Align Technology Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 1, 2023

There are 12 speakers on the call.

Operator

Greetings. Welcome to the Align Fourth Quarter and 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 is being recorded.

Operator

I will now turn the conference over to your host, Shirley Stacy with Align Technology, you may begin.

Speaker 1

Thank you. Good afternoon. Thank you for joining us. I'm Shirley Stacy, Vice President of Corporate Communications And then, Investor Relations. Joining me for today's call is Joe Hogan, President and CEO and John Marici, CFO.

Speaker 1

We issued 4th quarter and full year 2022 financial results Today's conference call is being audio webcast and will be archived on our website for A telephone replay will be available by approximately 5:30 pm Eastern Time through 5:30 pm Eastern Time on February 15th. To access the telephone replay, domestic callers should dial 866-813-9403 with access code 3,289,000. International callers should dial 929-458-6194 using the same access code. As a reminder, the information provided and discussed today We'll 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 Actual results may vary significantly, and Align expressly assumes no obligation to update any forward looking statements.

Speaker 1

We have posted historical financial statements, including the corresponding reconciliations, including our GAAP to non GAAP reconciliation, if applicable, and our Q4 and full year 2022 conference call slides on our website under Align Quarterly Results. Please refer to these files for more detailed information. With that, I'd like to turn the call over to Align Technology's President and CEO, Joe Hogan. Joe?

Speaker 2

Thanks, Shirley. Good afternoon, and thanks for joining us. On our call today, I'll provide an overview of our Q4 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.

Speaker 2

You'll note that we have shortened our formal remarks in order to leave more time for Q and A. Overall, I'm pleased to report 4th quarter results that reflect 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 and doctors' practices and iTero scanner demos improved. However, the unfavorable effect of foreign exchange on our Q4 and full year 2022 results reduced our revenues and margins significantly. Despite the large impact of unfavorable foreign exchange, Q4 revenues of $901,500,000 increased sequentially from Q3, Reflecting growth in systems and services as well as slight increase in clear aligner shipments.

Speaker 2

This is a Q1 in a year that our total revenues in clear aligner volumes increased As we move through 2023, I'm hopeful that we'll see continued stability and 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 In restorative dentistry, we anticipate 2023 will be an exciting year for new innovation at Align, We'll begin to commercialize one of the largest new product and technology cycles in our 25 year history. In Q4 systems and services revenue of 100 $69,900,000 were up 7.8 percent 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 $2,700,000 or 1.5 percent sequentially and approximately $11,200,000 or 6.2 percent 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.

Speaker 2

Q4 sequential growth also reflects continued growth of our scanner rental programs as well as initial deployment of a certified pre owned, 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 scanner sold. As our scanner portfolio expands and we introduce new products, we increase the opportunities for customers upgrade to make trade ins and 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.

Speaker 2

We also had higher non case systems revenues related to our scanner leasing rental programs previously mentioned. Self accelerate the adoption of digital orthodontist 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.

Speaker 2

The Itero Element Flex Is now the preferred restorative scanner for Desktop Labs and will connect Dennis directly to a suite of offerings from Desktop Labs that simplifies the digital design and manufacture of 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 It can be used for 3 d printing in their offices. In addition to Ikeros 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 $731,700,000 were down slightly 0.2% sequentially and down 10.3% year over year.

Speaker 2

On a constant currency basis for Q4, Clear aligner revenues were impacted by unfavorable foreign exchange of 13,400,000 or 1.8% sequentially and $56,400,000 or 7.2 percent 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 Liner volume increased sequentially in all markets And across product, especially recently launched Invisalign Moderate, Eyego Plus and Eyego Express, which enable GP dentists to treat a broader range of cases, mild to moderate types of mal inclusions and can easily be integrated in a wide range of restorative treatments in a dental practice.

Speaker 2

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 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.

Speaker 2

While the easing of COVID restrictions in China and the more recent downward trends in COVID infection rates are encouraging, many uncertainties remain, including the lingering impacts from For the other non case revenues, which include retention products such as our Vevera retainers, Clinical training and education, accessories, e commerce and a new subscription program such as our DSV, 4th quarter revenues We're 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 in year over year and expect to continue expanding DSP offerings And other regions. For Q4, the total number of new Invisalign trained doctors decreased sequentially due primarily To Q4 being a seasonally slower period for clinical education with holidays, etcetera, as well as fewer trainings in China and Brazil. This was offset by somewhat significantly higher numbers of new Invisalign doctors trained in EMEA.

Speaker 2

Gene 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 improve slightly. A smaller pool of potential teen patients may put pressure on traditional orthos and cause them to go between clear aligners of 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.

Speaker 2

In EMEA, Q4 was a record quarter for teen ks starts. On a year over year basis, Q 2014 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 For the full year, Invisalign clear aligner shipments for teens and young kids was approximately 733,000 cases. Our team case mix overall was a record 31% of Invisalign cases shipped for the year.

Speaker 2

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 'twenty two 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 direct 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.

Speaker 3

Thanks, Joe. Before I go through the details of our Q4 results, I want to comment on 2 items in our Q4 financial results. Restructuring and other charges. During Q4 2022, we incurred a total of $14,300,000 of restructuring and other charges, of which $2,900,000 was included in the cost of net revenues and $11,500,000 included in operating expenses. Restructuring and other charges included $8,700,000 of severance related costs and $5,600,000 of certain Lease terminations and asset impairments, primarily related to rightsizing operations in Russia in light of business needs.

Speaker 3

2nd, non GAAP tax rate. In Q4 2022, we changed to a long term projected tax rate For our non GAAP provision for income taxes, our previous methodology for calculating our non GAAP effective tax rate including certain non recurring and period specific items that produce fluctuating effective tax rates that management does not believe are reflective of the company's long term effective tax rate. We have recast non GAAP results For our provision for income taxes, effective tax rate, net income and diluted net income per share For each reporting period in 2022 to reflect this change. We did not make any changes to the results reported for 2021 As reflecting the change in our methodology for the computation of the non GAAP effective tax rate was immaterial to our 2021 results, Refer to the section in our Q4 press release titled recast of financial measures for prior periods in 2022 Now for our Q4 financial results. Total revenues for the Q4 were $901,500,000 Up 1.3% from the prior quarter and down 12.6% from the corresponding quarter a year ago.

Speaker 3

On a constant currency basis, q4 2022revenueswereimpactedbyunfavorableborenexchangeofapproximately16000000 dollars or approximately 1.7% sequentially and approximately $67,600,000 year over year or approximately 7%. For Clear aligners, Q4 revenues of $731,700,000 were flat sequentially, primarily from lower ASPs, mostly offset by higher volumes. On a year over year basis, Q4 Clear aligner revenues were down 10.3%, primarily due to lower volumes and lower ASPs, partially offset by higher non case revenues. For Q4, Invisalign ASPs for comprehensive treatment were flat sequentially and decreased year over year. On a sequential basis, ASPs reflect the unfavorable impact from foreign exchange, partially offset by higher additional liners and product mix shift.

Speaker 3

On a year over year basis, the decline in comprehensive ASPs reflect the significant impact of unfavorable foreign exchange, Product mix shift and higher discounts, partially offset by higher additional liners and per order processing fees. For Q4, Invisalign ASPs for non comprehensive treatment decreased sequentially and year over year. On a sequential basis, the decline in ASPs reflect product mix shift, unfavorable impact from foreign exchange and higher discounts, partially offset by higher additional aligners. On a year over year basis, the decline in ASPs reflect the significant Impact of unfavorable foreign exchange, product mix shift and higher discounts, partially offset by higher additional liners and per order processing fees. As we mentioned last quarter, as our revenues from subscriptions, retainers and other ancillary products continued to grow and And globally, some of the historical metrics that focus only on case shipments do not account for our overall growth.

Speaker 3

In our earnings release and financial slides, you will see that we've added to added our total clear aligner revenue per case shipment, which is more indicative of our overall growth strategy. Clear align's deferred revenues on the balance sheet Increased $56,400,000 or 4.8 percent sequentially and $171,900,000 or up 16.2 percent year over year and will be recognized as the additional aligners are shipped. Q4 2022 systems and services revenues of 100 $69,900,000 were up 7.8% sequentially, primarily due to higher scanner volume, Services and exocad revenues partially offset by lower ASPs and were down 21.3% year over year, Primarily due to lower scanner volume and ASPs, partially offset by higher services revenue from our larger installed base of scanners And increased non system revenues related to our certified pre owned and leasing and rental programs. Q4 2022 systems and services revenue were unfavorably impacted by foreign exchange of approximately $2,700,000 Or approximately 1.5 percent sequentially. On a year over year basis, system and services revenue were unfavorably impacted by foreign exchange of approximately $11,200,000 or approximately 6.2%.

Speaker 3

Systems and Services deferred revenues on the balance sheet Was up $9,000,000 or 3.4 percent sequentially and up $42,900,000 or 18.7 percent year over year, primarily due to the increase in scanner sales and the deferral of service revenues included with the scanner purchase, which will be recognized ratably over the service Moving on to gross margin. 4th quarter overall gross margin was 68.5%, down 1 point sequentially and down 3.7 points year over year. Overall, gross margin was unfavorably impacted by foreign exchange on our revenues by approximately 0.6 points sequentially and 2.2 points on a year over year basis. Clear aligner gross margin for the 4th quarter was 70.8%, down 0.1 points sequentially due to lower ASPs, Higher warranty and restructuring costs, partially offset by improved manufacturing absorption and lower training costs. Clear aligner gross margin for the Q4 was down 3.4 points year over year, primarily due to lower ASPs, Increased manufacturing spend as we continue to ramp up operations at our new manufacturing facility in Poland and a higher mix of additional aligner volume.

Speaker 3

Systems and Services gross margin for the Q4 was 58.8 percent, down 4.6 points sequentially due to lower ASPs and higher inventory costs and manufacturing inefficiencies, partially offset by higher services revenues and lower freight costs. Systems and services gross margin for the Q4 was down 5.9 points year over year for the reasons stated previously. Q4 operating expenses were $505,000,000 up sequentially 6.2% and down 3.6% year over year. On a sequential basis, Operating expenses were up $29,500,000 mainly due to restructuring and other charges And our continued investment in sales and R and D activities, along with higher consulting expenses. Year over year, operating expenses decreased by $18,600,000 primarily due to Controlled spend on advertising and marketing as part of our efforts to proactively manage costs as well as lower incentive compensation partially offset by Restructuring and other charges.

Speaker 3

On a non GAAP basis, excluding stock based compensation, restructuring and other charges And amortization of acquired intangibles related to certain acquisitions, operating expenses We're $459,700,000 up 3.7% sequentially and down 7% year over year. Our 4th quarter operating income of $112,700,000 resulted in an operating margin of 12.5%, Down 3.6 points sequentially and down 8.9 points year over year. Operating margin was unfavorably impacted by 0.9 points sequentially, primarily due to foreign exchange and lower gross margin. The year over year decrease in operating margin is primarily attributed To lower gross margin, investments in our go to market teams and technology as well as unfavorable impact from foreign exchange by approximately 4.2 points. On a non GAAP basis, which excludes stock based compensation, restructuring and other charges And amortization of intangibles related to certain acquisitions.

Speaker 3

Operating margin for the Q4 was 18.3%, down 1.9 points sequentially and down 6.4 points year over year. Interest and other income expense, Net for the Q4 was income of $2,700,000 compared to a loss of $21,000,000 in the 3rd quarter And a loss of $900,000 in Q4 of 2021, primarily due to net foreign exchange gains from the strengthening of Certain foreign currencies against the U. S. Dollar. The GAAP effective tax rate in the 4th quarter was 63.8% compared to 40.7% in the 3rd quarter and 13.2% in the 4th quarter of the prior year.

Speaker 3

The 4th quarter GAAP effective tax rate was higher than the 3rd quarter effective tax rate, primarily due to decreased earnings in low tax jurisdictions and an increase in the amount of U. S. Minimum tax on foreign earnings. Our non GAAP effective tax rate was 20% In the Q4 and reflects the change in our methodology that was discussed earlier, our non GAAP effective tax rate was 11.5% in the 4th quarter of the prior year in 2021, which does not reflect the change in our methodology. 4th quarter net income per diluted share was $0.54 down sequentially 0 point 39 dollars and down 1.8 $6 compared to the prior year.

Speaker 3

Our earnings per share was unfavorably impacted by $0.04 on a sequential basis and $0.22 on a year over year basis due to foreign exchange. On a non GAAP basis, net income per diluted share Was $1.73 for the 4th quarter, up $0.10 sequentially and down $1.10 year over year. Note that the prior year 2021 non GAAP net income per diluted share or prior year 2021 EPS does not reflect the Q4 2022 change in our methodology for the computation of the non GAAP effective tax rate. Moving on to the balance sheet. As of December 31, 2022, cash and cash equivalents and short term and long term marketable securities We're $1,000,000,000 down sequentially $99,500,000 and down $255,100,000 year over year.

Speaker 3

Of our $1,000,000,000 balance, dollars 387,900,000 was held in the U. S. $653,700,000 was held by our international entities. In October 2022, we purchased approximately 848 1,000 shares of our common stock at an average price of $188.62 per share Through a $200,000,000 accelerated share repurchase under our May 2021 $1,000,000,000 stock repurchase program. We have $250,000,000 remaining available for repurchase under this program, and we plan to repurchase this remaining amount Starting in Q1, 2023 through either or a combination of open market repurchases or an accelerated stock repurchase agreement Completing the repurchases in Q2 of 2023.

Speaker 3

Q4 accounts receivable balance was $859,700,000 Flat sequentially. Our overall days sales outstanding was 85 days, down one day sequentially and up approximately 7 days as Compared to Q4 last year, cash flow from operations for the Q4 was $144,700,000 Capital expenditures for the Q4 were $53,200,000 primarily related to our continued investment To increase aligner manufacturing capacity and facilities, free cash flow defined as cash flow from operations less capital expenditures Amounted to $91,500,000 We exited fiscal 2022 with a strong balance sheet, including $1,000,000,000 in cash And investments, a healthy cash flow position and no long term debt. As we announced with our earnings, Alliant's Board of Directors has authorized A new $1,000,000,000 stock repurchase program to succeed the current $1,000,000,000 program. This new $1,000,000,000 program reflects the strength of our balance sheet and our cash flow generation as well as management's and our Board's continued confidence in our ability to capitalize Now turning to our outlook. As Joe mentioned earlier, we are pleased with our Q4 results and what appears to be a more stable environment In North America and EMEA, we are cautiously optimistic for continued stability and improving trends as we move through the year.

Speaker 3

However, the macroeconomic environment remains fragile and given continued global challenges and uncertainty, we are not providing full year revenue guidance. We would like to see improvements in the operating environment and consumer demand signals, including stability in China before revisiting our approach. At the same time, we are confident in our large untapped market opportunity for digital orthodontics and restorative dentistry and our ability to make progress towards our strategic initiatives. We intend to focus on the things we can control and influence, which includes strategic investments in sales, marketing, technology and innovation. For full year 2023, Assuming no additional material disruptions or circumstances beyond our control, we anticipate our 2023 non GAAP operating margin to be slightly above 20%.

Speaker 3

With this backdrop, for Q1 2023, we anticipate clear aligner volumes to be down sequentially, primarily due to weakness in China from COVID, partially offset by some stability from our Americas and EMEA regions. We anticipate clear aligner ASPs to be up from Q4 2022, primarily due to higher pricing and favorable foreign exchange rates. We anticipate Itero scanner and services revenue to be down sequentially as the business follows a more typical capital equipment cycle. Taken in total, we expect Q1 2023 revenues to be about flat to Q4 of 2022. We expect our Q1 2023 non GAAP operating margin to be consistent with our Q4 2022 non GAAP operating margin as we continue to make investments in R and D and other go to market activities.

Speaker 3

For 2023, we expect our investments in capital Expenditures exceed $200,000,000 Capital expenditures primarily relate to building construction and improvements as well as additional manufacturing With that, I'll turn it back over to Joe for final comments. Joe?

Speaker 2

Thanks, John. In closing, we're pleased with our 4th quarter results and the improved trend and sequential growth we saw in the Americas and EMEA regions In parts of APAC that reflect a more stable environment for doctors and their patients. While it's 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.

Speaker 2

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 doctor 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 and direct three d printing and evolution in both Product and material science. These three platforms will give doctors tools only dreamt of before with a singular focus to make the Invisalign system the standard of orthodontic And we couldn't be more excited about it. Thank you for your time today.

Speaker 2

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?

Operator

Thank you. At this time, we'll be conducting a question and answer session. A confirmation tone will indicate your line is in the question The first comes from Jason Bednar with Piper Sandler. You may proceed.

Speaker 4

Thanks. Good afternoon. Thanks for taking the questions. Joe and John, congrats on seeing the stability return to the business. Maybe I'll start with that point.

Speaker 4

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 Improvement, teams 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.

Speaker 2

Hey, Jason, it's Joe. First of all, I think we have a more Stable macroeconomic environment. I mean, obviously, 2022 is pretty unprecedented when you think about China situation, Ukraine situation in Europe. The rapid increase in federal reserve rates, they really put the economy in a lot of ways. So I mean, we're working from a better platform in that sense.

Speaker 2

And I think, Obviously, Powell's comments today and 0.25 increase and all, I mean, it shows a little bit of confidence on the Fed's part in a sense of what they're seeing and What they're directing to. So I'd just say, Jason, from a broad standpoint, we feel really good about our portfolio. We feel good about the technology we talked about and all those things. We're just looking for a stable platform from an economic standpoint to operate from.

Speaker 4

Okay. All right. 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 the one point you mentioned Regarding the bracket and wire piece, it sure seems like maybe a profit motivated decision for docs, Maybe short sighted, but still profit motivated as they focus on the cost of brackets and wires versus that clear aligner lab fee.

Speaker 4

Yes. 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 Teams, 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? Thank you.

Speaker 2

Yes, Chase, that's a great question. First of all, I mean, doctors are doing what they think are in their best financial interest and from a patient standpoint too. A stronger macro economic environment will help in that sense because they'll have higher patient traffic and the trade off won't be as severe in that sense Because of the patient throughput, but what we help is in technology, and that's why we emphasize the technology developments and the investments that we're making that are really significant As we launch in this year and like I talked about with just software alone, the PIK-one, in the sense of being able to move patients through faster, Being able to have doctors really do cases a lot faster before with our products like IPP in different areas. So those technology advancements are really important. And how we put those together in business models like our digital subscription programs really help doctors get over that line too.

Speaker 2

So I feel we have A good format to be able to address that going forward. But again, I'll emphasize, we need a market that we can stand on in a sense and predict.

Speaker 1

Thanks.

Speaker 4

Thanks so much. Congrats again.

Speaker 1

Appreciate it. Next question, please.

Operator

Absolutely. The next question comes from Jeff Johnson with Baird. You may proceed.

Speaker 5

Hi, Jeff. Thanks, guys. Hey, guys. Good afternoon. Joe, I just want to ask a couple of questions here.

Speaker 5

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 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 EMEA are I'm 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 on absolute volumes for Americas and EMEA? And do you think China, could it be a recovery play This year, are you seeing any early signs

Speaker 4

of some pickup in some

Speaker 5

of those big dental hospitals or of the new adult and standard product there or anything?

Speaker 2

Hey, Jeff, first of all, on the front end with Western Economies is we just see stability. That's what we talked about. That's what we see versus before we saw the market falling away from us. But right now, we see it being stable and feel better about that point. On China, I mean, the uncertainty in China is incredible when you think about 1,000,000,000 people being sick there right now or have been sick over the last couple of weeks.

Speaker 2

And Jeff, I refuse to give a forecast over a number of quarters now because a lot of it has to do with the uncertainty that we See, in China, specifically, which is 2nd biggest market in the world. So I don't want to try to forecast China right now. I can tell you right now, it's a blur for us And very difficult, but just we feel good about where we stand with EMEA and the States From a stability standpoint, we try to reflect as much in our words what we see for the Q1 for you too.

Speaker 5

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 Deshpat 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 3 d printing of just restorations. Are you guys doing any early work with them on 3 d printing of clear aligners?

Speaker 5

And just kind of again kind of update us maybe with your most recent thoughts on when we might start seeing 3 d printing of liners in the office and kind of your competitive advantages you think you can as a line carve out in that kind of setting? Thanks.

Speaker 2

Yes, Jeff, that's a good question. The desktop metals is primarily we think about a restorative play. How labs play a huge role And restorative dentistry with General Dentists, I mean, they're really strong partners in that sense. What Desktop Metal represents is you see a lot of 3 d printing going on. There's Some really great resin development around restorative types of things, dentures, different areas that desktop metal leads in, and our Itero scanner can really help That too.

Speaker 2

Also, we have a vision of ortho restorative where you use our orthodontic procedures in order to reduce the amount of tooth loss It often comes with restorative procedures too that we'll work together with desktop about. The idea of printing aligners And standard types of STL kind of processes, from a 3 d standpoint, I don't see that. And honestly, Jeff, I'm not one to think that doctors should turn their offices into production facilities. 3 d printing is hard. The materials are difficult.

Speaker 2

There's a lot of doctors actually trying it, but I feel like doctors are much better being physicians and doctors in that sense Then trying to run a manufacturing operation.

Speaker 5

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

Speaker 2

Jeff, I just think there's some things that kind of make sense from a productivity standpoint and some things that don't. Maybe the technology changes to the point, Jeff, we'll have a different conversation. But as it stands today, I really don't believe that.

Speaker 5

Understood. Thank you.

Speaker 2

Yes. Thanks, Jeff.

Operator

Thank you. Our next question comes from Elizabeth Anderson with Evercore. You may proceed.

Speaker 6

Hi, guys. Thanks so much for the question. Hi. I was wondering if you could talk about, 1, How you sort of think about the OpEx spend in terms of particularly sales and marketing in this environment? Do you sort of obviously, with the uncertain demand profile, Are there things that you're doing incrementally in the Q4 and the Q1 that sort of switch that spend around?

Speaker 5

Yeah. I think what,

Speaker 3

you know, 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 volume come back, we'll invest even more. Like we talked about some of the stability in Americas and EMEA.

Speaker 3

So we'll constantly 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.

Speaker 6

That makes sense. And maybe I

Operator

was wondering if you could talk a

Speaker 6

little bit more about the GP demand profile, because that was interesting How that was sort of holding up on a relative basis. I heard what you said obviously about the teen commentary. Is it something about that market or maybe the lower price point per case or anything like that, that would sort of be impacting that? I'd be just curious to get more color on that.

Speaker 7

Elizabeth, it's Joe. Could you restate that question?

Speaker 2

I didn't quite get the entire question.

Speaker 6

I think in your prepared remarks, you talked about the GP dentist sort of Strength versus the ortho on a relative basis in the quarter. So I was wondering if you could talk more about sort of the underlying Color about why that why you sort of think that is at this point?

Speaker 2

Yes, that's a good question. When you think about it, we have it we're an elective procedure, right? And so Someone's going to go to an orthodontist on a procedure like this to have their teeth straightened. With a GP dentist, there's Patient traffic there constantly with cleaning and restorations and different things. And so just that 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.

Speaker 6

Got it. Thank you.

Speaker 2

Yes. Thank you.

Operator

Thank you. The following question comes from Jon Block with Stifel. You may proceed.

Speaker 8

Hi, Josh, guys. Good afternoon.

Speaker 7

Hey, Joe.

Speaker 8

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 rev is flat. So clearly ASP benefits and I think you realize the 5 point Percent of the docs stays on comprehensive or goes to 3 by 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 'twenty two levels when we think about 1Q 23 and into the balance of 23? That's a

Speaker 3

good way to look at it, John, because you're going to have some cases that kind of carry over where they've kind of Order them and they get shipped a little bit later. And then you're right, you're going to have some mix shift between the 3 by 3, which is Kind of the same price and then the full comprehensive. So 2% to 3% in that Q1 is about in that range.

Speaker 2

Go ahead, John.

Speaker 8

I'm sorry, that was a clarifier.

Speaker 7

That was just 2% to 3% sequential,

Speaker 8

John, correct, the 4Q to the 1Q?

Speaker 3

Yes, that's correct.

Speaker 2

Okay.

Speaker 7

And sorry, I mean the second question, just

Speaker 8

On the op margins, I think you said 18% non GAAP for 1Q greater than 20% for the year. I'll ask I'll just Load up on modeling questions here. Do we think about 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 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.

Speaker 8

How do you guys comfortable with that OM guide? There's enough wiggle room, I suppose, in the OpEx where you feel you could titrate spend accordingly? Thanks, guys.

Speaker 3

Yes. I'll take the modeling question, John. Yes, you would expect that just like we have in maybe prior years and so on, as you start to get that volume leverage, you'll start to see Some of that margin improvement as you go throughout the year. So kind of starts at that lower point and you would model it To see some improvement as you go through the year and like we said, total year, slightly above the 20%.

Speaker 2

And John, on the OEM guide and the confidence of it, 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 So from that, we understand our costs and we know what we have give and take. John and I watch it closely and we obviously manage it as a percentage of the total revenue So revenues have to adjust, we have to adjust too. 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 you.

Speaker 8

Fair enough. Thanks guys.

Speaker 2

Thanks, John.

Operator

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

Speaker 9

Hi, good afternoon. Thanks for the question. Joe, I just wanted to kind of Follow-up on your comments about starting to commercialize. Obviously, a product and technology cycle that you seem very excited about in that sort of Ortho and Restore division. I guess, could you maybe just kind of help crystallize that for us in terms of how that kind of comes to market in 2023 and The kind of type of investment that the company needs to make to kind of go after that opportunity?

Speaker 2

Nathan, overall, obviously, we do spend a significant amount on R and D in the business. And the foundation of that is the history of Align because Basically, we have revolutionized digital orthodontics overall. But what we see is it's not just invention for invention sake. We're always after How can we do these cases faster? How do we do them more predictably?

Speaker 2

How do we make it simpler for doctors, a better treatment for patients overall and experience? Just give you one statistic, right? So versus wires and brackets, which we talked about in the script, on an average, we do patient cases 5 months faster And 35% fewer visits to a doctor. And you do that through technology, right? You do that through remote monitoring.

Speaker 2

You do that through the consistency of your algorithms and moving teeth Normally, those seats are going to land as long as patients wear. And so the technology I talked about in those three areas, first of all, whether it's scanning, we get better on scanning every year. AI is a real important part of that because through AI, you can anticipate a lot of things moving scans through a lot faster. Inventions last year like IPP and Invisalign, personal plan, those kinds of technologies really reduce the traffic and communications between a doctor and us in the sense of And lastly, 3 d printed devices, as I mentioned, has always been the Holy Grail because we're the biggest 3 d printer in the world, but we don't really 3 d print devices. We print molds, But you vacuum form over top of it.

Speaker 2

When you vacuum form over top of a mold, you can't control wall thickness

Speaker 4

as

Speaker 2

you can in 3 d printing. And wall thickness is really critical to move teeth. So All these inventions take a lot of time and money overall, but we just see it as a huge opportunity for us to be able to increase Clinical efficacy, efficiency for doctors and patient experience, and that's why we're so excited about it.

Speaker 9

Okay, great. And then just a quick clarification. On the adult side, cases were up 7% sequentially. It sounds like You saw modest improvement in North America. I think that was the case in APAC as well.

Speaker 9

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 one thing about the Western economy is more in North America. Just curious if you also saw the same thing play out in EMEA as well.

Speaker 2

If I get your question right, Nathan, I mean, in May, it was great, both adults and teens. We felt good about it. They came you always go around, I call it the dark side of the moon in Europe in 3rd Right. But when they came out from the Q3, we had a good Q4 from that. And so we felt good on both the adult side and the teen side in Europe.

Speaker 2

Okay. Thank you. Yes. Thank you, Nate.

Operator

Thank you. Our next question comes from Kevin Caliendo with UBS. You may proceed.

Speaker 10

Hi, thanks for taking my question. Hi, guys. I always struggle with this number that you really haven't grown the number of docs, And it's been a while. And I understand that when demand is down, you don't ship to docs every quarter. But even the ones that are registered, Invisalign users haven't really grown.

Speaker 10

And I guess my question is, is there an issue with that? Like why hasn't that number really And do you need it as part of your growth algorithm to keep expanding the number of Is it just a change in culture

Speaker 4

in the world right now?

Speaker 10

Or is it competitive pressures that or is it just harder to find docs who are willing to do this? Because the penetration Of clear aligners, it would suggest there's a lot of doctors out there that could be doing this.

Speaker 2

Hey, Kevin, doctors both on the orthodontic side and on the GP side. I mean, obviously, I think you're right about that. And I mean, obviously, we expand a lot globally too, so everything you said is true. I'll just give you one word on your questions, China. China is like it's down.

Speaker 2

We shipped to thousands of doctors in China. We can't ship to right now. And that's the answer to your question in the sense of 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 find more doctors. It's just we can't escape the downdraft of China right now.

Speaker 3

And your equation is right. It's new doctors, doctors shipped to as well as utilization. That is the those are the 2 key metrics that help us grow our business.

Speaker 10

Can I ask a quick follow-up? You talked about the need to see consumer demand signals improving. And How far ahead can you actually see that? Meaning, 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 it We're starting to see an inflection point.

Speaker 10

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 point?

Speaker 2

Kevin, when we look at things, we're a real time business obviously. When you're a 3 d printing business like we do and what we make, and There's no leading indicator that would say that it has an R squared of over 9, 90%. But what we watch closely are the Consumer confidence indices in the States and Europe where we can get good ones. Now they're more confirming than they are predictive in what we're seeing, But they reflect the I think best from a demand standpoint of what we can expect. And The consumer confidence indices that we see both in Europe and the States have flattened out or turned slightly positive in the last month or so.

Speaker 1

Thanks, Kevin. Next question, please.

Operator

Absolutely. Our next one comes from Brandon Vasquez with William Blair. You may proceed.

Speaker 7

Hi, everyone. Thanks for taking the question. I wanted to ask one to kind of go back to a couple of us we're trying

Speaker 2

to get

Speaker 7

at. You're up you guided to a full year op margin about 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, we're just stable through the rest of the year rather than improving?

Speaker 3

Yes, it's a good question. I mean, we would expect as we start to see demand as it stabilize It's the exchange in the world and give us a better operating environment. We would expect to see some sequential improvement in revenue as you go through the year. And that would help us get some of the leverage that we need from an op margin standpoint.

Speaker 1

Thanks, Brandon. Next question please.

Operator

Absolutely. The next question comes from Erin Wright with Morgan Stanley. You may proceed.

Speaker 11

Great. Thanks. Just a follow-up to that last question, just to clarify, I understand you're not giving the full year guidance from a volume 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 Contribution?

Speaker 11

Thanks.

Speaker 3

I can start on the volume. I mean, we would expect as we're watching a lot of the signals closely. We try to give more color around Q1 and the rest of the year will play out as things in the world change To the situation. So we'll watch volume closely. But like I said, we would expect some sequential improvement as you go forward through the year, but We're not getting into the specifics of what it is for total.

Speaker 5

All right.

Speaker 2

It's Joe. On the DSP program, Originally, that was targeted primarily at retainers or orthodontists because a lot of orthodontists were making their own Retainers in a back room and for wires and brackets. And so we signed up. We also obviously do the touch up cases with that too, it's 10 aligners or less. That's worked out well.

Speaker 2

And we I think what you're referring to in the end is that's a subscription program to the doctor, 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 Recurring 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.

Speaker 1

Thank you. Next question please.

Operator

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

Speaker 5

You may proceed.

Speaker 4

Great. Thanks, guys. I'll throw in a couple just real quick, some are very fast. First on China, I think you mentioned that, I mean, you used the word for blur, which is kind of understandable, but any updated thoughts on VBP or any of the local partners on the ground, can you tell what's going on there while the COVID situation is ongoing or is it just kind of a black box? And then I also wanted to ask on the tax rate, the non GAAP tax rate, you called out 20% in 4Q.

Speaker 4

Should we sort of assume that that's the tax rate go forward?

Speaker 3

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

Speaker 2

On China VPP, I mean, obviously, that program over there, we talked about it several times. It's in Tier 3, Tier 4 cities. It's really not in the middle of our portfolio. It was picked up by some Chinese We're primarily private over there. We will sell the public hospitals.

Speaker 2

The program is not exclusive in that sense too. So I We feel like we can manage in China right now around this fine. All right. Thanks.

Speaker 6

Thank you.

Speaker 1

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

Operator

This concludes today's conference. Thank you for your participation. You may now disconnect your line.

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Earnings Conference Call
Align Technology Q4 2022
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