Align Technology Inc (ALGN) — Q4 2017 Earnings Call Transcript

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 2017 financial results today via Marketwired, 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 12 months. A telephone replay will be available today by approximately 5:30 PM Eastern Time through 5:30 PM Eastern Time on February 9. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13674959 followed by pound. International callers should dial 201-612-7415 with the same conference number. As a reminder, the information that the presenters discuss today will include forward-looking statements, including statements about Align's future events, product outlook, and the expected financial results for the first quarter and full year outlook for 2018. These forward-looking statements are only predictions and involve risks and uncertainties that are set forth in more detail in our most recent periodic reports filed with the Securities and Exchange Commission. Actual results may vary significantly and Align expressly assumes no obligation to update any forward-looking statements. We've posted historical financial statements, including the corresponding reconciliations and our fourth quarter conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information.

Thanks, Shirley. Good afternoon and thanks for joining us. On our call today, I'll provide some highlights from the quarter and then briefly discuss the performance of our two operating segments, clear aligners, and oral scanners. John will provide more detail on our financial results and discuss our outlook for the first quarter and how we see 2018 unfolding. Following that, I’ll come back and summarize a few key points and then open up the call to questions. Overall, the fourth quarter was a strong finish to another outstanding year for Align with better than expected revenues, volumes, and operating income. Record Q4 revenues were up 43.7% year-over-year, driven by increased Invisalign volumes across all geographies and customer channels as well as by record iTero scanner revenue. Q4 Invisalign volume was up 34.2% year-over-year, reflecting strong international growth from increased utilization and expansion of our customer base, which included over 4,000 new customers for the third consecutive quarter. Notwithstanding the strong performance, our Q4 results were impacted by the new US Tax Cut and Jobs Act, which reduced our reported net income and EPS. However, Q4 operating income was a record $109.6 million or 26%. John will discuss this in more detail in his section in a few minutes. For the full year, revenue of 1.5 billion increased 36.4% year-over-year, driven by both record Invisalign revenue, which surpassed the 1 billion mark for the first time ever and record iTero scanner revenues. These results reflect continued progress in execution of our four strategic growth drivers, which focus on driving international expansion, increasing orthodontist utilization of Invisalign, especially with teenagers, enabling GP dentists to treat and refer more Invisalign cases, and generating consumer demand from millions of people worldwide and connecting them with Invisalign doctors. Turning to the specifics around our fourth quarter results, let's start with the results of our North American region. For North America, Q4 was a good quarter with Invisalign case volume up 5.1% sequentially and 24.2% year-over-year. Sequential growth primarily reflects the seasonality, a seasonally stronger period for GP dentists as patients’ activities in their offices increased after summer holidays. Ortho customers treated more adult patients following the busy teen season. In addition, Q4 Invisalign utilization increased to 3.3 cases per GP dentist and North American Orthos received a record 14 cases per doctor, reflecting continued confidence and uptake of Invisalign system. On a year-over-year basis, strong growth was driven primarily by increased Ortho utilization and continued expansion of our GP customer base. For the full year, both North America Orthos and GP Dentists achieved record annualized utilization of 47 and 8 cases per doctor respectively. For international doctors, Q4 was another strong quarter with Invisalign case volume up 12.7% sequentially and 52.3% year-over-year. Sequential growth reflects a seasonally stronger quarter for EMEA region following summer holidays for doctors and patients, which offset expected decreases from seasonality in APAC, particularly as the Greater China market observed local holidays. On a year-over-year basis, strong Invisalign volume was driven by growth from both EMEA and the Asia Pacific region. Year-over-year growth for EMEA was up 42.9%, led by Spain, France, and the UK. We also saw strong growth across all of our smaller expansion markets, which include Central and Eastern Europe, the Middle East, and Africa. And APAC Q4 volumes were up 63% year-over-year, led by China, Japan, and Australia with record Invisalign volume in most APAC countries. For the full year, Invisalign volume increased 44.9%, led by growth from China and our core EMEA country markets. In total, international volume represented 38% of worldwide Invisalign case shipments. Now, turning to the teen market, which makes up 75% of total orthodontic case starts each year. In Q4, 63.5 thousand teenagers started treatment with Invisalign clear aligners, an increase of 44.1% year-over-year, driven by continued strong adoption across all major regions and increasingly for younger teens and tweens. For Q4, year-over-year Invisalign teen patient growth for North American Orthos increased 37.8% and international was up 64.7%. Notwithstanding some seasonality during the quarter, given fewer teen case starts, Q4 was a fifth consecutive quarter that Invisalign teenage patient volume grew faster than adults. On a sequential basis, North American ortho teen cases were down as expected as our ortho customers shifted their focus toward adult patient case starts in Q4 following a very busy summer teen season. For the full year, a total of 237,000 teenagers or 26% of our total volume started treatment with Invisalign clear aligners, up 40.4% from 2016. During the year, we continued to drive adoption of teenage patients through sales and marketing programs, including a major new direct-to-consumer campaign, emphasizing teens and moms. In addition, at the beginning of 2017, we launched the first clear aligner solution for Class II correction that combines all the benefits of the most advanced clear aligner system in the world with features for moving the lower jaw forward while simultaneously aligning the teeth. Invisalign teen with mandibular advancement or MATH as we call it, offers a simpler, more efficient, and patient-friendly option than functional appliances. MATH was launched in certain country markets in Canada, EMEA, and APAC and is ramping up nicely across the board, especially in China. To date, we've shipped over 5,000 MATH cases outside the United States, half of which were in Q4 alone and we're very excited about the potential for MATH worldwide. However, we do not expect any material contribution in the US from MATH until the back half of 2018, as we continue to work through the 510k regulatory approval process with the FDA, which includes collecting additional data and analysis. Invisalign brand is one of the most recognized in the dental and orthodontic market. Our integrated consumer marketing programs leverage traditional media, search, digital marketing, PR, and social media to engage consumers at every point in the consumer purchase journey. These programs continue to drive demand for Invisalign treatment and are key to adoption in both the teen and adult segments. In 2017, we launched a new Made to Move brand platform for Invisalign, which has been really impactful around the world. In North America, we expanded our traditional digital media campaigns, targeting both men and women for the first time and made a significant investment in our marketing to teens and moms. We stepped up our approach to teens by partnering with content developers, teen and mom social media influencers, and team brands like AwesomenessTV, which we saw pay off in increases in our consumer website activity and opt-in metrics. We also saw a positive impact from the global Made to Move campaign across EMEA and APAC and may have focused heavily on digital, social, and web traffic, which resulted in a huge increase in their online smile assessments and other KPIs. APAC markets like Singapore and Australia also saw an increase in KPIs based on their focus on social media and local event and influencer-driven marketing. As a result, in total for the year, there were over 15 million unique visitors to the Invisalign websites worldwide, 1.8 million potential patients searched for Invisalign providers on Doc locator, up 41% from 2016. 600,000 consumers completed Invisalign smile assessments on our website, of which 445,000 opted in for follow-up in the Invisalign social media community grew over 42% to 745,000 consumers following the Invisalign brand worldwide. You may recall that in January last year, we launched a new smile concierge program in Raleigh, North Carolina, with the objective to help more consumers start Invisalign treatment and improve their overall experience by shortening their research cycles and utilizing consumer insights to help our doctors better engage with consumers. Throughout the year, we made great progress from ongoing program improvements in December. We achieved a major milestone with the 6,500 Invisalign patients for the smile concierge team. Cumulatively, we scheduled over 26,000 Invisalign consultations, which equates to connecting hundreds of consumers to Invisalign practices every day. We continue to see incredible potential as our doctors’ offices are implementing changes to better engage with consumers that we send to them every day. We've also started to expand the small concierge service outside the United States with our first teams up and running in Singapore, Brazil, and Australia, with each of these countries having a great start to the year helping more consumers become Invisalign patients. In 2018, our smile concierge team will be very closely linked to the new Invisalign store pilot that we opened in November, which will utilize our consumer insights to better capture leads coming out of the store experience. The smile concierge team will be utilizing our touchpoint learnings to reach out to consumers who received a scan but don't schedule an appointment with a doctor. In addition, we’ll use our automated text and email services to remind consumers when and where to pick up their aligners or to see a doctor as scheduled. These are just a few of the exciting new ways that we're helping to educate consumers on the benefits of getting a better smile with Invisalign treatment and connect them with an Invisalign doctor of their choice. The Invisalign store pilot program that launched in November is an extension of our long-standing direct-to-consumer marketing programs that connect potential patients directly to doctors for Invisalign treatment. We're looking at other successful brands and how they use a physical location to engage consumers and extend the brand experience. In this case, we are trying to extend and strengthen what we do through digital ads, social media, PR, and TV advertising and our customers' own in-practice patient marketing. Our pilot store model relies on the doctor and the doctor's office for treatment. We are not treating patients in the store. Instead, we are educating consumers on how Invisalign works, showing them a scan-driven simulation of how they might look with straighter teeth and offering to connect interested consumers with a doctor of their choice. To date, we've learned a lot about creating the right consumer experience with the Invisalign system through a storefront and are continuing to evolve and make continued progress. In Q1, we will open another pilot store in San Jose, California, near our corporate headquarters. We're planning to open two additional pilot stores on the East Coast sometime in the first half of this year. We look forward to continuing to learn more from these four locations and sharing our progress throughout the year. Q4 was a strong quarter for iTero and better than expected with revenues up 30.8% sequentially and 37% year-over-year on record iTero scanner shipments. Q4 results reflect continued strength in our GP channel following our GP summit in September as well as sales to our major DSO partners and through our iTero distributor, Patterson Dental. The iTero scanner business was also strong in EMEA and has been growing rapidly in Asia Pacific, especially Japan where we see certification for iTero in Q3. Customers are quickly realizing a significant benefit of our iTero scanner platform and we are excited about the opportunity to continue to expand iTero’s footprint worldwide. The iTero scanner is central to our digital approach and overall customer utilization of Invisalign treatment. Use of the iTero scanners for Invisalign case submissions in place of traditional impressions continues to expand and remains a positive catalyst for Invisalign utilization. For Q4, total Invisalign cases submitted with a digital scanner in North America increased to a record 64.1%, up from 51.3% in Q4 last year. International scans increased to 40.8%, up from 24.9 in Q4 of last year. Not only does the iTero scanner provide the best workflow for Invisalign treatment with the Invisalign outcomes simulator and progress assessment tool, but it also seamlessly integrates with downstream restorative workflows, significantly improving their accuracy and precision. iTero is also the only scanner with time-lapse technology that makes chair-side consults more productive. By scanning patients at every visit using time-lapse and comparing historical scans to a current scan, patients see for themselves the changes in their tooth wear, tooth movement, and changes in alignment, encouraging them to accept treatment on the chair-side. In Q4, we cited a distribution agreement with Glidewell Dental for our iTero Element scanner in North America with glidewell.io, the in-office solution, a chair-side restorative ecosystem designed to simplify the process of prescribing and delivering laboratory-quality dental restorations. In 2017, iTero scanners volumes were up 37.5% year-over-year. To date, over 6.3 million orthodontic scans and 2.4 million restorative scans have started with iTero scanners. Finally, in the doctor-directed at-home channel, Align is a third-party supplier to SmileDirectClub and has a 19% equity investment in the company. We manufacture a portion of SDC aligners with non-Invisalign clear aligners. For Q4, shipments to SDC were down sequentially as expected as SDC increased their own internal capacity. As an investor and supplier to SDC, Align is focused on two things: expanding the market for orthodontic treatment and providing greater access to simple teeth straightening solutions to millions of more people who prioritize convenience and affordability, and creating new opportunities for Invisalign doctors by connecting consumers who aren't candidates for SDC’s limited protocols to an Invisalign practice. With that, I'll now turn the call over to John.

Thanks, Joe. Now for our Q4 financial results. Total company revenue for the fourth quarter was a record $421.3 million, up 9.4% from the prior quarter and up 43.7% from the corresponding quarter a year ago. Clear aligner revenue of $364.2 million was up 6.6% sequentially on higher than expected volume. Year-over-year clear aligner revenue growth of 44.8% reflected strong Invisalign shipment growth across all customer channels and geographies and increased Invisalign prices. Q4 Invisalign ASPs were down sequentially approximately $5 from Q3 to $1305, reflecting higher deferrals related to additional aligners and higher promotional discounts, partially offset by international price increases. On a year-over-year basis, Q4 Invisalign ASPs were up approximately $75, reflecting price increases, favorable foreign exchange, product mix, as well as the impact of discontinuing distribution and going directly in several regions, partially offset by increased promotional discounts and higher deferrals related to additional aligners. For the fourth quarter, total Invisalign shipments of 255,000 cases were up 8% sequentially, driven by our EMEA and North America customers. Year-over-year Invisalign case volume growth was up 34.2%, driven by growth across all regions. For North American orthodontists, Q4 Invisalign case volume was up 2.3% sequentially and up 30.7% year-over-year. For North American GP dentists, Invisalign case volume was up 9.2% sequentially and up 16.1% year-over-year. For international doctors, Invisalign case volume was up 12.7% sequentially and up 52.3% year-over-year. Our scanner and services revenue for the fourth quarter was $57.1 million, up 30.8% sequentially and up 37% year-over-year, primarily due to continued global investment and go-to-market activities and sales promotions as well as shipments to key DSO partners and our US distributor, Patterson Dental. Moving on to gross margin, fourth quarter overall gross margin was 75.5%, down 0.4 points sequentially and up 0.4 points year-over-year. Clear aligner gross margin for the fourth quarter was 77.6%, down 0.3 points sequentially, primarily due to higher manufacturing spend, driven by operational expansion activities. Clear aligner gross margin was up 0.1 points year-over-year, primarily due to increased ASPs and partially offset by higher manufacturing spend. Scanner gross margin for the fourth quarter was 62%, up 2 points sequentially and up one point year-over-year, primarily due to higher manufacturing efficiencies. Q4 operating expenses were $208.3 million, up sequentially 7.5% and up 37.2% year-over-year, primarily due to increased employee headcount and continued investment in our go-to-market activities critical to the growth of our operations. Our fourth quarter operating income was a record $109.6 million, up 11% sequentially and up 60.3% year-over-year. Our fourth quarter operating margin was 26%, up 0.4 points sequentially and up 2.7 points year-over-year. The sequential increase in operating margin relates primarily to leveraged operating spend in sales and marketing of higher volumes, partially offset by lower gross margin due to operational expansion activities. On a year-over-year basis, the increase in operating margin primarily reflects higher revenues from both clear aligner and scanner and services which created operating expense leverage. With regards to our fourth quarter tax provision, our tax rate was 92.4% and is up by 72.6 points compared to 19.8% in the same quarter last year, which includes $86.6 million in tax expense as a result of the US Tax Cuts and Jobs Act enacted on December 22, 2017. This is comprised of $76.6 million of mandatory deemed repatriation tax on foreign accumulated earnings not previously taxed by the US that we expect to pay over the next eight years and $10 million non-cash write-down of our deferred tax assets due to the statutory tax rate decrease from 35% to 21%. Going forward, we may repatriate cash back to the US to invest in market expansion opportunities, provide additional working capital and have greater flexibility to fund our stock repurchase program. In accordance with the SEC staff accounting bulletin number 118, we have recorded provisional amounts in the Q4 financial statements for certain income tax effects of the act based on reasonable estimates and information available as the close of the period. We may adjust and refine the provisional amounts over the next year when additional information, analysis and legislative guidance becomes available. Fourth quarter diluted earnings per share was $0.13, down 87.1% sequentially and down 78% compared to the prior year. Our diluted earnings per share includes 86.6 million or $1.06 per diluted share impact due to the new US Tax Cut and Jobs Act. Moving on to the balance sheet, as of the fourth quarter, cash, cash equivalents and marketable securities, including both short and long-term investments, were $761.5 million. This compared to $700 million at the end of 2016, an increase of approximately $61.5 million, primarily related to earnings growth. Of our $761.5 million of cash, cash equivalents and marketable securities, $271.4 million was held by the US and $490.1 million was held by our international entities. Q4 accounts receivable balance was $322.8 million, up approximately 0.5% sequentially. Our overall days sales outstanding, DSO, was 69 days, down six days sequentially and down seven days from 76 days in Q4 last year. DSOs have decreased as a result of improved collection activities across all regions. Cash flow from operations for the fourth quarter was $162.3 million, up $81.3 million compared to the prior year. Free cash flow for the fourth quarter, defined as cash flow from operations less capital expenditures, amounted to $92.8 million. Capital expenditures for the fourth quarter were $69.5 million, primarily relating to building purchases and improvements, equipment purchases for additional manufacturing capacity as well as our global expansion efforts, including a new manufacturing facility in Ziyang, China which will open in the second half of 2018. During the fourth quarter, we repurchased approximately 0.2 million shares of stock for $50 million under the April 2016 repurchase program. We have $200 million remaining available for repurchases under the existing stock repurchase authorization. Before we move to the Q1 outlook, I would like to make a few comments on our full year 2017 results. In 2017, we shipped a 931,000 Invisalign cases, up 31.4%. This reflects 44.9% volume growth from our international doctors and 24.3% volume growth from our North American doctors. Shipments of our iTero scanner were up 37.5% over 2016. Total revenue was a record $1.5 billion, up 36.4% year-over-year with Invisalign revenues breaking above $1 billion for the first time. Full year operating income of $353.6 million, up 42.1% versus 2016 and operating margin at 24%, up 0.9 points versus prior year. Free cash flow was $242.8 million. For the year, we repurchased 0.6 million shares of Align’s stock for $103.8 million. 2017 diluted earnings per share was $2.83, which includes 86.6 million or $1.06 per diluted share impact due to the new US Tax Cut and Jobs Act, comprised of a $10 million write down of our deferred tax assets and a mandatory deemed repatriation tax of $76.6 million. With that, let's turn to our Q1 outlook and the factors that inform our view, starting with the demand outlook. We expect our international business to continue to grow sequentially. For North America, we expect Q1 to be seasonally up for both GP dentists and Orthos. For our scanner business, we expect a sequential decrease following a strong year-end. In addition, capital equipment purchases are seasonally slower in Q1. As Joe commented earlier, this quarter we supplied fewer aligners to SDC in Q4 2017 compared to prior quarters. We are anticipating this trend to continue as SDC continues to ramp up their own manufacturing capacity. With this as a backdrop, we expect the first quarter to shape up as follows. Invisalign case volume is expected to be in the range of 264,000 to 269,000 cases, up approximately 27% to 29% over the same period a year ago. We expect Q1 net revenues to be in the range of $400 million to $410 million, an increase of approximately 29% to 32% year-over-year. We expect Q1 gross margin to be in the range of 74.3% to 75%, reflecting higher expenses as we regionalize our treatment planning operations, partially offset by higher ASPs. We expect Q1 operating expenses to be in the range of $223.5 million to $227.5 million, up on a sequential basis to reflect our continued investment in go-to-market activities. Q1 operating margin should be in a range of 18.5% to 19.5%. Our effective tax rate including an excess tax benefit of about $22 million should be approximately 2%. We expect a $1 million to $2 million loss related to our share of SmileDirectClub, and diluted shares outstanding should be approximately 82 million, exclusive of any share repurchases. Taken together, we expect our Q1 diluted earnings per share to be in the range of $0.94 to $0.98. In addition, as we continue our operational expansion efforts, we expect capital expenditures for Q1 to be approximately $65 million to $70 million and we expect depreciation and amortization to be $10.5 million to $11 million. Now, let me turn to our full year view. We anticipate 2018 revenue to be at the high end of our long-term operating model range of 15% to 25%. We also expect Invisalign revenue and volume growth to be close to the high end of that model. While we expect the scanner business to do well and continue to grow, we would not expect the same rate of growth of volume and revenue as we saw in 2017. We expect operating margins to be approximately flat to 2017 results as we plan to continue to fund our investments to fuel growth. We expect the equity loss for our investment in SmileDirectClub to be $1 million to $2 million per quarter. We expect our tax rate for 2018 to be approximately 18%, which includes approximately $24 million of excess tax benefits. As we’ve seen historically, we expect our earnings power in the second half of the year to be stronger than the first half with second half operating income to account for somewhere in the range of 56% to 58% of our full year results. We expect capital expenditures for 2018 to be in the range of $200 million to $230 million, primarily due to operational expansion and ongoing growth of the business. Finally, regarding the new revenue recognition standard ASC 606, we plan to adopt the standard in the first quarter of 2018 by applying the full retrospective method. We have assessed the financial statement impact of adoption, including but not limited to volume-based discount programs, sales commissions, and the identification of performance obligations and are continuing to evaluate the transition and disclosure requirements of the standard. We anticipate that adoption of the standard will not have a material impact on our consolidated financial statements.

Thanks, John, and thanks again for joining us. 2017 was a great year for Align and I'm very pleased with our strong performance across all key regions, customer channels, and product lines. This year, not only do we celebrate our 20th year in business, we also achieved several major milestones. We reached our millionth Invisalign team and our 5 millionth Invisalign patient. Invisalign volume in EMEA exceeded 200,000 cases for the first time. We opened our first treatment planning operations in China and Germany. China became our second-largest country market, next to the US. Invisalign revenues exceeded $1 billion for the first time ever. As I reflect on these achievements, I want to take a minute to thank more than the 130,000 Invisalign providers around the world who helped us expand the market for orthodontics using the Invisalign system. They’re increasing confidence in using Invisalign clear aligners to treat moderate to complex cases as reflected in our record utilization across all customer channels, and we're grateful for their partnership. We're continuing innovating to deliver new technology and solutions that provide Invisalign doctors with the right tools, support, and services to keep their practices flourishing. Even with growth rates significantly above the industry, our market opportunity is enormous and getting larger every day. With less than 10% share of the world orthodontic case starts each year, we have a long way to go to make clear aligners a standard of care, but our goal is to do just that. There are more than 300 million people around the world who would or could benefit from straighter teeth. Reaching out to those consumers, helping them understand treatment options, and getting them started in treatment will require new approaches and new models. We're committed to doing that in partnership with our customers. For 2018, we'll continue to focus on and execute our four key strategic priorities, and I feel really good about our plans. We're continuing to expand our business in EMEA, APAC and will accelerate our investment in LATAM and Canada, bringing more resources closer to our customers and launching direct-to-consumer advertising in some markets like Canada for the first time. The teenage market remains our number one priority across the ortho channel. For the first time, we will focus on teens and their moms and our consumer marketing programs in the EMEA region, making it easier for GP dentists to treat more cases also enables them to refer more complex ones to specialists. So we are creating dedicated GP resources across our sales and marketing organizations to ensure that we have a better understanding of how to drive Invisalign adoption among GP dentists and support their unique customer needs, including restorative and aesthetic dentistry. And finally, the Invisalign brand and our consumer marketing programs are key differentiators for the company. So we'll continue to invest and to build capabilities that enable us to talk directly to consumers, improve the overall experience with our brand, connect more people than ever with Invisalign practices, and ensure that they get started in treatment with Invisalign clear aligners every time. With that, I'll turn it over to the operator, and we’ll open the call up for your questions.

This is Nathan Rich on for Bob this evening. Joe, I just wanted to start with the revenue outlook for growth to be at the high end of the long term range. Obviously, that still implies a healthy level of growth, but down a little bit from what you guys saw in 2017. You’ve spent a lot of time on the call obviously talking about the initiatives that you've put in place and the opportunity that the company still has. So I was just wondering if you can maybe help us understand what the key drivers of the outlook are for this year and what if anything has changed from your point of view.

Well, I think nothing's really changed in that sense. There's some amplitude that we're talking about in the sense of what we're calling right now. But overall, we feel good momentum in the business and what we're trying to convey with you is we stay within the volume ranges that we've talked about before. But, we're just going to look quarter-to-quarter, we continue to look at the same drivers, I mean, continue to look at APAC being strong, Europe will be strong and North America, particularly around teens and our focus there and iTero scanners continue to go off well. So overall, I really feel good about our forecast and will be more and more clear obviously as we come back to you after the first quarter.

And just a follow up on the outlook, does it contemplate any change in the competitive landscape in 2018 and if you were to see a new competitor come to market, how would that impact your view of the year?

I think Nathan, we've been very clear over the last year or so that we do expect competition in 2018. In these forecasts, we are reflecting any kind of competition we might see, but there's been nothing out there recently that's changed any position that we've had from a competitor standpoint. So these forecasts do reflect how we see the marketplace and that includes potential competition as we get into longer parts of this year.

Can you speak to your retail store concept and how you envision that progressing? Has there been any sort of surprises thus far with the initiative, and how will the smile concierge team be involved? Do you plan to leverage your smile concierge build out in other countries as well to then leverage the retail store concept there or is it too early on that process?

We are expanding the small concierge program internationally this year, focusing on APAC and EMEA regions. The program is currently scalable, and we can apply the insights we've gained from North America, which involves a lot of IT and processes that assist in converting consumers to patients more effectively. This knowledge has influenced the Invisalign store pilot we're running in San Francisco, as we aim to bring the service closer to patients. It's important to note that we're not conducting any diagnoses; instead, we perform scans in these stores to show potential patients what their smiles could look like using two different approaches, which we refer to as signature and deluxe. We are currently in a pilot phase, refining the workflow between ourselves, the doctors, and the patients over the past 60 days, resulting in progress. This gives us the confidence to expand by opening a store in San Jose and two more on the East Coast this year. We will share our findings transparently. Our focus is on converting consumers to patients, and this model involves collaboration with our doctors. It's crucial how we engage with consumers, facilitating a smooth transition to a doctor and ensuring quick information exchange throughout the customer journey. We are learning and improving in this area, which makes us optimistic about our future plans. Similar to our concierge services, we have seen success and developed a scalable model that we can explore in various countries worldwide.

And can you give us an update on mandibular advancements here? What sort of data has been requested from the FDA and what sort of visibility do you have on the timing of the launch? I guess what are the next data points, and also how traction for that product I guess hoping to build adoption across the teen market outside of the US. Thanks.

Erin, this is really, it’s actually simple. Sounds like a drug or anything like that. They just need more data at the FDA and they just want to have more comfort with the safety and the efficacy of the product line, so we're supplying that data. We expect, hopefully, we’ll be through that by the second half of this year and then we'll move on. I mean, I talked about the 5,000 cases that we did last year with 2,500 of those being in the fourth quarter alone. Honestly, the feedback that we get from our patients overseas is tremendous. I mean when we look at the device that we've replaced through this, it's amazing like a twin block device. Let’s normally use that there. When you can actually move this jaw forward as comfortably as we do with math, but also straighten teen’s teeth at the same time. It's really an amazing invention. So I think that's part of the way the FDA wants more and more information because they really haven't seen a device like this before, but we feel very confident we'll be able to supply their informational needs and as we move into the second half of this year, we'll give you more clarity on exactly where that stands.

Hi. This is Jamie on for Rich Newitter. A quick question that I have I guess is on the teen segment. Of course, you guys posted nice performance this quarter, so I'm kind of thinking about when you guys think this market could be potentially reaching an inflection point and how we should be thinking about the additional investments in your direct-to-consumer campaigns and really seeing the payoff there and how it translates into further growth in 2018?

It’s Joe again. Look I would say we've done one in a row on teens and we have more work to do on this, but we have to put a lot of money into the system in the sense of educating moms and teens, peer-to-peer training for doctors, all these things. And so I'd say, the whole idea, enthusiasm around the tipping point, we're not there yet. We have to continue to see this market and push this market in order to get it going. We're confident in our ability to do that based on what we experienced in the last five quarters, but not necessarily ready to claim victory and that this has its own momentum at this point in time.

And then just one other quick question on scanners, I guess you were saying for you, if I heard you correctly, for the full year 2018, you're not expecting the same sort of growth for the scanner business. So just kind of on that front, what sorts of expectations or assumptions do you have baked in for 2018 for growth in this market?

This is John. We would expect scanner growth to be approximately equal to Invisalign.

Joe, could you share your thoughts on the revenue growth expectations for 2018 and the allocation of spending? Clearly, there are returns, but is that focused on hiring more representatives, increasing direct-to-consumer efforts, or a combination of both? Also, how should we think about this spending throughout the year in terms of achieving a critical mass with the reps? I have a follow-up question as well.

What we're doing is amplifying the investments we made in 2017, particularly in teenage and broader advertisements, which help drive gross profit volume growth, especially in the United States. We're also investing in our concierge service, and as you mentioned, we have more field personnel engaging with customers to boost the business. There's a clear connection between our investments in these areas to stimulate demand and the demand we can generate. We are maintaining our previous trajectory, but I understand your question is about leverage. When that leverage happens, I must emphasize that it is not self-sustaining yet. We need to invest to stimulate demand, educate consumers, and train doctors. I do not anticipate that changing in 2018.

To shift gears, I know it's early, but I do want to sort of follow-up with the store front initiative. Clearly, the model gets the volume into the doc’s offices and you've been very vocal about that and it's unlike that of SDC, but what are you hearing from your customers, maybe even if it's only specific to San Francisco, are there any that are sort of unsettled by called the fixed economics for Express type cases and they shouldn’t be saying, hey, I'm getting 500 bucks instead of 50 for doing an SDC markup, but have they come around and what are you hearing in the early days from that customer base?

From the perspective of our San Francisco store, doctors there are very supportive of what we're doing because they are close to the store and see our efforts. However, when we look at doctors across the country, there is some concern regarding what Align aims to achieve with these stores. We are focused on communicating that this model is designed for doctors, and we are trying to drive demand primarily through orthodontics and general practice. Regarding your question about our signature product and its pricing, that has not been particularly favored by our doctors. There is a market price that reflects the demand, but our focus is on improving anterior teeth movement, which is essentially enhancing smiles, something patients desire. While some doctors are supportive and content with this initiative, others are not, and we allow them the choice to decide if they want to engage with it. We also offer deluxe cases, but the pricing has not aligned well with orthodontists' expectations. Nonetheless, we have a considerable number of patients interested in the Deluxe option once they understand the potential long-term benefits, like bite changes.

This is actually Zach Wachter on for Steve. Thanks for the questions. Joe, I wondered if you saw the 3Shape and 3M release out today on the collaboration and any early thoughts on that.

I was quite surprised to hear that 3M acknowledged their scanner isn't working properly for the digital marketplace. This caught me off guard more than anything else. Given that, it's not surprising they would turn to 3Shape since they have a reliable Confocal imaging scanner, which is partially supported by our technology. However, what really surprised me is that it seems 3M's current def scanner is going to be retired in some way. From a competitive perspective, this doesn't change anything; it just indicates that 3M realized they needed a different digital front end for their system than what they currently produce.

And as far as the 3Shape transition on the scan submissions, how are you doing in terms of back filling those volumes and what do you think about the overall impact there?

That’s like we didn't call our forecast any impact. We have customers upset at us because we had to make that move and wanted to make that move. But we're working through that, through offers of iTero that help offset this and also through subsidizing some submissions we did have in a fundamental way than the analog way in order to do impressions. So right now, we're not calling any kind of a downside based on that. We emphasize with customers who have been effective from a workflow standpoint, we're doing everything we can to mitigate that and make it as easy as possible.

There have been a couple of questions regarding the storefront. Specifically about the consumer finance program, can you share any early insights or feedback, and is there any additional volume worth mentioning?

Look, we're doing a pilot now in some key markets and learning a lot and working through to make sure that we have the best possible patient and customer experience through this. So we're learning, making sure that it gets rolled out in the right way and you'll see a larger rollout coming in the future.

Joe, given the very strong growth that you just finished up in ’17, how do you feel about the manufacturing infrastructure’s ability to handle it? If you had similar growth in ’18 as you just put up, would there be any strains on the system and whereas in particular and do you have to put some more capital work there to stay ahead of that?

Yes, we do. We handle that almost systematically. We ensure that we have sufficient SLA equipment and capabilities, and with the additional capacity coming online in China, it will help alleviate some pressure on that facility as well. There is a potential bottleneck concerning patient assessments and case prescriptions, particularly regarding Costa Rica. However, we typically maintain a steady approach, and last year posed significant challenges due to a swift surge in volume, but we managed to recover and address it. Overall, I am confident in our operations team and our ability to anticipate needs, ensuring we have adequate capacity available upfront to meet demand. Therefore, we do not foresee this being an issue in 2018.

And then just one follow-up, can talk a bit about key new innovations. So you gave us a nice update on mandibular advancement, as we think about ’18, is there anything out on the horizon that you would maybe care to preview?

Well, I think we've talked a lot about rapid palatal expansion. I mean we talked about that about 18 months ago. We’ve given updates on that, that technology continues to progress. We're enthusiastic about it. That's rapid palatal expansion, John. You put in, in this case a device, it replaces a device where you use actually a wrench today to turn it, or a twin block device. It's very crude in the sense of how you expand the palate, that this would be a digital way with plastic and being able to expand the palate on a regular basis. We also have a product called dental expansion, which will expand your upper arch also Invisalign with Invisalign aligners also. So those are the big products that we're moving toward. When you think about the teen marketplace, and we call tweens and teens and 30% of that marketplace is basically rapid palatal expansion and math, mandibular phase 1 kind of things. And so that technology is really aimed at making us more have a more substantial footprint and capability in that teen segment.

John, I think as you mentioned on SDC, maybe revenue is coming down a little bit in the forward quarters here after a couple of quarters in a row, near 10 million as they continue to ramp their aligner manufacturing. I guess my question just why do they keep investing in manufacturing capacity. Obviously, they have a good partner in you guys, you guys have plenty of manufacturing, I know, maybe some strain on it and whereas as we were just discussing, but why the investments there still and why not just continue to use you guys for most of their aligner needs?

Jeff, I think it looks at a separate company. They're looking at this as how they want to run their company and decisions that they make to invest and produce their own product. We take anything that comes externally that they don't want to manufacture and it varies. As you've seen kind of quarter by quarter, based on what they produce versus what they go outside with, but it's an internal decision that they make.

And then when I try to triangulate, I take 1Q guide kind of your 1.8 versus 2.8 EBIT guide and think about kind of what's going on in the business right now, help me out just understand what looks like it could be a down margin in the first quarter and I know John is going to give you a pass on that, but let me just push a little bit on it. How much of that is just your opening, Cologne recently opening in China in the treatment planning, China manufacturing costs or manufacturing facility being built out, it just seems like you are doing quite a bit right now, a couple of new storefronts, all that stuff. Is that really the driver of just some elevated expenses here in the near-term or should we be thinking anything ASP driven or anything else kind of core fundamental to the business just versus some investments that need to be made right now.

Yes. Jeff, it's mostly investments. If you think about how 2017 played out, from the investments early on in the year and progressively as we went quarter by quarter, we've got increasing operating leverage. That's the same type of play that we would have for 2018. We're investing, we continue to follow the strategy that we have and you'll see those investments throughout the year and the first quarter, it's not as much operating leverage, but to guide something flat on a year-over-year basis, around that 24%, you would expect that some of that increase as we go through the year.

This is Kevin substituting for Matt today. I wanted to follow up on a previous question about manufacturing. I'm aware that the facility in China is set to begin operations later this year. I'm curious about the main investments there, specifically any updates on new printers or materials. Additionally, considering the growing cash balance and the possibility of bringing some cash back to the US, how does the company plan to utilize its cash effectively at this time?

Yeah. I can start with that one. I mean when we think about our China operation, I mean, as kind of been noted, when we talk about investments that we have to make up to accommodate the manufacturing, we're always investing. So now, we're going to add to that capacity that we need in China. So it's really a shift in some cases from Mexico to China and we'll continue to make those investments as needed from an overall growth standpoint. And when we look at our cash position that we have, as we said on previously, we're going to look at what strategically makes the most sense to bring cash back where we need it, where we can properly use that cash for future investments. But in other cases like China, we’ll leave cash there to be able to grow that operation that we need. So we're going to look at this very strategically as to how we best fund our growth.

I was looking at the percentage of cases completed through the iTero digital scanning process, which has been increasing steadily each quarter and was about 50% in North America this time last year. This reflects significant progress. Ideally, we aim for 100%, but is there an internal target the company has set for 2018 or the upcoming years? Additionally, how should we consider the potential savings from fewer adjustments needed or chipping the molds out? Is it more substantial than we might expect?

It's Joe. We don't set specific year-to-year targets for our projections, but you may remember we had a ten point increase last year in North America alone. We anticipate this trend will continue as scanners become more widely adopted, which will naturally lead to fewer impressions being made. Ideally, we'd aim for 100% adoption someday, but reaching around 80% or 85% seems more realistic, especially since many, particularly in the GP sector, might hesitate to invest in scanners until they are confident in their Invisalign volume to justify that investment. As for the benefits of this transition, while it is clear that we will have better-fitting aligners and other advantages, we currently don't have any specific economic quantifications or changes to report at this time.

I have a couple of housekeeping questions, John. Regarding the first quarter revenue guidance of 400 to 410, it’s uncommon to see a sequential quarter-over-quarter decline. Can you provide some insight into the actual size of the scanner decrease from the fourth quarter to the first quarter and whether that is mainly due to upfront Patterson shipments that we won't see again in the first quarter?

Brandon, as you mentioned, the revenue we guided is primarily based on our expectations from the scanner sales. Q4 was particularly strong in this area due to significant investments from our doctors, but we do not expect the same level of activity in Q1. Therefore, we anticipate a decline as we move from Q4 to Q1, which is an anticipated outcome based on our analysis. And then secondly in terms of the ’18 outlook, can you give a sense of where you see your percentage of SmileDirect manufacturing volumes shaken out for the year? And then secondly, curious if you’ve finalized plans on whether you expect it to take a little, more or less pricing this year. So, on SmileDirectClub, we would expect about the same volume year-over-year. So what we saw in ’17 should approximate and repeat in 2018 and that would be included in the overall numbers that we gave. And in terms of ASPs, we increased in the past, we haven't announced any increase in 2018. We will let our customers know in advance and then communicate that afterwards, but our past history has been to include.

Thanks, everyone. This concludes our conference call today. We look forward to seeing you at upcoming financial conferences and industry meetings, including the Leerink Healthcare Conference, Morgan Stanley European Healthcare conference, and the Chicago Midwinter Meeting. We're also announcing today that we will be hosting an Investor Day in New York City on May 23. Additional information will be available shortly. We hope to see you there. If you have any questions, please contact Investor Relations. Thanks, and have a great day.