 of last year. For the Americas, 91.4% of Invisalign cases were submitted using an intraoral digital scan compared to 87% in Q2 last year. Cumulatively, over 60.4 million orthodontic scans and over 12.6 million restorative scans have been performed with iTero scanners. Our Q2 exocad CAD/CAM products and services, which include restorative dentistry, implantology, guided surgery and smile design offerings are included in our Systems and Services revenue. Exocad products and services are helping extend our digital dental solutions and broaden the Align Digital Platform towards fully integrated interdisciplinary end-to-end workflows. During the quarter, exocad released dental CAD 3.1 Rijeka in the new powerful lab software, which saves design time and offers more intuitive workflows along the designs earning from CAD to CAM. In addition, the release -- the exocad release launched the new, myexocad portal, introducing mandatory end-user software use registration that for the first time, allows exocad to collect information about who and how customers are using the software. This expands the opportunities for future product improvements. Also during the quarter, we signed a new long-term contract with exocad’s largest customer, Arming Gearbox, further strengthening our relationship. Finally, we continue to execute our strategy of geographic expansion. In June, our European manufacturing facility in Wroclaw, Poland began manufacturing clear aligners for the EMEA region. Locally, for the first time, we also continued our operational expansion in Poland with our latest treatment planning facility. Our expanded operation in Poland supports Invisalign doctors in local languages, increases our flexibility and timeliness and supporting our doctor customers across the region, and we expect will positively influence the quality and time of preparation of ClinCheck treatment plans and provide our doctor customers with benefits of digital orthodontics with the Invisalign system. We are uniquely positioned with manufacturing and treatment planning in all three regions, and no other clear aligner manufacturer has our global footprint and capabilities. With that, I'll now turn the call over to John.

Joe Hogan:

Thanks, John. Closing Q2 in the first half of 2022 has proved to be tougher than we expected. As we continue to navigate macroeconomic uncertainty and weaker consumer confidence and impacts related to COVID-19 variance, we cannot lose sight of the strong fundamentals of our business and the enormous market opportunity for digital orthodontics and restorative dentistry. The decisions we make this year will have lasting strategic implications for the future of our industry and the competitive landscape. We are holding true to our business strategy, and making good progress in a very difficult operating environment. We remain committed to balancing investments to drive growth and long-term strategic priorities with near-term headwinds while acting with a sense of urgency to ensure that we're ready to capitalize and extend our global innovation leadership as growth resumes. Thanks for your time today. We look forward to updating you on our next earnings call. With that, I'll turn it over to the operator. Operator?

Nathan Rich:

Thank you, good afternoon. Hey, Joe and John. I guess, I wanted to start high level. Joe, you kind of highlighted the consistent case in revenue trends in the second quarter relative to the first. But within the context of a challenging macro environment, I guess, how does that influence your thinking on the trajectory of the business? And have you seen an impact on patient traffic to dental practices or treatment acceptance rates that's kind of driving that commentary?

Nathan Rich:

Yes, definitely. And maybe just a quick follow-up. – were you, I guess, able to size kind of the headwind from the lockdowns in China? And with that -- in that market specifically, have you started to see those volumes recover as we're starting to see those lockdowns ease?

Nathan Rich:

Thank you.

Operator:

Thank you, Mr. Rich. The next question is from the line of Elizabeth Anderson with Evercore. Please proceed.

Joe Hogan:

Hi, Elizabeth.

Joe Hogan:

That's a good question, Elizabeth. Obviously, our sales force -- being a direct sales force is really important to us in that way. And so the way we do this, obviously, as you indicated, we hire a lot of salespeople upfront. We have sales training programs too that help to initiate them as they come into the corporation. But I would tell you, depending on where you are around the globe, there is a six-month and nine-month burn-in period, before you really feel that they're up to speed. They understand the Invisalign system, the digital platform and those types of things. So I would say in some simpler kinds of situations geographically, it could be six months. But in general, it's nine months or so before we have confidence that they're going to be really good on their feet as they talk to our doctors.

Joe Hogan:

Yes. Keep in mind, we see a lot more concern from an adult standpoint, when you look year-over-year in the sense of our order growth in adults, I mean it's been affected Elizabeth, and there's a lot of data that we produce that will show you that. On the teen side, it's hard to pull a lot of the second quarter because it really starts in the third quarter. But I felt overall good about it, but again, not surprised because we've always felt that teens have a certain window of time from a treatment standpoint. And so it's not necessarily an emotional purchase in a way, it's usually planned for and anticipated. And -- and what we saw between the second quarter and beginning of the third quarter, it really bears that out.

Joe Hogan:

You’re welcome.

Jon Block:

Great. Thanks, guys. Good afternoon. I'll follow up on teen, maybe just to go there. I think worldwide teen was down year-over-year. And I believe, Joe, you mentioned that teen and APAC was up year-over-year, which sort of implies that North American teen was down maybe a decent amount. So anything to call out there? Why do we see that maybe specific to North America? And then more importantly, you did have some positive commentary around teen case packs, you talked about enrollment. So maybe just talk to us on how long it might take for the teen case pack program in North America to give that segment a shot in the arm and then your plans to roll that out internationally? I've got a follow-up.

Jon Block:

Got it. Helpful. Thank you. And then for my second one, let me try to maybe jam two in one, and hopefully not make a mess of it. So just for us on the 3Q versus 2Q overall case volumes, China is reopened. China is a decent chunk of business for you guys. So if China snaps back, you talked about Shanghai, then maybe talk to us on why we wouldn't see you guys resume some sequential growth 3Q versus 2Q? I know there's many other markets. And then maybe just to stick with China. I just love your thoughts on what's going on over there, maybe in terms of market share, your main competitor had some quasi numbers out recently. It looked like they were down mid-single digits in cases 1H 2022 year-over-year, which quite honestly, I actually thought that was a good number considering the environment. So I would love your thoughts on just China and your ability to hold share on what's going on from a market share perspective? Thanks guys.

John Morici:

And we should see some of the sequential history that we normally see in our business. It goes to what Joe said that, there's just some unforeseen variables that are still there. If there is a shutdown in China, that will impact our numbers. If there's no shutdown, we should see sequential improvement. And then you have some of the other macro economics that we've talked about in terms of potential recession or other things that people are concerned about, that affects their decisions on whether they go into treatment. But we're watching closer to see how sequentially things are behaving and making investments appropriate based on what we see.

Jon Block:

Sorry. if I can just jump in...

Jon Block:

Sorry, Joe. I was just going to say, John and Joe, maybe to follow up on that lasts comment just for clarity purposes because I think it's an important one. Are you guys saying sort of as you sit here today, who the heck knows what's going on with Wuhan, I don't know, something worse incrementally with the economy. But as we sit here today in late July, you're expecting the resumption of sequential growth off the 2Q number, this evening?

Jon Block:

Okay. Very helpful. Thanks, guys.

Operator:

Thank you, Mr. Block. Our next question comes from the line of Jeff Johnson with Baird. Please proceed.

Joe Hogan:

Just to answer your last part of your question first, Jeff. No, we have a lot of room to grow in the Americas, too. In United States, Canada, but also you have to throw in Latin America and Brazil in that. There's a lot of growth, John and I have ported over these numbers a lot. You know what happens, if you backed these numbers up before really the big surge in orders that we had before, we can draw a line through these things. It doesn't upset us. You have to split orthos and GPs very clearly. Remember, you have some GPs that do like three cases a year. As things kind of slow down, they'll be out of the circulation for a while and then they order another and whatever. And these numbers will go up 81, 1,000, 2,000, we'll see them go up and down. But don't look at this in any way as that we're saturated in this marketplace, both from an orthodontic standpoint and a GP standpoint. Jeff, the other thing too, I think, that people forget from an orthodontic standpoint is that our orthodontists who do teens. These are orthodontists that are really committed to Invisalign for the most part, and they do a lot of teens. But we still have a significant amount of orthodontists at do Invisalign almost exclusively for adults. And so you'll see that whole piece from a utilization standpoint as we increase our team penetration, you should see the utilization rates there improve.

Joe Hogan:

I'll answer the UK piece first. The UK was outstanding for us last year. Remember, Europe grew 300% for us last year, Jeff, right? The UK led that. So I'm sure that UK number is higher than what that aggregate number is. And so what you're seeing is adult retrenchment in the UK from an order standpoint, but not an indication of a utilization issue that I'd say, across the doctor base that we have in the UK. John, I don't know…

Joe Hogan:

Yeah. Thanks Jeff.

Unidentified Analyst:

Hi, good afternoon. Can you just touch on your sales and marketing spending strategy a little bit in the short-term and longer term? I guess, when can you decide to flip the switch?

Unidentified Analyst:

Yeah, yeah.

John Morici:

And we adjust into the market. So keep the overall brand awareness, keep that averages. Remember, still sudden spending even as we right-size things, hundreds of millions of dollars in marketing and media to be able to go to market, drive that awareness. But then in certain markets, if there's COVID or if there's economic concerns and so on, we're adjusting things to make sure that we right-size and continue to make sure that we make the right trade-off between how we're investing in go-to-market, and continue to reinvest in the rest of the business like R&D and operations.

A – Joe Hogan:

And the region that you mentioned were really underpenetrated, huge opportunity. I mean we've seen great progress in Brazil. We're seeing good progress in India. Reported in -- I mean, it's -- when we talk about those 500 million patients, they're out there. And the way to get them is we do -- we put salespeople in place. We put the right kind of capability on the ground. This is a direct sales force that you have to have in order to sell our product line. But to answer your specific question, the penetration rates aren't even close. And that's -- again, you can see that in our script, that's how we remain so confident that in a stable environment, we'll continue to perform really well.

Unidentified Analyst:

Got it. Thank you very much.

Operator:

Thank you, Mr. [indiscernible]. Our next question is from the line of Jason Bednar with Piper Sandler. Please proceed.

Jason Bednar:

Hey, good afternoon. Yes. So Joe, I'll go big picture here in the US market, and maybe go back to clarifying point on Jon Block's question earlier. On one hand, demand in the category broadly just did seem to show some signs of moderation in the second half of last year relation to a bit of a leading indicator in other parts of high end then on the help of the average consumer. I mean this needs are going to be coming into some easier absolute comparisons as we head into the back half of this year, which I don't know, maybe helps reverse this downtrend in Invisalign case growth. But I guess we're also in the early days of what still could be some more pain coming for the consumer. So I guess what dominates in your opinion? Do the easier comps dominate, or does it more challenge on consumer dominate? And again, just thinking about the domestic market you're and ignoring again some of that China and predictability that's out there.

John Morici:

Yes. It's consumer confidence overall, and in certain cases…

Joe Hogan:

Yeah. No, Jason, that's okay. I look at the United States too is -- I just give you consumer confidence more than anything. Not just saying that there's no big variant issue or something that happens with COVID. We're all kind of have PTSD in that sense and what we experienced over the last two years. But yeah, I like the comparison year-over-year. That's going to be helpful. But those consumer confidence numbers, whether I'm talking about Europe or I'm talking about the States, those are the ones that we stay alluded to that we think are a really good indicator in the sense of our market, and that adult market that we appeal to, both in the GP segment and the adult market in the orthodontic segment, too.

Jason Bednar:

Okay. That's helpful. And maybe just a quick follow-up here. A lot of questions out there right now from investors on the decremental margin impact for the business with volumes and revenue doing what it's doing here. You added a lot of head count. It's significantly expanded branding and advertising efforts during the pandemic really helped to widen the competitive moat, so really impressive. It sounds like some of that marketing though has been recalibrated here. Are there further resets that -- with the OpEx structure that might be necessary in this environment? And I guess, what's the trigger for you to decide that a further rightsizing is necessary?

John Morici:

It's a balance, both short and long-term. So as we balance out our plans, we look to the growth opportunities we have, we want to make sure we continue to invest in those growth opportunities. But then obviously, we have to be mindful of the current conditions that we're in, and we'll adjust as needed to still maximize the return on investments that we're making.

John Morici:

Thanks Jason.

Erin Wright:

Great. Thanks. And I wanted to ask another Americas teen question here. But just given the seasonality and given this is an area where you should have some better visibility. I just want to clarify, does this -- does this mean you're going to see a meaningful sequential pickup in the coming quarter, or why would that not happen for you? And just given that should be an area more under your control here. Thanks.

John Morici:

But specifically in the US, US teen, we should see sequential improvement as we get into teen season, going from Q2 to Q3, notwithstanding any occurrences that happened from an economic standpoint, but the expectation is given our products, given the opportunity, given the utilization that we have, we should be able to see growth. Notwithstanding, anything else that gets in our way.

John Morici:

Erin, FX, obviously, Q1 to Q2 was a big impact in FX. We see it in the numbers from revenue all the way down to our EPS. I would think of it's tough to forecast where FX is going to go. Certainly, dollar has strengthened. I think you kind of take the numbers that they're at now and kind of play that forward for the rest of the year is how we look at that. I think from an overall ASP standpoint, there's always going to be puts and takes. So we're not doing anything different from a discounting standpoint, how we're going to market and so on. You might have some mix effects that come through. But I take the FX rates kind of as they are now, project those forward and then ASP should be too much different than what you see now notwithstanding any FX.

Operator:

Thank you, Ms. Wright. The next question is from the line of Brandon Couillard with Jefferies. Please proceed.

John Morici:

Well, ballpark, I would look at that is about 1 point, maybe just over 1 point of impact. We saw that 1.1 point impact from Q1 to Q2 in op margin. I would kind of look at the full year and about the same.

Joe Hogan:

Yes. I'll start with -- I mean, obviously, we had trouble selling scanners in China because China shut down. And China is one of our bigger markets is between China and Japan and Asia. So I didn't look at that so much as and overall market problem, I looked at that as more of a COVID problem. And so hopeful of, as I mentioned before, if that COVID stays clear, that will write itself. United States, just a good job by the team, strong demand there. 5G plus tends to be the really strong scanner out there. On the restorative side, dentists liking the NERI, the near-infrared technology for carries detection and orthodontists continue like the exactness of how our workflows at all from an overall iTero standpoint. So I feel good about the Americas and what the performance was in that piece. And as I mentioned in my script is 40% with a large installed base now, 40% is services, too, which is really helpful in that business overall. And look, I feel good about, again, our scanners in Europe compared to get some pretty big numbers again last year. So I wouldn't be blinded by the year-over-year number in that sense. But Europe has the added pressure right now from a Ukraine standpoint. It's just -- it wears on the consumer sentiment piece. I think it makes docs a little more reluctant in -- but there's -- I feel good about our position in Europe from a scanner standpoint. And as the market hopefully starts to stabilize here, we'll see that business that we had return loans.

Operator:

Thank you. Our next question is from the line of Kevin Caliendo with UBS. Please proceed.

Joe Hogan:

I'll turn it over to John. But first of all is, remember, we don't carry inventory in this business outside of scanners. So it's a real-time business. We don't have any inventory to reflect from or any -- very little business from a week-to-week standpoint. So I'll move it over to John, but keep that in mind that we, kind of, feel these trends early on both ends. As the economy picks up, we'll probably feel it first. And as it turns down, we feel it by just the nature of the business first.

Kevin Caliendo:

All right. Appreciate that. Thank you.

Michael Ryskin:

Great. Thanks for taking the question guys. I have kind of a follow-up to one of the earlier ones, and some that Kevin just asked sort of on the moving pieces going forward. I mean we spent a lot of time talking about China lockdowns and the impact that had, and there was some discussion on consumer confidence as well. But it was sort of brought up in the sense of, well, what happens when things improve. I hate to be the pessimist here, but can we talk about the other side of things as inflation is one thing and consumer sentiment and consumer confidence is another thing. But recessionary impact, if unemployment goes higher, if job losses start to accelerate, there is a scenario where things are -- should get worse for the next couple of quarters before they get better. So can you talk through sort of how you view the likelihood of that happening, the impact you think it will have on the business? And also sort of what's your response going to be what's the game plan? You talked a little bit about controlling costs in the quarter already. What would be the other levers you would pull if things for the consumer in the Americas and in Europe get materially worse over the next three to six to nine months?

John Morici:

And as a result, we've been able to make these adjustments. We're fortunate as a company to have the cash position, the balance sheet that we have and all these other. And in the end, you know the story, we have a huge opportunity to be able to grow. You just have this in our way. And like Joe said, and what many others say is it could get worse. We have to be able to be able to balance those short-term worse to with our long-term goal of being able to make Invisalign the standard of care. And that's what we're balancing right now, and that could play out -- that will play out in the next -- whatever, a year to 18 months, things will evolve. We hope that the economies improve. We hope that that a lot of this has just got a short term and things get better. And when things do get better, we're well positioned to be able to grow into this market, but we just have to be based on the realities of what's happening in short term.

John Morici:

Yes. No, it's a good question. So if you think like an overall picture, you hit some of the FX and so on, you look -- everybody can look at FX rates and see the changes and so on, you can project based on those. When you talk about a COVID lockdown or talk specifically in China, there was an impact for us. And we've seen that in the first quarter, we saw it in the second quarter, but it's -- happens in China. It happens in every place that we see where there's a lockdown, we have a reduction in volume. Where that lockdown goes away, the volume starts to come back. So I would say when you think of China, as you go from lockdown to not lockdown, that's favorable for us. We start to see some of the volume come back. And I think when you look at -- I think part of your question is around the US, I think what do you see for the US is it's -- maybe things stabilizing a little bit more. You're not seeing -- maybe it's pretty similar to what we exited Q2 into Q3. And I think when you look at the team benefit that ideally comes through with some of the products and programs that we have in teen in the US and other places, but focus on the US, we think that's helpful for us as we go from Q2 to Q3.

Operator:

Thank you, Mr. Ryskin. 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.

Operator:

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