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    Align Technology Inc (ALGN)

    Business Description

    Align Technology, Inc. is a global medical device company specializing in the design, manufacture, and marketing of Invisalign® clear aligners, which are used by orthodontists and general dental practitioners to treat malocclusions, or misaligned teeth . The company also provides Vivera™ retainers for retention, iTero™ intraoral scanners and services for dentistry, and exocad™ CAD/CAM software for dental laboratories and practitioners . Align operates through two main segments: Clear Aligner and Imaging Systems and CAD/CAM Services, with the Invisalign system being the principal product line .

    1. Clear Aligner - Develops and markets Invisalign® clear aligners, which are used to treat teeth misalignment by orthodontists and general dental practitioners .
      • Vivera™ Retainers - Offers retainers designed to maintain teeth alignment post-treatment .
    2. Imaging Systems and CAD/CAM Services - Provides iTero™ intraoral scanners and services for dental practices, along with exocad™ CAD/CAM software for dental laboratories and practitioners .

    Q3 2024 Summary

    Initial Price$241.65July 1, 2024
    Final Price$245.35October 1, 2024
    Price Change$3.70
    % Change+1.53%

    What went well

    • Investing in Key Technologies for Future Growth: Align is heavily investing in critical future technologies such as 3D printing and the next phases of the Lumina scanner, which they believe will revolutionize the orthodontic industry and position the company for another growth cycle when the market rebounds.
    • Strong Adoption of iTero Lumina Scanner: Despite economic challenges, the new iTero Lumina scanner has captured doctors' attention, leading to strong sales and providing a foundation for future growth, especially with the upcoming restorative software release in Q1 '25.
    • Significant Growth in International Markets: Align reported strong growth in markets like China and the Asia Pacific region, with record teen case starts driven by products like Invisalign First and the Palatal Expander, indicating underpenetrated global markets and substantial future opportunities.

    What went wrong

    • Align Technology announced a global reorganization and restructuring, including headcount reductions, which may indicate cost pressures and challenges in the business.
    • Investments in new technologies like 3D printing are expected to be dilutive to gross margins in fiscal year 2025, suggesting near-term margin pressure before benefits are realized in 2-3 years.
    • Reduced R&D spending (down 4% year-over-year) and significantly lower CapEx spending could signal a reduction in investment towards future growth initiatives.

    Q&A Summary

    1. Restructuring and Margin Outlook
      Q: What's the nature of the restructuring and its impact on margins?
      A: Align is undergoing restructuring involving a reduction of about 700 employees, approximately twice the size of last year's restructuring. This move aims to create room for investment in key growth areas like Direct Fab, 5-minute ClinCheck, and Lumina restorative, while also delivering year-over-year operating margin accretion in 2025. The restructuring will help fund these initiatives and position the company for future growth.

    2. Macro Conditions and US Market Softness
      Q: How is the macro environment affecting the US market versus international?
      A: The US market is facing challenges due to low consumer confidence and economic concerns, impacting patient throughput and case acceptance rates. Both the orthodontic and dental channels are equally pressured. In contrast, international markets, particularly China and parts of Europe, have shown better performance.

    3. Operating Margin Expansion and Investments
      Q: Are you committing to operating margin expansion in '25 despite investments?
      A: Yes, Align is committed to year-over-year operating margin accretion in 2025, even while investing in initiatives like Direct 3D Printing Fabrication, 5-minute ClinCheck, and Lumina. The restructuring provides room to make these investments while still improving margins.

    4. 3D Printing Initiative and Gross Margin Impact
      Q: How will the 3D printing initiative impact gross margins?
      A: Initially, the Direct Fab 3D printing will have a higher cost until scaled up, which may dilute gross margins in 2025. However, as production scales over the next 2 to 3 years, Align expects significant improvements in productivity and reduced material costs, positively impacting gross margins.

    5. Top Line Growth Expectations in 2025
      Q: What are your top line expectations for 2025?
      A: While not providing specific guidance, Align indicates that starting from the fourth quarter is a good baseline. Future growth will depend on economic conditions, with additional contributions expected from new products like Lumina restorative. More details will be provided as 2025 approaches.

    6. Teen Market Dynamics
      Q: What's your assessment of the teen market performance?
      A: Internationally, especially in Asia, the teen market showed strong performance with products like Invisalign First and Invisalign Palatal Expander. In the US, orthodontic customers are challenged, with lower close rates among teens due to economic pressures, leading some practices to revert to wires and brackets to maintain profitability.

    7. iTero Scanner and Lumina Rollout
      Q: How is the iTero growth progressing with Lumina rollout?
      A: Despite pressure on capital equipment sales, the Lumina scanner, a brand-new platform, has captured doctors' attention, resulting in strong sales even in a traditionally slower third quarter. The restorative workflow is expected to launch in the first quarter of next year, further supporting growth.

    8. GLP-1 Medications Impact
      Q: Is demand for GLP-1 drugs affecting Invisalign sales?
      A: While some speculate that spending on GLP-1 medications might impact discretionary spending on treatments like Invisalign, Align hasn't quantified this effect. They believe the broader economic environment and low consumer confidence are the more significant factors affecting demand.

    9. China Market Performance
      Q: Can you elaborate on the positive performance in China?
      A: China showed strong results during the teen season, with increased sales to more doctors and higher utilization. There was good adoption of products like Invisalign First, contributing to the strong performance in this market.

    10. ASPs and Factors Affecting Them
      Q: What factors are affecting ASPs, and what's the outlook?
      A: ASPs have been impacted by factors like VAT in the UK, which will anniversary at the beginning of next year. Currency headwinds have also played a role. Looking ahead, Align expects ASPs to be flat to slightly down, with percentages in the range of 1.1% down year-over-year.

    11. Costco Partnership and Financing Initiatives
      Q: What's the status of the Costco partnership and financing initiatives?
      A: The Costco partnership has had some success but is not yet material to the business. It's part of a brand strategy to leverage the strong Invisalign brand. Align is also working on financing initiatives to help consumers who are financially challenged, aiming to increase case acceptance rates.

    Key Metrics

    View all financials →
    Revenue by Segment - in Millions of USDFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Clear Aligner789.8832.7794.9781.93,199.3817.3831.7786.8
    - Americas----1,463.0-371.8349.2
    - International----1,449.5-383.0361.5
    - Non-case74.3---286.9-76.976.1
    Systems and Services153.3169.5165.3174.8662.9180.2196.8191.0
    - Scanners and Services--------
    Total Revenue943.11,002.2960.2956.83,862.3997.41,028.5977.9
    Revenue by Geography - in Millions of USDFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    U.S.411.1429.6421.3403.91,665.9432.1438.5421.204
    Switzerland313.1341.0259.6254.61,168.3251.8270.9216.638
    China--------
    Other International218.9231.6279.4298.11,028.0313.6319.0340.030
    - Americas-375.3---372.3-349.2
    - International-378.4---370.6-361.5
    - Non-case-79.0---74.3-76.1
    Netherlands--------
    Total Revenue943.11,002.2960.2956.83,862.3997.41,028.5977.872
    KPIs - Metric / QuarterFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Invisalign Cases with Digital Scanner in Americas (%)93.194.094.695.1-95.695.996.1
    Invisalign Cases Digitally by NA Orthodontists (%)97.797.997.998.0-98.298.298.2
    Utilization Rate NA Orthodontists (cases/doctor)26.226.428.825.9-28.228.828.3
    Utilization Rate NA GP (cases/doctor)4.95.24.95.0-4.95.35.0
    International Doctor Utilization Rate (cases/doctor)6.26.66.16.5-6.36.76.2

    Questions to Ask Management

    1. Given the continued sluggish consumer demand in the U.S., especially impacting patient throughput and treatment conversion rates, what specific strategies are you implementing to stimulate growth in your orthodontic and dental channels amid these challenges?

    2. With the recent restructuring actions, including the elimination of key executive roles and workforce reductions, how do you plan to maintain operational effectiveness and support your growth initiatives, particularly in scaling critical technologies like direct 3D printing?

    3. Considering the pressures on capital equipment sales due to high interest rates and economic conditions, how confident are you in driving adoption of the new Lumina scanner, especially with the upcoming restorative software release, and what measures are you taking to incentivize purchases in this tough market?

    4. International markets like China have shown growth for Align, but with geopolitical tensions and varying economic conditions globally, how sustainable is this growth, and what strategies are you employing to mitigate risks and capitalize on opportunities in these regions?

    5. As you invest heavily in future technologies amidst a period of economic malaise and restructuring, how are you balancing these long-term investments with the need to deliver margin accretion and meet near-term financial performance expectations?

    Share Repurchase Program

    Program DetailsProgram 1Program 2
    Approval DateMay 2021 January 2023
    End Date/DurationCompleted in March 2023 No expiration date
    Total additional amount$1.0 billion $1.0 billion
    Remaining authorization$0 $225.0 million
    DetailsProgram completed $275.0 million repurchase planned for Q4 2024-Q1 2025

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024
    • Guidance:
      1. Worldwide Revenues: Expected to be in the range of $995 million to $1.015 billion .
      2. Clear Aligner Volume and ASPs: Expected to be slightly up sequentially .
      3. Systems and Services Revenues: Expected to be up sequentially, consistent with typical Q4 seasonality .
      4. GAAP Operating Margin: Expected to be slightly lower than 14%, primarily due to restructuring charges .
      5. Non-GAAP Operating Margin: Anticipated to be slightly up sequentially .
      6. Capital Expenditures for Fiscal 2024: Expected to be above $100 million .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024 and FY 2024
    • Guidance:
      • Q3 2024:
        1. Worldwide Revenues: Expected to be in the range of $980 million to $1 billion .
        2. Clear Aligner Volume: Expected to be down sequentially .
        3. Clear Aligner ASPs: Expected to be down sequentially .
        4. Systems and Services Revenues: Expected to be down sequentially .
        5. GAAP Operating Margin: Expected to be below Q3 2023 .
        6. Non-GAAP Operating Margin: Expected to be flat compared to Q3 2023 .
      • FY 2024:
        1. Total Revenue Growth: Expected to be up 4% to 6% year-over-year .
        2. GAAP Operating Margin: Expected to be slightly below 2023 .
        3. Non-GAAP Operating Margin: Expected to be above 2023 .
        4. Capital Expenditures: Expected to be approximately $100 million .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024 and FY 2024
    • Guidance:
      • Q2 2024:
        1. Worldwide Revenues: Expected to be in the range of $1.030 billion to $1.050 billion .
        2. Clear Aligner Volume: Expected to be up sequentially .
        3. Clear Aligner ASP: Expected to be down slightly sequentially .
        4. Systems and Services Revenue: Expected to be up sequentially .
        5. GAAP and Non-GAAP Operating Margin: Expected to be slightly above Q1 2024 .
      • FY 2024:
        1. Total Revenue Growth: Expected to be up 6% to 8% versus 2023 .
        2. Clear Aligner ASPs: Expected to be slightly up year-over-year .
        3. GAAP and Non-GAAP Operating Margin: Expected to be slightly above 2023 .
        4. Capital Expenditures: Expected to be approximately $100 million .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: Q1 2024
    • Guidance:
      1. Worldwide Revenues: Expected to be in the range of $960 million to $980 million .
      2. Clear Aligner Volume and ASPs: Expected to be up slightly sequentially .
      3. Systems and Services Revenue: Expected to be down slightly sequentially .
      4. GAAP and Non-GAAP Operating Margin: Expected to be slightly above Q1 2023 .
      5. Total Revenues for FY 2024: Expected to be up mid-single digits over 2023 .
      6. Clear Aligner and Systems and Services Revenues: Expected to grow year-over-year .
      7. Clear Aligner ASPs: Expected to be up slightly year-over-year .
      8. Capital Expenditures: Expected to be approximately $100 million .

    Competitors

    Competitors mentioned in the company's latest 10K filing.

    • Traditional orthodontic treatments using metal brackets and wires .
    • Clear aligner products manufactured and distributed by various companies, both within and outside the U.S. .
    • Direct-to-consumer (DTC) companies providing clear aligners directly to consumers .
    • Doctors manufacturing retainers and custom clear aligners using 3D printing technology .
    • Traditional dental conglomerates and companies dedicated primarily to scanner development and sales in the intraoral scanner market .
    • Traditional PVS impressions used for clear aligner therapy or other dental procedures .
    • Traditional bite wing 2D dental x-rays for detecting interproximal caries .
    • Traditional medical device companies, laboratories, startups, and Dental Support Organizations (DSOs) manufacturing custom aligners .
    • Large consumer product companies potentially supplying orthodontic products .