Align Technology - Q4 2023

Transcript

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 fourth quarter and full year 2023 financial results today via Business Wire, which is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately 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, including the corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our fourth quarter and full year 2023 conference call slides on our website under quarterly results. Please refer to these files for more detailed information. With that, I'll turn the call over to Align Technology President and CEO, Joe Hogan. Joe?

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 fourth quarter and full results and discuss a few highlights from our two operating segments, systems, services, and clear aligners. John will provide more detail on our Q4 financial performance and comment on our views for 2024. Following that, I'll come back and summarize a few key points and open the call to questions. I'm pleased to report fourth quarter results with better-than-expected revenues and earnings. As of the end of Q4, we achieved several major milestones, including 17 million Invisalign patients treated, including 4.7 million teens, +4 million Vivera retainer cases, and over 100,000 iTero scanners sold.

For the full year, fiscal year 2023, total revenues exceeded our prior outlook, and we delivered fiscal 2023 non-GAAP operating margin above 21%. For Q4, total revenues were up 6.1% year-over-year, reflecting increased systems and services revenues, strength in clear aligner volumes for teens and international doctors, as well as continued growth from Invisalign touch-up cases under our Invisalign Doctor Subscription Program, or DSP. Our Q4 systems and services revenues were up year-over-year, primarily due to increased services, CAD/CAM, and non-systems revenues, including scanner leasing and rental programs and certified pre-owned scanner sales. Q4 total clear aligner shipments were slightly lower year-over-year. On a year-over-year basis, clear aligner volumes were down for the Americas and EMEA regions and were up for the APAC regions.

For Q4, clear aligner shipments include approximately 20,000 Invisalign DSP touch-up cases, primarily in North America, an increase of more than 60% year-over-year from Q4 2022. DSP continues to be well received by our customers and is currently available in the U.S. and Canada, Iberia, Nordics, and most recently, the U.K. We're excited that DSP is proving helpful to doctors and their patients as we continue to expand the program. For fiscal 2023, total Invisalign DSP touch-up cases shipped were 73,000, up 85% year-over-year. For non-case revenues, Q4 was up 13.3% year-over-year, primarily due to continued growth from Vivera retainers along with Invisalign DSP retainer revenues.

On a sequential basis, Q4 total revenues were down slightly, 0.4%, primarily reflecting anticipated seasonally lower teens case starts, especially in the U.S. Ortho channel, and unfavorable foreign exchange, offset somewhat by increased revenues from system and services, as well as an increase in clear aligner volume for adults and non-comprehensive cases, and stronger volumes from Canada and the EMEA region.

Q4 total aligner shipments were slightly lower sequentially. On a sequential basis, clear aligner volumes were down for the Americas and APAC regions and were up sequentially for the EMEA region. The December Gauge Practice Analysis tool that collects and consolidates data from approximately 1,000 orthodontic practices across the U.S. and Canada, reported year-over-year decline for new patients, total exams, and total starts, particularly among teens and kids.

It also shows a year-over-year decline for wires and brackets and total clear aligner starts, with Invisalign case starts better than the clear aligner brands. In the teen segment for Q4, 197,000 teens and younger patients started treatment with Invisalign clear aligner systems, up 6% year-over-year, and were a record number of teen cases shipped compared to prior fourth quarters. Q4 teen starts were down sequentially, consistent with historical seasonality, primarily in China, as well as seasonally fewer teen starts in North America compared to Q3. For fiscal 2023, total Invisalign clear aligner shipments for teens and younger patients reached a total of 809,000 cases, up 8% compared to the prior year, and made up 34% of total clear aligner shipments.

During Q4, we announced that the U.S. Food and Drug Administration cleared the Invisalign Palate Expander system, we call it IPE, Invisalign Palate Expander, for commercial availability in the United States. The FDA 510(k) clearance is for broad patient applicability, including growing children, teens, and adults. Full early intervention treatments, such as phase one or early interceptive treatment, makes up about 20% of the orthodontic case starts each year and is growing.

Together with Invisalign First aligners, IPEs provide doctors with a solution set to treat the most common skeletal dental malocclusions in growing children....The addition of mandibular advancement features to Invisalign aligners also provides doctors with more options for treating skeletal, dental jaw imbalances, and bite correction, and for their growing patients during their teenage years. Essentially, we now have an Invisalign digital treatment solution for every phase of treatment.

IPE is currently available on a limited basis in Canada and the United States, and we recently received regulatory clearance in Australia and New Zealand, where we anticipate commercialization in Q2. We expect IPE to be available in other markets, pending future applicable regulatory approvals. We're also launching ClinCheck Smile Video, the next generation of in-face visualization with AI-assisted video that is expected to be available to all doctors who use the Invisalign Practice App and ClinCheck treatment planning software. This new tool is designed to help improve patients' understanding and confidence in Invisalign treatment, and is based on iTero intraoral scanners and doctor's ClinCheck plan for Invisalign treatment.

ClinCheck Smile Video simulates the doctor's ClinCheck treatment plan with a short video of a patient's face, and they talk and smile, which helps patients visualize their potential new smile and can lead to a higher patient treatment acceptance. We expect to roll out ClinCheck Smile Video in Q1 2024 in North America and EMEA, followed by APAC later in the year. Before I turn the call over to John for our fourth quarter financial review, I want to share one more, exciting news. Today, we introduced the latest innovation in the iTero family of intraoral scanners. The iTero Lumina intraoral scanner, designed to meet the needs of doctors and their patients by offering smaller wand with unparalleled data capture capabilities for effortlessly scanning by clinical members.

The iTero Lumina intraoral scanner is a breakthrough technology, with 3X wider field of capture and a 50% smaller wand that delivers faster scanning, higher accuracy, and superior visualization for greater practice efficiency. iTero Lumina quickly, easily, and accurately captures more data while delivering exceptional scan quality and photorealistic images that eliminate the need for intraoral photos altogether.

Doctors can now scan at twice the speed with a wide field of capture, multi-angle scanning, and large capture distance, meaning they can capture more dentition in greater detail throughout the scanning process. To date, Align has filed over 30 patent applications covering technology related to the iTero Lumina intraoral scanner. I believe iTero Lumina has the potential to set a new standard of care for dental practices by simplifying the scanning of complex oral regions while offering superior chairside visualization and more comfortable experience for patients, especially kids.

Initial doctor feedback has been very positive, noting that iTero Lumina scanner is much faster, clearer, less invasive for their patients, and the imaging and visualization translates to better communications and patient experience. The iTero Lumina intraoral scanner is available now with orthodontic workflows and will be available in the second half of 2024 restorative workflows, although we expect that GP practices can benefit now from the new scanning technology. A global broadcast to unveil iTero Lumina and provide attendees with insights and detailed information from our iTero team and early customer users, is planned for February fifteenth. Registration will open on February first, and a link has been provided in our financial slides as well as in today's press release. With that, I'll turn the call over to John.

John Morici (CFO and EVP of Global Finance)

Thanks, Joe. Now for our Q4 financial results. Total revenues for the fourth quarter were $956.7 million, down 0.4% from the prior quarter and up 6.1% from the corresponding quarter a year ago. On a constant currency basis, Q4 2023 revenues were impacted by unfavorable foreign exchange of approximately $12.8 million, or approximately 1.3% sequentially, and were favorably impacted by approximately $13.8 million year-over-year, or approximately 1.5%. For clear aligners, Q4 revenues of $781.9 million were down 1.6% sequentially, primarily from lower volumes. On a year-over-year basis, Q4 clear aligner revenues were up 6.9%, primarily due to higher ASPs and non-case revenues, slightly offset by lower volumes.

For Q4, Invisalign ASPs for comprehensive treatment were up sequentially and up year-over-year. On a sequential basis, ASPs reflect higher additional aligners, partially offset by the unfavorable impact from foreign exchange, higher sales credits, and higher discounts. On a year-over-year basis, the increase in comprehensive ASPs reflect higher additional aligners, price increases, and favorable impact from foreign exchange, partially offset by higher discounts and product mix to lower ASP products. For Q4, ASPs for non-comprehensive treatment were down sequentially and up year-over-year. On a sequential basis, the decline in ASPs reflect the unfavorable impact from foreign exchange, a product mix shift to lower ASP products, and higher net revenue deferrals, partially offset by price increases and lower discounts.

On a year-over-year basis, the increase in ASPs reflect price increases, the impact from favorable foreign exchange, and higher additional aligners, partially offset by a product mix shift to lower ASP products and higher discounts. Last quarter, we announced about a 5% global price increase for some Invisalign products across most markets, effective January 1, 2024.

Invisalign Comprehensive Three and Three product is available in North America and certain markets in EMEA and APAC, most recently launching in China, Korea, Hong Kong, and Taiwan. We are pleased with the continued adoption of the Invisalign Comprehensive Three and Three product and anticipate it will continue to increase, providing doctors the flexibility they want and allowing us to recognize more revenue upfront, with deferred revenue being recognized over a shorter period compared to our traditional Invisalign Comprehensive product.

Q4 2023, clear aligner revenues were impacted by unfavorable foreign exchange of approximately $10.7 million, or approximately 1.4% sequentially. On a year-over-year basis, clear aligner revenues were favorably impacted by foreign exchange of approximately $12 million, or approximately 1.6%. Clear aligner deferred revenues on the balance sheet increased $14.9 million, or 1.2% sequentially, and $74.6 million, or up 66.1% year-over-year, and will be recognized as the additional aligners are shipped.

Q4 2023 systems and services revenues of $174.8 million were up 5.8 sequentially, primarily due to higher ASPs and an increase in CAD/CAM and services revenue, partially offset by lower volumes, and were up 2.9% year-over-year, primarily due to higher services revenues from our larger base of scanners sold and increased non-system revenues related to our CPO and leasing rental programs, mostly offset by lower ASPs and scanner volume. CAD/CAM and services revenues for Q4 represent approximately 50% of our systems and services business. Q4 2023 systems and services revenues were unfavorably impacted by foreign exchange of approximately $2.1 million, or approximately 1.2% sequential. On a year-over-year basis, systems and services revenue were favorably impacted by foreign exchange of approximately $1.9 million, or approximately 1.1%.

Systems and services deferred revenues on the balance sheet were down $4.3 million, or 1.6% sequentially, and down $13.1 million, or 4.8% year-over-year, primarily due to the recognition of services revenue, which is recognized ratably over the service period. As our scanner portfolio expands and we introduce new products, we increase the opportunities for customers to upgrade, make trade-ins, and purchase certified pre-owned scanners in certain markets. Developing new capital equipment opportunities to meet the digital transformation needs of our customers and DSO partners is a natural progression for our equipment business, with a large and growing base of scanners sold. Moving on to gross margin. Fourth quarter overall gross margin was 70%, up 0.9 points sequentially and up 1.5 points year-over-year.

Q4 non-GAAP gross margin was 70.5%, up 0.9 points sequentially and up 1.2 points year-over-year. Overall, gross margin was unfavorably impacted by foreign exchange by approximately 0.4 points sequentially and favorably impacted by approximately 0.4 points on a year-over-year basis. Clear aligner gross margin for the fourth quarter was 71.1%, up 0.4 points sequentially, primarily due to lower manufacturing spend, partially offset by higher freight costs. Clear aligner gross margin for the fourth quarter was up 0.3 points year-over-year, primarily due to higher ASPs and favorable foreign exchange, partially offset by higher manufacturing spend and freight costs. Systems and services gross margin for the fourth quarter was 64.8%, up 3.8 points sequentially due to higher ASPs, partially offset by higher service and freight costs.

Systems and services gross margin for the fourth quarter was up 6 points year-over-year due to improved manufacturing efficiencies and favorable foreign exchange, partially offset by lower ASPs. Before I go into the details, I want to note that during Q4 2023, we incurred a total of $14 million of restructuring and other charges, primarily related to post-employment benefits. Q4 operating expenses were $498 million, roughly flat sequentially and down 1.4 points year-over-year.

On a sequential basis, operating expenses were up slightly, due primarily due to restructuring and other charges, offset by lower employee compensation. Year-over-year, operating expenses decreased by $7.1 million, primarily due to controlled spend on advertising and marketing as part of our efforts to proactively manage costs, partially offset by employee-related costs and slightly higher restructuring charges.

On a non-GAAP basis, excluding stock-based compensation, restructuring and other charges, and amortization of acquired intangibles related to certain acquisitions, operating expenses were $446.7 million, down 2.5% sequentially and down 2.8% year-over-year. Our fourth quarter operating income of $171.5 million resulted in an operating margin of 17.9%, up 0.6 points sequentially and up 5.4 points year-over-year. Operating margin was unfavorably impacted by approximately 0.6 points sequentially, primarily due to foreign exchange. The year-over-year increase in operating margin is primarily attributed to operating leverage and proactively managing our costs, as well as favorable impact from foreign exchange by approximately 0.6 points.

On a Non-GAAP basis, which excludes stock-based compensation, restructuring and other charges, the amortization of intangibles related to certain acquisition, operating margin for the fourth quarter was 23.8, up 2 points sequentially and up 5.5 points year-over-year. Interest and other income and expense, net for the fourth quarter was an income of $1.3 million, compared to our loss of $4.2 million in the third quarter, and income of $2.7 million in Q4 2022, primarily driven by favorable foreign exchange. The GAAP effective tax rate for the fourth quarter was 28.3%, higher than the third quarter effective tax rate of 25.1% and lower than the fourth quarter effective tax rate of 63.8% in the prior year.

The fourth quarter GAAP effective tax rate was higher than the third quarter effective tax rate, primarily due to one-time benefit related to tax guidance issued in Q3, partially offset by lower U.S. taxes on foreign earnings in Q4. As a reminder, in Q4 2022, we changed our methodology for the computation of our non-GAAP effective tax rate to a long-term projected tax rate and have given effect to the new methodology from January first, 2022. Our non-GAAP effective tax rate for the fourth quarter was 20%, reflecting the change in our methodology. Fourth quarter net income per share was $1.64, up sequentially $0.06, and up $1.10 compared to the prior year. Our EPS was unfavorably impacted by $0.07 on a sequential basis and favorably impacted by $0.08 on a year-over-year basis due to foreign exchange.

On a non-GAAP basis, net income per diluted share was $2.42 for the fourth quarter, up 28 cents sequentially and up 69 cents year-over-year. Moving on to the balance sheet. As of December 31, 2023, cash, cash equivalents, and short and long-term marketable securities were $980.8 million, down sequentially $321.2 million, and down $60.8 million year-over-year. Of our $980.8 million balance, $196.1 million was held in the U.S., and $784.7 million was held by our international entities.

In October 2023, we purchased approximately 1 million shares of our common stock at an average price of $190.56 per share through a $250 million accelerated share repurchase. In November and December 2023, we purchased approximately 466,000 shares of our common stock at an average price of $214.81 per share through a $100 million open market purchase, both under Align's current $1 billion stock repurchase program. We have $650 million remaining available for repurchase of our common stock under this stock repurchase program. Q4 accounts receivable balance was $903.4 million, slightly down sequentially. Our overall days sales outstanding was 85 days, flat sequentially and year-over-year.

Cash flow from operations for the fourth quarter was $46.9 million. Capital expenditures for the fourth quarter were $33.4 million, primarily related to our continued investments to increase aligner manufacturing capacity and facilities. Free cash flow, defined as cash flow from operations less capital expenditures, amounted to $13.5 million. Now turning to our outlook. Assuming no circumstances occur beyond our control, we provide the following framework for Q1 and fiscal 2024. For Q1 2024, we expect our worldwide revenues to be in the range of $960 million-$980 million, up slightly from Q4 of 2023. We expect clear aligner volume and ASPs to be up slightly sequentially.

We expect systems and services revenue to be down slightly sequentially, although less than the historical seasonal decline, given the launch of the iTero Lumina for ortho workflows in Q1 2024. We expect our Q1 2024 GAAP operating margin and non-GAAP operating margin to be slightly above Q1 2023 GAAP operating margin and non-GAAP operating margin, respectively.

For full year, we expect fiscal 2024 total revenues to be up mid-single digits over 2023. We expect fiscal 2024 clear aligner and systems and services revenues to grow year-over-year in the same approximate range as our 2024 total revenues. We expect fiscal 2024 clear aligner ASPs to be up slightly year-over-year, primarily due to price increases and favorable foreign exchange, partially offset by a higher mix of non-comprehensive products, which have lower ASPs.

We expect fiscal 2024 GAAP operating margin and non-GAAP operating margin to be slightly above the 2023 GAAP operating margin and non-GAAP operating margin, respectively. We expect our investments in capital expenditures for the fiscal 2024 to be approximately $100 million. Capital expenditures are expected to primarily relate to building construction and improvements, as well as manufacturing capacity in support of our continued expansion.

In summary, I am pleased with our fourth quarter and fiscal 2023 results, and I am especially proud of our continued focused execution of our product roadmap and innovation pipeline. We are committed to delivering on our strategic growth drivers of international expansion, patient demand, orthodontist utilization, and GP dentist treatment to extend our leadership in digital orthodontics and dentistry.

I believe that the next wave of innovation that we are introducing into the market will further differentiate Align and allow us to continue to increase our share of the large untapped market opportunity of 22 million annual orthodontic case starts, as well as an additional 600 million consumers who could benefit from a healthy, beautiful smile using Invisalign clear aligners. With that, I'll turn it back to Joe for final comments. Joe?

Joe Hogan (President and CEO)

Thanks, John. In closing, while I'm pleased with our better than expected fourth quarter results and start to the year, I'm even more excited about Align innovation in 2024 and our next wave of growth drivers. When I spoke to you about a year ago, I discussed the innovations that we were planning to bring to market that would continue to revolutionize the orthodontic and dental industry, and scanning software and direct 3D printing.

We are delivering on that promise. With the introduction of iTero Lumina, powered by Multi-Direct Capture technology, we are pushing the boundaries of what intraoral scanners can do. iTero Lumina is a combination of years of research and development to offer visualization capabilities that support doctors' clinical decisions, while also enhancing their patients' comfort and overall treatment experiences.

Building on more than 20 years of expertise in revolutionizing imaging technologies, the iTero Lumina scanner elevates the standard in digital scanning to achieve exceptional clinical outcomes and increase practice efficiency. The iTero scanner is at the forefront of digital dentistry. With the closing of our acquisition of Cubicure, a pioneer of direct 3D printing solutions for polymer additive manufacturing, we will enable the next generation of 3D printed products, helping to create more unique configurations for aligners that are more sustainable and also efficient solutions.

We also expect it to extend and scale our printing, materials, and manufacturing capabilities for our 3D printed product portfolio, which now includes the Invisalign Palate Expander system. With the introduction of IPE, we have expanded the clinical applicability of the Invisalign System to nearly 100% of the orthodontic case starts.

The ability to direct 3D print IPE will eventually lead to other direct printed products, with the goal of direct 3D printed Invisalign clear aligners, which we hope to achieve in the next couple of years. As a company, Align has multifaceted competitive advantage, technology innovation, where we invest up to $300 million in R&D per year to bring in some of the most disruptive products in digital dentistry and orthodontics to the market in a highly regulated industry. A direct sales force that consists of 5,000 highly trained specialists, a doctor-centered model, because we understand the importance of doctor-directed care, a billion-dollar brand trusted by over 17 million patients worldwide, and global scale and manufacturing to deliver millions of customized clear aligner parts every day.

We are extremely pleased with our latest innovations and commercialization of products to better serve our doctor, customers, and their patients. Our belief in the future, business overall is unwavering. Before we turn the call over to the operator, I want to address an important matter regarding DTC, or direct to consumer, clear aligners in our industry.

Align has always believed that a doctor-centered model for orthodontic treatment is the safest for patients, and we're always looking for new and better ways to support doctors as they work to create better smiles for their patients. Recent news regarding the bankruptcy of a DTC clear aligner company has led many consumers to reach out to Invisalign providers to address their unmet needs, including helping those DTC patients with incomplete treatments.

To support these former DTC patients who are seeking help from Invisalign providers and practices, in Q4, we introduced a program in the U.S. and select other markets, offering up to 50% off Invisalign case submission and Vivera retention to help offset any additional costs to finish their treatment. We want to help everyone achieve a healthy, beautiful smile and strongly recommend that individuals who have impacted by this matter seek the advice of a licensed orthodontist or dentist. Our concierge team is always available to answer questions and help connect consumers with Invisalign practices. With that, I'll thank you for your time today. We look forward to updating you on our next earnings call. Now I'll turn the call over to the operator for questions.

Operator (participant)

Thank you. At this time, we'll-

Joe Hogan (President and CEO)

Operator?

Operator (participant)

Thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star one one on your telephone keypad and wait for your name to be announced. You may press star one one again if you would like to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment for questions. Our first question comes from Elizabeth Anderson with Evercore ISI. You may proceed.

Elizabeth Anderson (Senior Managing Director of Healthcare Technology and Distribution Equity Research)

Hi, guys. Congrats on the quarter-

Joe Hogan (President and CEO)

Hi, Elizabeth.

Elizabeth Anderson (Senior Managing Director of Healthcare Technology and Distribution Equity Research)

Thanks so much for the question. Hey, I was wondering if you could walk us through the components of the mid-single-digit guide for 2024. I understand what you said, that, like, systems and services and clear aligners would be in the same range. I guess I'm just sort of thinking about, like, how to think about that. It seems like maybe it's, like, low-single-digit ASP improvement and then sort of, you know, low- to mid-single-digit case growth. Is that the right way to think about it? Like, what else can you—is there anything else you can sort of clarify on that, and sort of how do you expect, at least currently, the sort of pacing of the year to progress?

John Morici (CFO and EVP of Global Finance)

Yeah, Elizabeth. Hi, this is John. You have it framed the right way. We're looking at the segments up mid-single digits and then ASPs because of the, you know, have a price increase. We have some offset due to some of the lower stage products that we have, including these DSP touch-ups and so on, that you would expect then a little bit lower ASP impact year-over-year.

Elizabeth Anderson (Senior Managing Director of Healthcare Technology and Distribution Equity Research)

Got it. That makes sense. And then, separately, how has the volume in sort of market in China been progressing across the fourth quarter and maybe into the first quarter, so far as you can comment?

Joe Hogan (President and CEO)

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

Elizabeth Anderson (Senior Managing Director of Healthcare Technology and Distribution Equity Research)

Got it. And sorry, maybe one last one from me. Can you just remind us the sort of one to two dip in the operating margins and then how it sort of steps up across the year? I understand the guidance you gave for the first quarter of the year, but just why that first quarter has a sort of different perspective than the rest of the year? Thanks.

John Morici (CFO and EVP of Global Finance)

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

Elizabeth Anderson (Senior Managing Director of Healthcare Technology and Distribution Equity Research)

Perfect. Thanks so much, guys.

Thanks, Elizabeth.

Operator (participant)

Thank you. One moment for questions. Our next question comes from Jeff Johnson with Baird. You may proceed.

Joe Hogan (President and CEO)

Hey, Jeff.

Jeff Johnson (Managing Director and Senior Research Analyst)

Hey, thanks. Good afternoon, guys. Hey, can you hear me okay?

Joe Hogan (President and CEO)

Yeah.

Shirley Stacy (VP of Corporate Communications and Investor Relations)

Yeah, we'll hear you fine.

Jeff Johnson (Managing Director and Senior Research Analyst)

All right, great. Hey, John, maybe I want to, I'll follow up on Elizabeth's margin question there beyond just the one Q. You know, let's say you hit your guidance this year on operating margin. It's up, nominally from, 2023 levels. You know, it'd be three years in a row, kind of in that low to mid 21% range. I think pre-COVID, you were up in the 25% range or so. What's it gonna take to get those margins moving back towards those pre-COVID?

You've taken price increases two years in a row. It feels like your R&D should be coming down a little bit. Obviously, with Cubicure and that, I know you're continuing to invest aggressively, but iTero is out, Lumina now out, things like that. Just help us understand, you know, when could we start to see a path back towards, you know, getting those margins maybe up a few points from where they've settled in the last few years?

John Morici (CFO and EVP of Global Finance)

Yeah, Jeff, this is John. Really, when you start to get some of that volume leverage, you know, we're positioned as, you know, having our manufacturing and the organization that we have that's really set to drive more growth. And once we get some of that volume leverage, we should see that benefit showing up in our numbers. And it's really what we saw as we went through the quarters last year, where you see some of that volume benefit. You get that benefit as well when you go through, when you go through the year. But really looking to try to drive as much volume as we can, and you'll start to see some of that leverage that shows up in our numbers.

Jeff Johnson (Managing Director and Senior Research Analyst)

All right. Fair enough. And then, Joe, you know, I think we've talked for many years now how iTero has carved out such a commanding or, you know, strong competitive position. You've sold a ton of iTeros over the last, you know, five, six years or so. They're all probably getting, you know, I don't know, close to their end of their useful life or so.

You know, Lumina, for the first time, feels like that kind of product with the better form factor, especially things like that, that could really cause some of these docs, docs to say, "You know, I, I got to get rid of this big iTero and go back down to this much smaller wand," and things like that, just things that would actually matter to the docs. And I'm sure the technology does this, too. I don't want to just put it on the size. But just thinking there, is this the kind of product that could finally kick off that multiyear upgrade, strategy or path in iTero that, you know, we've kind of been waiting to see?

Joe Hogan (President and CEO)

You know, Jeff, the easy answer and the quick answer is yes. I mean, it's just a brand-new platform. Now we've set up... You know, I mentioned in my script about we have 100,000 units out there that we've sold so far. About a third of those are 5D pluses, which are upgradable by just a wand switch out, is the way we've designed Lumina. And so that part's easy. Also, we've been really aggressively upgrading our installed base between E1 and E2 out there, too, to better position it for this kind of a move. So, you know, as we developed Lumina, we had exactly in mind what you just questioned, and we think we're in good position to do that.

Jeff Johnson (Managing Director and Senior Research Analyst)

If you switch out that wand, you know, from the five to the Lumina, there is a fee there, right? It's not like, "Hey, you bought this knowing that you could always upgrade at no charge to Lumina?

Joe Hogan (President and CEO)

There's no charity here at Align. You have to- there'll be a charge.

Jeff Johnson (Managing Director and Senior Research Analyst)

I like to hear that. God bless capitalism. Thanks, Joe.

Operator (participant)

Thank you. One moment for questions. Our next question comes from Jon Block with Stifel. You may proceed.

Joe Hogan (President and CEO)

Hey, Jon.

Jon Block (Managing Director of Medical Technology and Supplies Equity Research)

Hey, guys, good afternoon. So Joe, maybe this one's for you. You know, V1 Q 2024, IPE, some markets today, but more on the come, and IPE should help longer term with teens. Docs might take a little bit of a wait-and-see approach. You talked about the new scanner. You know, in your opinion, like, is innovation, are we seeing that in the 2024 guide, or is that more of like a ramp into 2025?

And, you know, maybe even to take that a step further, John, for you, is there a way to sort of quantify out of that mid-single-digit revenue growth, what can you attribute to these new products coming on board in 2024? I'm just trying to think about the impact of 2024. Is this more the ramp or the slope into 2025 for the innovation hitting?

Joe Hogan (President and CEO)

Yeah, Jon, I like the way you set that up. It's a ramp. It really is. But you know how we feel? We feel good that we can play offense with these product lines. Now, you know, we still have to scale IPE. We have a great team that knows how to scale, and we'll get through that. Obviously, you know, Lumina is a completely different set of, you know, outside of the computer itself, the wand itself is, you know, we feel good about the scale part of that and, you know, as we sell through the marketplace. But overall, I think the way you described it, as a ramp of this new technology, really beginning in 2024, is a good foundation for that kind of a thought process.

Jon Block (Managing Director of Medical Technology and Supplies Equity Research)

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

Joe Hogan (President and CEO)

It really is just too early, yeah.

Jon Block (Managing Director of Medical Technology and Supplies Equity Research)

Okay. Okay. So second one is maybe multipart, but just first on the CapEx, $100 million. I mean, I was really surprised on how low that number was for this year. You know, it was $400 million in 2021, $300 million in 2022. And I was maybe even more surprised when I think about the direct fabrication initiative. So I know the slides say, hoping to print Invisalign clear liners, you know, quote, unquote, "next couple of years." Do we still think retainers, 2H 2024, 1H 2025? When do we feel like, you know, you've proved it out, so to say? And do we start to see gross margin benefits from this as early as next year, you know, turning accretive in 2025? And then, you know, admittedly, just a jump to another question.

For the guidance, can you just help us what's embedded in there? And I bring that up because we've seen this big move in U.S. consumer confidence. Europe still seems very choppy. So when we tie it back to your guidance for the year, you know, what are you extrapolating out, if you would, for the current macro? Thanks, guys.

John Morici (CFO and EVP of Global Finance)

You know, I'll start with that, Jon, in terms of the current guidance. Look, we're looking at the environment that we're all in. It's not a great economy most places, it's but it is more stable, and we're building off of that. And then, as Joe said, we're doing things to play offense, new products that we have with Lumina and IPE and so on, which we think can help us grow in this environment.

Joe Hogan (President and CEO)

Jon, your question about, you know, the ramp-up, the margin piece or part of that, you know, what's that mean in 2025 or whatever? You know, look, we feel confident, as you know from our discussions and, you know, our analyst presentations last year, 3D printing is foundationally, you know, it can be less expensive as we scale it. And so, I mean, we'll start to see that come through as we scale that, but we need time to scale this.

No one's ever had this polymer before. That has to scale. No one's ever used a Cubicure system to the degree that we need to use it. Now, we did this with 3D Systems years ago because we basically scaled those systems through our team, and the team knows how to do that. I just can't tell you specifically within those next one to three years, with this being the first year, exactly when that really hits that hyperbolic side.

John Morici (CFO and EVP of Global Finance)

And just to close on the CapEx, you know, those prior years, that was a lot of that was, it was equipment. Of course, we were always adding capacity, but a lot of that was very much unique for buildings, adding buildings for our locations, manufacturing and so on. And, you know, when we add some of the capacity that we're adding for our manufacturing, it will go in existing buildings. So we don't have to add another building in most cases for this. So that's why the CapEx is where it is.

Jon Block (Managing Director of Medical Technology and Supplies Equity Research)

All good. Thanks for the color, guys.

Joe Hogan (President and CEO)

Thanks, John.

Operator (participant)

Thank you. One moment for questions. Our next question comes from Brandon Vazquez with William Blair. You may proceed.

Brandon Vazquez (Research Analyst)

Hey, everyone. Thanks for-

Operator (participant)

Hey, Brandon.

Brandon Vazquez (Research Analyst)

-taking the question. On, hey, on the guidance, one-- maybe one other way I wanted to ask you and see if I could tease out a little bit of color on what's assumed here. You know, if I kind of go back to some old sequentials in the teen side, assuming that's a little less susceptible to macro headwinds, you can probably kind of get to a, a low single-digit volume growth, I think, for, for the entire clear aligner business already. That's probably not even including some DSP. So is that-- am I thinking about this correctly, that really out of adults on a year-over-year basis for full year 2024, you're really assuming kind of flattish, maybe even down, depending on how teens and, and some of the DSP cases are doing?

John Morici (CFO and EVP of Global Finance)

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

Brandon Vazquez (Research Analyst)

Okay. And then can you just reiterate, maybe both for IPE and for Lumina, you know, exciting, it seems like they're going to ramp over the coming quarters. Are there any, like, key quarters and catalysts that we should think about that might take that up? You know, you're talking about a ramp. How do we get to the next level on the ramp on any of those, when they go from maybe a limited launch to full market release? Anything like that? Thanks.

Joe Hogan (President and CEO)

Hey, Brandon, Joe again. On the Lumina side, remember our, restorative scanner for GPs comes out in the third quarter, but it's like John indicated, and we indicated, we feel we can sell that into the market now with the capabilities it has. But that'll ramp, and that'll probably be more hinged to the regulatory approvals we have to get around the world.

You know, right now, as I mentioned, we only have the United States and Canada and, and ANZ. You know, secondly, on IPE, it's the same thing, we're regulatory constrained. We still have to go through Europe. You know, as I mentioned, IPE will come out in the second quarter in Australia and also. And, you know, as we gate that, obviously, we'll be scaling IPE, too, and, you know, understanding the dynamics around that. It's more of a ramp, as I mentioned a few calls ago, than anything.

Brandon Vazquez (Research Analyst)

Okay. Thanks, everyone.

Operator (participant)

Thank you. One moment for questions. Our next question comes from Jason Bednar with Piper Sandler. You may proceed.

Joe Hogan (President and CEO)

Hi, Jason.

Jason Bednar (Senior Research Analyst)

Hey. Hey there. Thanks for taking the questions. I'm gonna pile on here on the guidance, just to focus there first. You mentioned non-comprehensive mix as being an offsetting factor to ASPs. I know you've got that DSP factor. I had thought maybe originally you were signaling adults growing better than teens, but doesn't seem like that's the case, just given your comments there to Brandon. But I guess regardless, on adults, are you seeing this market, you know, getting its footing back?

It sounds like it, but, you know, if you are, you know, what, what's giving you the confidence, or what are you seeing that kind of the day-to-day or month-to-month that's showing adults are coming back into the office for treatment? And then, sorry to load a few in here, but should we expect this faster non-comprehensive mix also to have gross margin benefits for the year as well? I think it typically does, but I, I don't think we've gotten a, kind of a gross margin cadence outlook for 2024.

Joe Hogan (President and CEO)

Hey, Jason, I'll take the first part of your question and hand the rest off to John. You know, we feel we're on a more stable, I'd call it, economic platform than last year. And so the adult and teen question that you had is, you know, we expect that to carry through in 2024, as we indicated, you know, with our guidance, too.

So, you know, when I look back, you know, everybody has a clearer vision, you know, backwards and forward. We look back at last year, you know, a pretty unstable platform that we experienced through the year, and the third quarter was a tough one in that sense. But I think we all see it right now. We have more confidence that, at least we're dealing with stability from an economic standpoint in most parts of the world from what we've seen.

John Morici (CFO and EVP of Global Finance)

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

Jason Bednar (Senior Research Analyst)

All right. That's helpful. Thank you. And then I'll for the follow-up here, I'll ask on teens. It does look like you're back to gaining share against brackets and wires. Looks like kind of the second consecutive quarter of that. I am curious if you could talk maybe bigger picture, what's changed, or what do you think has changed the last three to six months versus maybe the 12+ months that preceded that? Do you think the share gains you're seeing versus brackets and wires, does that have to do with changes you made to that Teen Guarantee program middle part of last year? Or are there other items at the practice level or associated with your go-to-market activities that are driving that shift?

Joe Hogan (President and CEO)

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

Jason Bednar (Senior Research Analyst)

Okay, helpful. Thank you.

Joe Hogan (President and CEO)

Thanks, Jason.

Operator (participant)

Thank you. One moment for questions. Our next question comes from Michael Ryskin with Bank of America. You may proceed.

Michael Ryskin (Managing Director of Life Science Tools and Diagnostics Equity Research)

Great. Thanks for taking the question, guys. I want to start with DSP, kind of where you left off. Really successful, obviously, and you had great growth year-over-year for the whole year. But it's kind of moved in sort of like a step function. If I just look in the numbers, you know, six, seven, 9,000, and then you're kind of like in the 11-12 range. Now you're in the 18-20 range. Is there another step function coming next year? Is there, you know-- Could you dig into a little bit into what's driving that and just sort of where do you see that going over the next couple of years?

John Morici (CFO and EVP of Global Finance)

Yeah, Michael, this is John. I would say, as we look to expand this out, it's been successful every place that we've gone. We've seen, as you said, you know, North America starts with this. So you see some doctors start, and then we have more and more doctors that, that sign up for the program. And then as the doctors sign up for the program, then they end up doing more and more, volume with us.

We've taken that same approach to other countries, and now we've introduced this in, in, in EMEA and other places, and the same thing happens. More and more doctors sign up for it, they start to see the benefits of it, and then they, they utilize it more. So it's really just a matter of now scaling this to other parts of the world because we find that this is really a nice way to supplement how a doctor wants to run their practice.

Michael Ryskin (Managing Director of Life Science Tools and Diagnostics Equity Research)

Okay. And, maybe a follow-up on a few questions that were asked on, Cubicure and direct 3D printing earlier. Really exciting technology that, that you unveiled, late last year, and you definitely see the, the opportunity, but could you help walk us through the roadmap a little bit? Sort of like, what should we be looking for, you know, as, as sort of a goalpost, six months out, a year out, two years out, just to sort of track progress and, and see how it's, see how it's progressing?

Joe Hogan (President and CEO)

You know, Michael, it's Joe again. I think the best way for me to describe it to you, it's a—like I said in my script, it's a one to three year journey. You know, and obviously we'll, we know how to make these aligners now. We understand how to do it. It's just scalability of resin in the Cubicure process, and that takes time. And we'll obviously report on it quarter-by-quarter, so you really understand, you know, where we're going with it and what the hurdles are and what the opportunities are.

Michael Ryskin (Managing Director of Life Science Tools and Diagnostics Equity Research)

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

Joe Hogan (President and CEO)

I mean, obviously, the scale, you look at retainers first, because, you know-

Michael Ryskin (Managing Director of Life Science Tools and Diagnostics Equity Research)

Yeah

Joe Hogan (President and CEO)

They're units of one. And that's where it's... And then you'd end up with, you know, comprehensive full cases in some way, and that, that's basically how we'll ramp.

Michael Ryskin (Managing Director of Life Science Tools and Diagnostics Equity Research)

Okay, great. Thanks, guys.

Joe Hogan (President and CEO)

Yep.

Shirley Stacy (VP of Corporate Communications and Investor Relations)

Thank you, Michael.

Operator (participant)

Thank you. One moment for questions. Our next question comes from Nathan Rich with Goldman Sachs. You may proceed.

Nathan Rich (VP of Equity Research)

Hey, hey, good afternoon, thanks for the questions. I wanted to ask on the systems and services revenue guidance for 2024. Just looks low to me, just given you know, I think growth in 2023 was basically flat and up slightly. You know, with the Lumina launch, we thought it would maybe be up more than it was in 2023. So I don't know if you could just maybe elaborate on what you're expecting for that segment.

John Morici (CFO and EVP of Global Finance)

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

Nathan Rich (VP of Equity Research)

Okay, great. And then just going back to the margin cadence. I guess, are there any either upfront or one-time costs associated with either the launches of iTero Lumina or IPE that impact the margin in the early part of the year, just as we think about, you know, cadence and sort of what the right, right baseline is?

John Morici (CFO and EVP of Global Finance)

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

Nathan Rich (VP of Equity Research)

Great. Thank you.

Shirley Stacy (VP of Corporate Communications and Investor Relations)

Thanks.

Operator (participant)

Thank you. One moment for questions. Our next question comes from Erin Wright with Morgan Stanley. You may proceed.

Erin Wright (Senior Equity Research Analyst)

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

Joe Hogan (President and CEO)

And on the DTC customers, you know, we've always argued that that, you know, that wasn't our marketplace in the sense of the price point and all, but, I mean, obviously these patients will pursue treatment now, you know, probably more so for doctors than DTC, and we're just doing what we can in order to support those customers going forward. But again, as I was clear in my script, you know, we're a, we're a doctor-focused kind of company, and we'll keep it that way. But, we do see this as being a certain opportunity, just hard for us to quantify it right now. On the DSO relationships, I'd say they've just gotten stronger all around the globe. You know, two to call out would be, you know, Heartland and Smile Doctors.

You know, Smile Doctors being more on the ortho side and Heartland Dental, you know, being more on the GP side. But we have really, you know, good relationships, and we leverage our portfolio, you know, well with them to help them grow, and we grow with them. So I feel good about our position with DSOs, and we have good, strong relationships out there with them.

Erin Wright (Senior Equity Research Analyst)

Okay. Thank you.

Shirley Stacy (VP of Corporate Communications and Investor Relations)

Thanks, Erin.

Operator (participant)

Thank you. One moment for questions. Our next question comes from Brandon Couillard with Jefferies. You may proceed.

Joe Hogan (President and CEO)

Hey, Brandon.

Brandon Couillard (SVP of Equity Research)

Hey, thanks. Good afternoon. Joe, given the positive macro shift we've seen in the last few months with consumer confidence coming back, any chance you can comment on what you've seen in case starts in January, any inflection? And then with respect to the 2024 growth outlook, any chance you could break that out between Americas and International?

Joe Hogan (President and CEO)

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

Brandon Couillard (SVP of Equity Research)

Okay, and then one housekeeping, one for you, John. The fourth quarter operating cash flow was pretty weak. Can you just unpack any of the moving parts that might have been one time in the quarter? It looks like there was a spike in prepaid expenses on the balance sheet, but, you know, anything you'd, you would call out?

John Morici (CFO and EVP of Global Finance)

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

Brandon Couillard (SVP of Equity Research)

Gotcha. Thanks.

Operator (participant)

Thank you. We have reached the end of our question and answer session. I will now turn the call back over to Shirley Stacy for closing remarks.

Shirley Stacy (VP of Corporate Communications and Investor Relations)

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

Operator (participant)

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