Align Technology - Q2 2024

Transcript

Operator (participant)

Welcome to the Align Technology second quarter 2024 earnings call. At this time, all participants are in 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.

Shirley Stacy (VP of Corporate Communications and Investor Relations)

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 second quarter 2024 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 one 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 statement.

We have posted historical financial statements with corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our second quarter 2024 conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information. With that, I'd like to turn the call over to Align Technology's President and CEO, Joe Hogan. Joe?

Joe Hogan (President and CEO)

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, Systems and Services and clear aligners. John will provide more detail on our Q2 financial performance and comment on our views for our 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 2024 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 2024 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 2024 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, EMEA, and Latin America. Our Q2 results also reflect a record number of doctors submitting cases and record doctors shipped to for the quarter. Q2 2024 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 one point year-over-year. For imaging systems and CAD/CAM services, Q2 2024 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 and wand upgrades, iTero Element scanner trade-ins, as well as increased iTero scanner leases. For Q2 2024, adult patient case starts were up 5% sequentially and 1% year-over-year, reflecting our highest number of adult shipments in eight 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 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 the 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 e-commerce. 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 touch-up 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 2024 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 Doctors 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 align with our vision, strategy, and business model goals.

Today, Invisalign is the most recognized orthodontic brand globally, and Invisalign clear aligner treatment is faster and more effective than traditional metal braces, yet the underlying market opportunity 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 and 50 million visitors to our websites globally. Below are additional highlights from Q2, and more information is available in our Q2 2024 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, YouTube, Snapchat, WeChat, Douyin, across the markets. Reaching young adults as well as teens and their parents also requires the right engagement through Invisalign influencers and creator-centric campaigns.

In the Americas, our influencer and 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 teen demand, we launched new activations with teen high school sports social media platform, Overtime, 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 continued to invest in consumer advertising across the region and expanded our reach in Japan and India via Meta and YouTube, and partnered with key social media influencers.

Finally, adoption of My Invisalign consumer patient app continued to increase, with over four million downloads to date and over 384,000 monthly active users, an 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 six hundred and ninety-two thousand cases, reducing time spent in 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 Systems and Services revenue were up 16.1%, reflect higher scanner ASPs and non-system revenues driven by iTero Lumina wand upgrades, increased service revenues, and a larger base of scanners sold.

On a sequential basis, Q2 Systems and Services revenues were up 9.2%, reflecting higher scanner volumes, higher scanner ASPs, and higher non-systems revenues driven by iTero Lumina wand upgrades. The iTero Lumina's 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 iTero Element 5D Plus scanner. During the second quarter, we had a record number of competitive trade-ins, demonstrating the continued success of the iTero Lumina 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 lapsed 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 2025. Today, we introduced the iTero Design Suite, offering doctors an intuitive way to facilitate designs for 3D printing of models, bite splints, and restorations in 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 MyiTero portal. Software is expected to be available later this year in selected markets. With that, I'll turn it over to John.

John Morici (CFO)

Thanks, Joe. Now for our Q2 financial results. Total revenues for the second quarter were $1,028.5 million, up 3.1% from the prior quarter and up 2.6% from the corresponding quarter a year ago. On a constant currency basis, Q2 2024 revenues were impacted by unfavorable foreign exchange of approximately $11.6 million, or approximately 1.1% sequentially, and were unfavorably impacted by approximately $18.1 million year-over-year, or approximately 1.7%. For clear aligners, Q2 revenues of $831.7 million were up 1.8% sequentially, primarily from higher volumes, partially offset by lower ASPs.

On a year-over-year basis, Q2 clear aligner revenues were flat, primarily due to higher discounts, a product mix shift to lower ASP products, and the unfavorable impact from foreign exchange, offset by lower net revenue deferrals, higher volumes, and price increases. Q2 2024 clear aligner revenues were unfavorably impacted by foreign exchange of approximately $9.5 million, or approximately 1.1% sequentially. On a year-over-year basis, clear aligner revenues were unfavorably impacted by foreign exchange of approximately $14.7 million, or approximately 1.7%. For Q2, Invisalign ASPs for comprehensive treatment were down sequentially and year-over-year. On a sequential basis, the decline in ASP primarily reflects higher discounts, a product mix shift to lower ASP products, and the unfavorable impact of foreign exchange.

On a year-over-year basis, the decline in comprehensive ASPs primarily reflects higher discounts, a product mix shift to lower ASP products, and the unfavorable impact from foreign exchange, mostly offset by lower net revenue deferrals and price increases. For Q2, Invisalign ASPs for non-comprehensive treatment were down sequentially and year-over-year. On a sequential basis, the decline in ASPs reflects the unfavorable impact from foreign exchange, higher net revenue deferrals, and a product mix shift to lower ASP products, partially offset by price increases. On a year-over-year basis, the decrease in non-comprehensive ASPs reflects higher discounts, a product mix shift to lower ASP products, the unfavorable impact of foreign exchange, and the unfavorable impact of a price adjustment in the U.K. to make the recently mandatory application of VAT to our aligners cost neutral to customers.

Our Invisalign Comprehensive 3-and-3 product is available in North America, EMEA, and in certain markets across APAC. We are pleased with the continued adoption of the Invisalign Comprehensive 3-and-3 product and anticipate adoption will continue to increase. Comprehensive 3-and-3 provides doctors the flexibility they want while allowing us to recognize more revenue upfront, with deferred revenue being recognized over a shorter period compared to our traditional Invisalign Comprehensive product and benefiting us with a more favorable gross margin. Clear aligner deferred revenues on the balance sheet decreased $7.8 million, or 0.6% sequentially, and decreased to $5.2 million or 0.4% year-over-year, and will be recognized as the additional aligners are shipped.

Q2 2024 Systems and Services revenues of $196.8 million were up 9.2% sequentially, primarily due to higher volumes, higher ASPs, and non-systems revenues, mostly related to upgrades. Q2 2024 Systems and Services revenues were up 16.1% year-over-year, primarily due to higher ASPs, increased non-system revenues, mostly related to upgrades in our leasing rental programs and higher service revenues. We are pleased to be able to leverage our operational and financial capabilities to provide different types of go-to-market models for our customers, such as leasing and rental options. In the end, we are focused on selling the way our customers want to buy. Q2 2024 Systems and Services revenues were unfavorably impacted by foreign exchange of approximately $2.1 million, or approximately 1% sequentially.

On a year-over-year basis, Systems and Services revenues were unfavorably impacted by foreign exchange of approximately $3.4 million, or approximately 1.7%. Systems and Services deferred revenues on the balance sheet was down $20.4 million, or 8.3% sequentially, and down $43.4 million or 16.2% year-over-year, primarily due to the recognition of services revenues, which are recognized ratably over the service period. The decline in deferred revenues, both sequentially and year-over-year, primarily reflects the shorter duration of service contracts applicable to initial scanner purchases. As our scanner portfolio expands and we introduce new products, we are increasing the opportunities for customers to upgrade and make trade-ins, in addition to our scanning, leasing, and rental programs.

Developing new capital equipment opportunities to meet the digital transformation needs of our customers and our DSO partners is a natural progression for our equipment business with a large and growing base of scanners sold. The structural programs we have implemented across both of our operating segment benefit our customers by providing them with more options to choose what they need, in some cases, at a reduced price that may impact our ASPs. But the cost of service for us is lower, and the benefit is then reflected in our gross margins. Moving to gross margin. Second quarter overall gross margin was 70.3%, up 0.3 points sequentially and down 0.9 points year-over-year.

Overall, gross margin was unfavorably impacted by foreign exchange by approximately 0.3 points sequentially, and unfavorably impacted by approximately 0.5 points on a year-over-year basis. Clear aligner gross margin for the second quarter was 70.8%, down 0.1 point sequentially, due primarily to lower ASPs, partially offset by lower additional aligners and leveraged manufacturing spend. Clear aligner gross margin for the second quarter was down 1.7 points year-over-year, due primarily to lower ASPs and higher manufacturing spend as we continue to ramp up Poland manufacturing facility and the impact of unfavorable foreign exchange. Systems and Services gross margin for the second quarter was a record 68.2%, up 2.3 points sequentially, primarily due to higher ASPs and manufacturing efficiencies.

Systems and Services gross margin for the second quarter was up three points year-over-year for the reasons stated above. Q2 operating expenses were $575.6 million, up 5.9% sequentially and 6.3% year-over-year. On a sequential basis, operating expenses were up by $31.9 million, due primarily to about $31 million in legal settlements. Year-over-year operating expenses increased by $33.9 million, primarily due to legal settlements and higher employee compensation, partially offset by lower outside services, advertising, and marketing expenses. On a non-GAAP basis, excluding stock-based compensation, amortization of acquired intangibles related to certain acquisitions, restructuring, legal settlements, and other charges, operating expenses were $499.5 million, down 1.3% sequentially, and down 1.1% year-over-year.

Our second quarter operating income of $147 million resulted in an operating margin of 14.3%, down 1.2 points sequentially and down 2.9% year-over-year. Operating margin was unfavorably impacted from foreign exchange of approximately 0.6 points sequentially, and unfavorably impacted by 1.2 points year-over-year. On a non-GAAP basis, which excludes stock-based compensation, amortization of intangibles related to certain acquisitions, restructuring, legal settlements, and other charges, operating margin for the second quarter was 22.3%, up 2.5 points sequentially and up one point year-over-year.

Interest and other income expense, net for the second quarter, was an expense of $3.2 million, primarily due to unfavorable foreign exchange, compared to an income of $4.3 million in Q1 of 2024, and an expense of $0.3 million in Q2 of 2023. Recall that Q1 2024 included a non-recurring gain on our equity investments. The GAAP effective tax rate in the second quarter was 32.9%, compared to 33.7% in the first quarter, and 34.8% in the second quarter of the prior year. The second quarter GAAP effective tax rate was lower than the first quarter effective tax rate, primarily due to discrete tax expenses recognized in Q1 of 2024 that did not reoccur in Q2 of 2024, and that benefit was partially offset by an increase in non-deductible expenses.

Our non-GAAP effective tax rate in the second quarter was 20%, which reflects our long-term projected tax rate. Second quarter net income per diluted share was $1.28, down sequentially $0.11 and down $0.18 compared to the prior year. Our EPS was unfavorably impacted by $0.11 on a sequential basis and $0.17 on a year-over-year basis due to foreign exchange. On a non-GAAP basis, net income per diluted share was $2.41 for the second quarter, up $0.27 sequentially and up $0.19 year-over-year. Moving on to the balance sheet. As of June 30, 2024, cash, cash equivalents, and short and long-term marketable securities were $782.1 million, down sequentially $120.4 million, and down $251.7 million year-over-year.

Of our $782.1 million balance, $140 million was held in the U.S., and $642.1 million was held by our international entities. During Q2 2024, we repurchased approximately 0.6 million shares of our common stock at an average price of $250.73, through $150 million of open market repurchases. As of June 30, 2024, $500 million remains available for repurchases of our common stock under the January 2023 repurchase program. During the quarter, we completed a $75 million equity investment in Heartland Dental, a multidisciplinary DSO with GP and ortho practices across the United States. Q2 accounts receivable balance was $1,020.1 million, up sequentially.

Our overall days sales outstanding was 89 days, up approximately three days sequentially and up approximately eight days as compared to Q2 last year. Cash flow from operations for the second quarter was $159.8 million.... Capital expenditures for the second quarter were $53.5 million, primarily related to our continued investments to increase aligner manufacturing capacity and facilities. Free cash flow, defined as cash flow from operations, less capital expenditures, amounted to $106.4 million. Now turning to our outlook. Assuming no circumstances occur beyond our control, we provide the following business outlook for Q3 and fiscal year 2024. For Q3 2024, we expect our Q3 worldwide revenues to be in a range of $980 million-$1 billion.

We expect clear aligner volume to be down sequentially as a result of Q3 seasonality and clear aligner ASPs to be down sequentially, primarily due to foreign exchange and product mix. We also expect Systems and Services revenues to be down sequentially because of Q3 seasonality. We expect our Q3 2024 GAAP operating margin to be below Q3 2023 GAAP operating margin, and Q3 2024 non-GAAP operating margin to be flat to Q3 2023 non-GAAP operating margin. For fiscal year 2024, we expect fiscal year 2024 total revenue growth to be up 4%-6% year-over-year, due in part to lower clear aligner ASPs year-over-year from continued unfavorable foreign exchange and product mix.

In addition, our revised revenue outlook reflects our anticipated commercial launch of iTero Lumina with restorative capabilities to occur in Q1 of 2025 instead of 2024, as previously anticipated. We expect fiscal year 2024 GAAP operating margin to be slightly below 2023 GAAP operating margin, and 2024 non-GAAP operating margin to be above 2023 non-GAAP operating margin. We expect investments in capital expenditures for fiscal year 2024, 2024 to be approximately $100 million. Capital expenditures primarily relate to building construction and improvements, as well as manufacturing capacity in support of continued expansion. With that, I'll turn it back over to Joe for final comments. Joe?

Joe Hogan (President and CEO)

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 and the future of digital innovation. Our purpose is to transform smiles and change lives, with the goal of being the standard of care in orthodontics with Invisalign clear aligner 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 and potential patients, who increasingly seek convenient, elevated digital experiences. Our digital platform of integrated technologies, software, and services has helped improve orthodontic treatment for 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?

Operator (participant)

Thank you. At this time, we would like to conduct a question-and-answer session. If you'd like to ask a question, please press star one one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star one one again to remove yourself from the queue if your question has been answered. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star one one keys. One moment for our first question. Our first question comes from the line of Michael Cherny from Leerink Partners. Your question please.

Michael Cherny (Senior Managing Director and Equity Research Analyst of Healthcare Technology and Distribution)

Good afternoon, and thank you for taking all the call, taking 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 as you think about the guidance, in particular on the ASP side, how are you thinking about the flow-through of what isn't within your control on mix? Is this something you can do on promotion? Is there anything else that can come from a pricing competition that we 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.

John Morici (CFO)

Yeah, it's a good question, Michael. This is John. Look, when we looked at the total year, and based on what we're seeing now, we see the unfavorable foreign exchange impact. We saw it in Q2, and we continue to see and project that that will continue for the rest of this year. So that's in our outlook. Just over a point of our reduction in our total year is related to foreign exchange. The mix effect that you talked about, that's really the way our customers want to buy. In some cases, they're buying lower price products as part of our portfolio. We see that as incremental in cases like Doctor Subscription Program. They're just at a lower ASP, but what we end up seeing then is a better gross margin.

Our cost to serve, in many cases, is lower than that, but it really is a reflection of what, doctors wanna do with, the cases that they buy.

Michael Cherny (Senior Managing Director and Equity Research Analyst of Healthcare Technology and Distribution)

Okay. Thank you. Thanks, folks.

Operator (participant)

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

Elizabeth Anderson (Senior Managing Director)

Hi. Hi, guys. Thanks so much for the question. I was wondering if you had just regarding the guidance, if you had any insights that you could share on whether any of the iTero restorative scan revenue was originally contemplated in the 2024 guidance, and now with the push-out on the launch, if that was sort of an impact on the, on the guidance as well? And then as a follow-up, if you could talk a little bit more about the acceleration in the teen revenue, or sorry, in the teen cases, which accelerated off a tougher comp, that would be helpful to also get some more additional perspective there. Thanks.

John Morici (CFO)

Yeah. Hi, Elizabeth. Yes, you're right. The Lumina restorative that we expected to launch in the fourth quarter, now the full launch 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.

Elizabeth Anderson (Senior Managing Director)

Great. And any chance you wanna quantify that iTero restorative contribution change or no?

John Morici (CFO)

Yeah. Yeah, we're not giving it directly, but it's, you know, it's less than 1%, slightly less than 1% of the total.

Elizabeth Anderson (Senior Managing Director)

That's helpful. Thank you.

Operator (participant)

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

Joe Hogan (President and CEO)

Hey, Jon.

Jon Block (Managing Director)

Hey, guys. Hey, Joe. Good afternoon. Yeah, where to start? You, you know, everyone was nervous about cases, and then you come in and you beat cases handling, and obviously, the focus is gonna be on the ASP. So, John, maybe let me know if I have these numbers right, but it looks like the aligner ASP was down roughly 4% Q-over-Q. The FX hit was about 1%. So can you talk in detail as much as possible, the other 3% decline in the ASP, Q-over-Q, if I've got that right? You know, it seems like a big deviation from where your head was at three months ago. How much of it was mix versus discounts? And if it was a lot of mix, why did mix become so pronounced over the past three months? And maybe we could start there, please.

John Morici (CFO)

Yeah, John, and when you look at mix that we have, we see doctors, you know, 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 op margins.

Jon Block (Managing Director)

Okay. So I guess to maybe just as a follow-up to that, are you saying that discounts weren't more aggressive, call it in 2Q 2024, than maybe what we've seen historically? And just to tack on to that follow-up, you know, you brought down the midpoint of the rev guide from about 7% to 5%. You said FX was 1%. You said the GP restorative push on Lumina was slightly less than 1%. I mean, are you sort of implying that clear aligner revenue, by and large, for 2024, is somewhat unchanged or maybe down a smidge? And then I'll ask my quicker follow-up. Thanks.

John Morici (CFO)

Yeah, clear aligner revenue down, down a little bit for the total year because of the ASPs that we spoke about. You know, not necessarily due to, due to any volume changes. Like you said, we are pleased with the Q2 volume that we have, but that's how we would look at the, the change. You know, mostly, mostly the effects 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.

Jon Block (Managing Director)

Okay. And last question for me, I guess, online. Just, John, if I've got this right, it looks like the revenue comes down a little bit, you know, the midpoint, but I believe the non-GAAP EBIT margins came up slightly. I think before it was, like, flat to slightly up, and now you're saying slightly up. So maybe just talk through the dynamics where you're able to arguably increase the non-GAAP EBIT margin assumption for 2024, even off the more modest revenue base. And thanks for the time, guys.

John Morici (CFO)

... Yeah, no, it's a good question. And so as we looked at, and as we talk about some of the, you know, I know ASP gets a focus, but really, when you look at the margin that we get on all of these products, as you 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.

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.

Operator (participant)

Thank you. Our next question comes from the line of Jeff Johnson with Baird. Your question, please.

Joe Hogan (President and CEO)

Hey, Jeff.

Jeff Johnson (Managing Director and Senior Research Analyst)

Hey, Joe. Good afternoon, guys. I wanted to start maybe on your doctor ship-to number in the quarter. You shipped to a little over 86,000 docs this quarter. I think for three straight years, you've kind of been in that 82,000-85,000 range. So maybe not a big breakout, but at least, you know, some of these underlying numbers on utilization, these doctors shipped to and that are, are starting to perk up a little bit. So I guess what I'm trying to understand on that doctor ship-to number, are you starting to see some benefits of some of the investments John's been talking about the last couple of quarters on getting that doctor prescribing base to expand? Is it expanding that base?

Is it slowing the outflow of that base, as we know you've had some competitive losses here over the last couple of years? Just maybe help us understand the inflow and the outflow rates and, and what's moving, between those two pieces. Thanks.

Joe Hogan (President and CEO)

Hey, Jeff. Joe, you know, first of all, it's. You know, we're pleased with that. It's good to see the utilization go up. It's also great to see the doctors go up, too. Obviously, there's you know strong concerted effort. We talk about that, you know, underserved marketplace out there, and we know there's still a lot of doctors to train, and there's still, you know, doctors do a lot more cases, so it's a big focus for the business. You know, when you ask that question, you know, are we losing few or gaining few? There's always a mix and a change in those kinds of things, Jeff. You know, 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.

You know, the whole story with what we've been through as competitors have entered the marketplace is, you know, sometimes we'll lose some doctors; they often come back. And, you know, one of the things about, you know, our business, too, sometimes it takes, you know, 18 months for doctors to figure out if those competitive cases are actually going to work. And you know, and obviously I think we're making good progress in the sense of convincing doctors to move ahead with us. And this growth in doctors and utilization occurred, you know, across the globe, which is great. It wasn't like it just came out of one region.

Jeff Johnson (Managing Director and Senior Research Analyst)

Yeah, understood. All right. Then maybe just to follow-up on the manufacturing side. You know, we saw the news maybe a couple of months ago of Emory's new role leading Direct Fab. He's going to stay in that role, it sounds like, through 2026, when he's going to ride off into the sunset. So does that tell us anything about timelines on Direct Fab? I mean, Emory just doesn't seem like the kind of guy that would want to walk away in the middle of something. So is that kind of drawing a line in the sand that by 2026, you should be up and running fairly well, fairly, you know, maybe not efficiently, but fairly completely in getting that Direct Fab plans all put together and rolling out some of that 3D printed stuff in a bigger way?

Joe Hogan (President and CEO)

Hey, Jeff, it's a good question. You know, 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, you know, aligners to the point, you know, that he has. And so it's really fun to have him in this role because he gives us great feedback in the sense of where we are. You know, Jeff, the best I can say, what we've talked about with analysts is we're looking at two to three 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 that'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 two to three year kind of a rollout.

Jeff Johnson (Managing Director and Senior Research Analyst)

Understood. Thank you.

Joe Hogan (President and CEO)

Okay.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Brandon Vazquez from William Blair. Your question, please.

Brandon Vazquez (Equity Research Analyst)

Hi, everyone. Thanks for taking the question. I'll, 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, 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 to normal seasonality within this year?

And then the follow-up to that on kind of a long-term guidance question is like, look, if we look, let's call it three years out, what's kind of the growth expectations of this business or the growth algorithm? Any color you can give us around that, assuming that, you know, we're stuck in somewhat of an uncertain end market, stable, but not exactly where you want it. So, you know, talk about the opportunity to accelerate, if even possible, in an end market like this over the couple, three-plus years. Thank you.

John Morici (CFO)

Yeah, Brandon, this is John. I could take the question kind of on the remaining part of this year and so on. So we've guided to what we can see based on how the quarter played out. We actually saw in the second quarter, I mean, I'm not saying it's a return to normal seasonality, but it's much more seasonal in the second quarter in terms of how our volume progressed and how it changed quarter-over-quarter to more normal seasonality. You know, and so our reflection of what we try to do for the rest of this year, based on what we see in terms of volume, take out FX and some of that noise that gets caught into Q2. But from an underlying volume standpoint, we saw more normal seasonality.

As we play out the rest of this year,

... we expect that to continue with, you know, teen season that comes in, that we're in now. The, you know, China in the third quarter is a strong quarter for them because of teen season. Europe, not so much. We expect that to play out more normally as it moves from Q3 to Q4. When we think of the total, and looking out into three years, and so look, we're in an under-penetrated market, and we've talked a lot about that. We think we have the products and the go-to-market capabilities to really move this market forward, and it's up to us to be able to help drive this market forward.

When we look out in our long-term model, we believe in the opportunity. Revenue growth is 20%+ and op margin, 25%+. And that's how we are positioning things for growth, for whether it's Direct Fab and the growth opportunities that we have there and the efficiencies that we can drive, as well as the standard production that we have now. That's how we're building from an investment standpoint. We're mindful of changes that can happen short term in the economy and so on, and that's why we give you kind of the guidance that we have, at least now in short term. But in longer term, we believe in our model, and that's how we're investing in the future.

Operator (participant)

Thank you. As a reminder, if you do have a question at this time, please press star one one. Our next question comes from the line of Jason Bednar from Piper Sandler. Your question, please.

Jason Bednar (Managing Director)

Hey, afternoon, everyone.

John Morici (CFO)

Hey, Jason.

Jason Bednar (Managing Director)

Hey there. Wanted to touch on one near-term item with third quarter guidance. You know, some of it's been discussed already, but, you know, clearly a little bit lower than where you probably modeled things out internally three to six months ago. And I guess I'm just reminded of maybe where we were a year ago in the third quarter. You had higher expectations than where you ended up finishing. So I guess I'm curious, maybe how much of that experience from last year informed your view on volumes and product mix versus, say, the trends and macro data points that you've seen develop the last few months? And then maybe include here, if you could, just how you're seeing that teen season develop since we are in the thick of that right now.

John Morici (CFO)

Yeah, Jason, I could take that on, on the Q3, some of those specifics. Certainly, we look at last year, we look at the, you know, 2022. You know, you get into those COVID years, they're tough to call, and then, you know, then you have to jump before COVID, so now you're talking about almost five years ago. So, you know, you look at what you see at the time, knowing that, you know, most recently you have, you know, 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. You know, U.S. is in teen season, China gets into teen season as well, and we want to see how that plays out.

So we call 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 teen?

Joe Hogan (President and CEO)

Yeah, on the teen side, you know, Jason, as I said in my script, and we were pleased with the teen growth. You know, it was over 8%, which is, you know, great to see. A lot of that was supported by Asia and also Europe, when you really got to get into the teen numbers. Again, IPE is part of that. You know, it's, we look at that as, you know, obviously pre-teen, and we're watching the ramp-up of that and the acceptance in the marketplace. So hope I'm answering your question, but overall, we feel good about the teen. Now, you know, there's a big teen season in China in the third quarter. You know, we're watching it closely. We expect, you know, to be able to perform in that side, too, so I'm optimistic as it stands.

Jason Bednar (Managing Director)

Okay, great. Then just for my follow-up, I'm gonna pack a few in here. You know, 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, you know, expanding that utilization line, improving doctor productivity. You've got the Costco relationship that's been discussed. You know, 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, you know, either or 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, you know, coming to focus more significantly with today's results? Thank you.

John Morici (CFO)

Yeah, that's a good, great question, Jason. I look at... Just to answer it a couple different ways, because I think one is, like, on the Advantage you brought up. That's really a reflection of trying to put some structure, a little added structure to our Advantage program, where many of our promotions we're trying to get to. And in the end, for an Advantage program is trying to get new doctors in, give them a progression of how they can get discounts as they do more and more cases, drive utilization. So that's good for new doctors, that's good for existing doctors. So the Advantage changes, really, we're trying to put more structure into that, into the second half and carrying forward, because they really hadn't been refreshed like what we've done now.

But it's all about driving utilization, getting doctors to do more and more cases. Programs like we're testing or piloting with Costco is really just trying to drive, you know, more conversion. Find ways where those consumers or those potential patients are out there, they're shopping around, they're looking. You see the economy, you see inflation, you see other things. We know those potential patients are out there. We just have to find ways to be able to connect them with a great product that we have with our customers, with our doctors, and Costco is an example of that that we'll test, and we'll see. But it's really, that specifically is designed around conversion, drive as much conversion as we can.

Jason Bednar (Managing Director)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Michael Ryskin from Bank of America. Your question, please.

Michael Ryskin (Managing Director)

Hey, thanks for taking the question, guys. Joe, John, I want to follow-up on a point that you touched on a couple of times already in terms of the ASPs. You know, you talked about part of it is the mix shift, and a lot of it is, you know, how your customers want to buy, whether that's, you know, different products within the portfolio, whether our DSP, things like that. But what I want to get at is, you know, are you concerned by that trend itself at all, is that customers want the lower products? I get that, you know, it gives you the option to still meet them in the air, and that still drives the volume. But, you know, is that something that you expected, this shift down?

You know, as you say, the market is 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, you know, the rest of the market that's out there really doesn't exist at that $1,300+ ASP, maybe it's lower and lower and lower?

Joe Hogan (President and CEO)

Hey, Michael, it's Joe. Look, I think the ASP piece, to try to explain as much as we can, is, you know, we're always staring at the margin side and make sure that our margins are good. We find out that all over the world, I mean, if you're in India, they ask for a different product than they ask in the United States at different areas. And, you know, some people want a 5x5, someone want 3x3. All these things are different products for different kinds of applications, and GPs and orthos are different at times, too. So what we're seeing, and there's varying ASPs on it, but we always have high... You see our margins have actually moved up on that. So you're seeing not necessarily the market just driving price down.

You're just seeing us having a variation of options that customers or doctors want around the world and making sure that we supply those well. You know, we talked about 25,000 cases came through DSP. Remember, those are cases that, you know, that doctors used to mold these things in their offices in order to address those, right? And now they're buying three or four of ours. Now, yeah, we're getting great margin on that product line, but overall, it's a lower ASP in that sense, as part of the DSP program. So what you're seeing is just us responding to a market. It's a good market out there with varying degrees of price and value, and you'll see us continue to do that in order to grow the marketplace.

Michael Ryskin (Managing Director)

Okay, and then much quicker follow-up, hopefully. Sorry if I missed it, but did you call out why the Lumina restorative was pushed out to Q1 2025? Was this commercial decision or something on the development side?

Joe Hogan (President and CEO)

Yeah, you know, Michael, well, there's like, there's like five areas of restorative that you have to be, you know, very good at as you go through this. And to tell the truth, we've made extremely good progress on most of them. But we just, we want to take a little extra time to make sure that we get this right, and we want to make sure that we run it through our doctors who are actually going to use it. You know, the luminaries out there that help to promote the product and make sure that they're comfortable with it, too. So we just feel it's diligent and responsible to make sure that we take a few more months here, launch it in the first quarter so that we have the world's best product.

Michael Ryskin (Managing Director)

Okay, thanks. Makes sense.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Erin Wright from Morgan Stanley. Your question, please.

Erin Wright (Senior Equity Research Analyst)

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 just— 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?

Joe Hogan (President and CEO)

Erin, we—I mean, we had that in our script, and, you know, we talk about it as, you know, we're, we're expecting stability. I mean, obviously, not stability in exchange rates, right? We can't—we're not that smart. We'd be working somewhere else if we knew exchange that well. But as far as the market overall and how we want to go about it, we still feel we're dealing in a stable environment. The last thing I'll say about this, you know, this is a very global business. You saw that, you know, Japanese yen, Brazilian real, the business has grown substantially that way, and there's a certain amount of stability that we have that plays across geographies, too.

John Morici (CFO)

That adult piece, you know, 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 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's a better margin for us.

Erin Wright (Senior Equity Research Analyst)

You mentioned China, too, and the teen market there, but just generally speaking, can you give us an update on kind of China, the underlying demand trends and market dynamics there?

Joe Hogan (President and CEO)

It's Joe again, Erin. China performed the way we wanted China to perform, just as we predicted. You know, overall, I mean, you know, the market is challenged. I think the Tier 3 and 4 cities are actually challenged more than, you know, the private and 1 and 2s. But, you know, overall, there's no surprise. We have a good team there. Joon Hock is a great leader for us there, and, we like the results, and, you know, we're looking forward to a good team quarter there, which is, you know, third quarter is always the biggest quarter for China.

Erin Wright (Senior Equity Research Analyst)

Okay. Thank you.

Joe Hogan (President and CEO)

You're welcome.

Operator (participant)

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 closing comments.

Shirley Stacy (VP of Corporate Communications and Investor Relations)

Thank you, operator. 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 (participant)

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.