Align Technology Inc (ALGN) — Q3 2018 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 third quarter 2018 financial results today via GlobeNewswire, 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 p.m. Eastern Time through 5:30 p.m. Eastern Time on November 7. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13683414 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 fourth quarter of 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 statement. We have posted historical financial statements, including the corresponding reconciliations and our third quarter 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's President and CEO, Joe Hogan. Joe?

Thanks, Shirley. Good afternoon, and thanks for joining us on our call today. I'll provide some highlights on the quarter and then briefly discuss the performance of our two operating segments, clear aligners and scanners. John will provide more detail on our financial results and discuss our outlook for the fourth quarter. Following that, I'll come back and summarize a few key points and open up the call to questions. I'm pleased to report third quarter results with revenue and earnings above our outlook, driven by higher-than-expected Invisalign volume, offset somewhat by lower ASPs and foreign exchange. We also had another record quarter for iTero scanner business. Q3 Invisalign volume increased 5.5% sequentially and up 35.3% year-over-year, reflecting strength across regions and customer channels as well as strong growth from both teen and adult patients...

Thanks, Joe. Now for our Q3 financial results. Total revenue for the third quarter was $505.3 million, up 3.1% from the prior quarter and up 31.2% from the corresponding quarter a year ago. Year-over-year revenue growth was favorable in all regions. Clear aligner revenue of $421.1 million was down 1.4% sequentially, driven by lower ASPs as a result of higher-than-expected discounts and unfavorable foreign exchange, partially offset by increased volume. Year-over-year clear aligner revenue growth of 25% reflected strong Invisalign shipment growth across all customer channels and geographies, and was partially offset by lower ASPs...

Great. Thanks, Joe and John, for the question. I guess just to start on the lower ASPs, which you guys provided some details around at least the areas that impacted it. And John, if I heard you correctly, it sounds like of the $85 sequential decline, if I remove FX, it would have been more like $60, $61 sequential decline. So, of that decline, I was hoping maybe you could just break down how much of that came from promotions versus mix shift.

Yeah. Hey, Bob. This is John. On the remaining piece that's left, about half of the drop in ASPs was due to mix. It was mix shift to the lower stage products. And about the other half or $30 or so was related to those promotions.

And Bob, it's Joe. Look, obviously on the Advantage Program and the special programs we ran for the quarter, we do this all the time. We're trying to encourage customer stickiness. We're checking out different segments of the marketplace. We do this all the time. But in this case, what happened is we incentivized the upper end of our customer segment. We did not get the engagement in the lower end that we anticipated. And so, in that sense, we will shut that thing down. We won't repeat it again. We obviously learned from it and we move on.

Thanks. Good afternoon. Maybe, John, in terms of the aligner gross margins in the quarter, can you break out the impact of the manufacturing capacity expansions relative to ASPs? And as you look into 2019, given we're kind of bouncing along the low end of your three- to five-year model here at about 73%, would it be logical to expect year-over-year expansion in terms of the aligner margins as you start to soak up some of that new manufacturing capacity expansions?

Yeah. You're right, Brandon. I mean, what we'll see initially because of the low volumes, we'll see more of that fixed cost over that low volume. So, that's a 0.5 to 1 point impact due to the manufacturing start-up. And then as we get more efficient, we should see some improvement as we go forward related to those manufacturing costs.

Overall, Q3 was another good quarter with strong growth for both the Invisalign and iTero businesses. Our performance reflects continued success in driving adoption and utilization across all regions and customer channels, as well as increased traction in new expansion markets with our DSO partners. We have a huge market opportunity ahead to connect millions of consumers with Invisalign doctors for orthodontic treatment...

Thank you, everyone. That concludes our conference call today. If you have any further questions, please contact Investor Relations. And we look forward to seeing you at the upcoming conferences and at the Invisalign Ortho Summit next month. Have a great day.