Align Technology Inc (ALGN) — Q3 2019 Earnings Call Transcript

Thank you. Good afternoon, everyone, 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 2019 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 6. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13694915#, 16127415 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 2019. 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 have posted historical financial statements, including the corresponding reconciliations and our third quarter 2019 conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information. With that, I'd like to turn the call over to Align Technology's President and CEO, Joe Hogan. Joe?

Thanks, Shirley. Good afternoon, and thank you for joining us. On our call today, I'll provide some highlights for the third quarter and briefly discuss the performance of our two operating segments, clear aligners and intra-oral 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. For Q3, I'm pleased to report revenues, volumes and earnings above our third quarter outlook, driven by better-than-expected volume across the Invisalign portfolio in Asia Pacific and Latin America, reflecting record highs for both regions and improving trends in the North American orthodontics channel. Notwithstanding EMEA summer seasonality, we saw continued adoption from teens and especially young patients using Invisalign First across the board. Q3 Invisalign volumes were up 20.7% year-over-year, driven by the growth across the product portfolio as well as the expansion of our customer base, which increased by 5,900 new Invisalign doctors for a total of 63,000 active doctors worldwide. The iTero scanner and services business was up 16.5% year-over-year, reflecting continued growth across each region, and down sequentially as expected coming off a record second quarter. Now let's turn to the specifics around our third quarter results, starting with the Americas region. For the Americas region, typical Q3 summer seasonality for adult case starts in North America was offset by the growth in the North American teen market as well as the strength from Latin American orthodontists. Q3 Invisalign case volume was up 2% sequentially and 13% year-over-year on tough comps. Recall in Q3 '18, we had a teen and adult promotion that drove approximately 4 to 5 points of growth in the Americas. In Q3, we trained over 2,700 new doctors in the Americas region, of which nearly half were Latin American doctors. On a sequential basis, Q3 Invisalign volume growth reflects increased utilization for the Americas region overall, driven by the North American Orthos at 19.1 cases per doctor, where we saw improved momentum throughout the quarter and good growth from teens in Invisalign First patients. North American GP volume was seasonally lower in Q3, and we're seeing improving trends into fourth quarter, reflecting benefit from our investment in sales resources added at the beginning of the year. New and existing reps are continuing to ramp up, and we would expect further progress over the remainder of the year. We also had continued strength across comprehensive and non-comprehensive products in Latin America, led by Brazil. Year-over-year, Q3 Invisalign volume for the Americas region was driven by continued growth from both the Ortho and GP channels, including the DSOs. The DSO channel remains an important channel and consistently grows faster than non-DSO practices. For our international business, Q3 reflects increased growth in Asia Pacific, especially from our teen segment in China, partially offset by sequentially lower volume in EMEA due to the summer holidays for Invisalign practices in most European countries. On a year-over-year basis, Invisalign volume increased 32.1%, reflecting strength across our product portfolio with continued expansion of our customer base. In Q3, we trained over 3,100 new Invisalign doctors internationally, with 60% in the Asia Pacific region. In EMEA, Q3 Invisalign volumes were down sequentially as expected, reflecting more pronounced seasonality in the first half of the quarter and strong momentum in the back half, led by Iberia in the U.K. Q3 volumes were up 29% year-over-year with broad-based growth across the Invisalign product portfolio and continued momentum from Invisalign Go treatment. We also continue to see strong growth across our key expansion markets as well, led by Central and Eastern Europe and the Middle East and Africa. In Q3, as part of our corporate structure reorganization, we reallocated order acquisition for EMEA from the Netherlands to Poland. This site will serve as a centralized facility for order acquisition, local sales and support. In addition, this location will also offer treatment planning to support all of EMEA country markets except for Spain and Germany, where we'll continue to support their local markets. For APAC, Q3 Invisalign volume increased 35.1% year-over-year, led by Greater China and Japan. We continue to see strong growth from GP dentist, which was up 53.2% year-over-year, especially in Japan, where adoption of Invisalign Go continues to exceed expectations. On a sequential basis, Q3 Invisalign volume for APAC reflects continued momentum in China, especially from teen cases and growth from Taiwan and Korea. We also saw increased adoption of Invisalign First in Japan and ANZ and Taiwan as well as positive results from Teen Edge professional marketing programs, which are helping to drive Invisalign growth. During the quarter, we opened the treatment planning facility in Yokohama, Japan, to better support Japanese doctors in local language and local time zones. APAC remains a huge growth opportunity for Align, and this investment reflects our commitment to providing our customers with continued support as we grow and scale our business across the region. Teens and kids continue to make up the largest portion of the orthodontic market and represent a huge growth opportunity for Invisalign treatment to replace metal braces worldwide. Over the past 2 years, we introduced 2 product innovations to help doctors treat more patients in this segment. Invisalign treatment with mandibular advancement addresses roughly 45% of teen cases and is the only clear aligner to move the mandible forward while straightening teeth at the same time. Invisalign First treatment is the first clear aligner product designed with features specifically for growing patients as young as 7 years old, and Phase 1 addresses 20% of the orthodontic case starts each year. Both products have continued to grow and helped increase utilization for Invisalign treatment worldwide. In Q3, 130,000 teenagers and kids as young as 7 years old started treatment with Invisalign clear aligners, an increase of 31.5% year-over-year, reflecting continued adoption across all major regions, especially China. Cumulatively, nearly 2 million teens or younger patients have used Invisalign clear aligners. In Q3, we continue to see strong dental engagement with consumers, reaching over 4.5 million unique visitors on Invisalign websites worldwide for a total of 62 million visitors to date. Our digital approach to teen marketing continues to drive awareness and interested teenagers into Invisalign practices. Other key metrics show increased activity and engagement with the Invisalign brand and are included in our Q3 quarterly slides. In addition, we launched a new advertising campaign for North America at the beginning of the quarter. The North American campaign was launched across all key media channels with a reach to over 140 million consumers, combining a robust paid media strategy across prime broadcast, cable and connected TV channels with paid search and social media. While still new in the marketplace and very early in the cycle, we're seeing a positive response from doctors and consumers. In the last few weeks, all KPIs metrics have shown strong momentum with more than a 50% increase in Doctor Locator searches and in leads scheduled from our Smile Concierge service. Finally, as many of you may have seen, we recently announced marketing relationships with several professional sports teams, including the San Francisco 49ers, the Toronto Raptors, the Carolina Hurricanes and the New England Patriots. Align is always looking for ways to evolve our brand marketing to be relevant to potential patients where they work, live and play. Over the last few years, many sports brands have evolved their own brand programs to engage with fans in a variety of ways and through multiple touch points. Partnering with teams that have an omni-channel approach to brand marketing and engagement gives us direct access to large, loyal fan bases and helps us reach individual consumers and whole families through a variety of existing fan platforms. With the right team partners, we can create awareness for the power of winning smiles. And as always, the goal is the same for us: to build awareness and demand for Invisalign treatment and connect engaged consumers with Invisalign doctor practices in their markets. For Q3, iTero scanner and services revenue was down sequentially as expected and up 16.5% year-over-year, reflecting continued growth across all regions and customer channels, including large DSOs. Year-to-date, iTero revenues were up 47.3%, reflecting continued adoption of digital dentistry. Cumulatively, over 18 million orthodontic scans and 4.3 million restorative scans have started with iTero scanners. Heartland Dental, one of our largest DSO partners, recently celebrated their millionth iTero scan, highlighting how important iTero and Invisalign workflow is in their doctor practices, which now includes 900 offices across the U.S. and is enabling them to add nearly 200,000 digital scans per month. Use of iTero scanners for Invisalign case submissions continues to grow and remains a positive catalyst for Invisalign utilization. For Q3, total Invisalign cases submitted with a digital scanner in the Americas increased from 78.7% to 71.9% in Q3 of last year. International scans increased 62.5%, up from 53.9% in the same quarter last year. Within the Americas, 92.9% of cases submitted by North American orthos were submitted digitally. We continue to expand the iTero portfolio to address doctors' needs and enable them to more easily adopt Invisalign treatment in their practices. In August, we announced the commercial availability of the iTero Element 2 scanner in China, with the first made in China iTero Element 2 produced in our manufacturing facility in Ziyang. The launch exemplifies Align's continued innovation and investment to advance digital dentistry in China. In September, we announced a global distribution agreement for the iTero Element family of intraoral scanners with Zimmer Biomet Dental. The agreement enables us to leverage Zimmer Biomet Dental's extensive direct global sales force and network of dental clinicians and laboratories to help further drive the penetration of iTero scanners and services in their growing digital restorative market. The collaboration also offers Zimmer Biomet Dental customers access to Invisalign clear aligners through the iTero platform to facilitate a comprehensive interdisciplinary treatment approach. We know that a key differentiator in the evolution to a digital practice and dental ecosystem is clinical education. Through this collaboration, the iTero scanner becomes the exclusive intraoral scanner used in the U.S. and European Zimmer Biomet Institutes, which trains thousands of doctors annually in an interactive learning environment, with the ultimate goal of improved clinical outcomes. We also joined Zimmer at the Japan Society of Oral Implantology Meeting in Japan and at the EAO in Portugal, where the iTero intraoral scanners were showcased.

Thanks, Joe. Now for our Q3 financial results. Total revenue for the third quarter was $607.3 million, up 1.1% from the prior quarter and up 20.2% from the corresponding quarter a year ago. Year-over-year revenue growth was favorable in all regions. For clear aligners, Q3 revenue of $516.3 million was up sequentially due to Invisalign volume growth in most geographies and higher ASPs. Year-over-year clear aligner revenue growth of 20.9% reflects strong Invisalign shipment growth across all customer channels and geographies and higher ASPs. Q3 Invisalign ASPs were up sequentially by approximately $30 to $1,260, primarily due to price increases in all regions, partially offset by promotional discounts. On a year-over-year basis, Q3 Invisalign ASPs were up $30, primarily reflecting price increases in all regions, partially offset by promotional discounts and unfavorable foreign exchange. Total Q3 Invisalign shipments of 385,400 cases were up 2.2% sequentially and up 20.7% year-over-year. For Americas Orthodontists, Q3 Invisalign case volume was up 5.6% sequentially and up 16.4% year-over-year. For Americas GP Dentists, Invisalign case volume was down 4.1% sequentially and up 7.4% year-over-year. For international doctors, Invisalign case volume was up 2.5% sequentially and up 32.1% year-over-year. Our scanner and services revenue for the third quarter was $91.1 million, down 12.4% sequentially as expected, reflecting lower volume coming off another strong Q2, partially offset by higher ASPs. Year-over-year, scanners and services revenue was up 16.5%, driven by increased services revenue off a higher installed base and higher volume. Moving on to gross margin. Third quarter overall gross margin was 72%, flat sequentially and down 1.6 points year-over-year. Gross margin was impacted by approximately 0.3 points year-over-year due to unfavorable foreign exchange. Clear aligner gross margin for the third quarter was 73.5%, down 0.2 points sequentially, primarily due to increased aligners per case, partially offset by higher ASPs and seasonally lower doctor training. Clear aligner gross margin was down 1.8 points year-over-year, primarily due to increased aligners per case, partially offset by higher ASPs. Scanner gross margin for the third quarter was 64.1%, up 0.5 points sequentially and up 0.2 points year-over-year, primarily due to higher ASPs and increased manufacturing efficiencies. Q3 operating expenses were $310.4 million, up sequentially 21.3% and up 25.9% year-over-year. The sequential increase reflects the benefit of $51 million related to the Straumann litigation settlement recorded in the second quarter. Additionally, the third quarter includes a $6.8 million benefit from the early termination of our Invisalign store leases. The year-over-year increase reflects our investment in consumer advertising with a brand-new North American campaign launched in August, continued investment in R&D, geographic expansion and go-to-market activities, partially offset by the benefit from the early termination of our Invisalign store leases. Our third quarter operating income of $127.2 million resulted in an operating margin of 20.9%, down 8.5 points sequentially and down 3.9 points year-over-year. The sequential decrease in operating margin is primarily attributed to the $51 million benefit related to the Straumann settlement recorded in Q2, partially offset by a $6.8 million benefit related to the Invisalign store lease terminations in the third quarter. The year-over-year decrease in operating margin is primarily due to lower gross margin, as described earlier, and the increased investments in our geographic expansion and go-to-market activities, partially offset by the benefit from the early termination of our Invisalign store leases in the third quarter. Operating margin was impacted by approximately 0.6 points year-over-year due to the unfavorable foreign exchange. Interest, other income and expense for the third quarter was $1.3 million, down $16.1 million sequentially and flat on a year-over-year basis. The sequential decrease reflects the $15.8 million gain related to the sale of our equity investment in SmileDirectClub during the second quarter. With regards to the third quarter tax provision, our tax rate was 20.2%. Third quarter diluted earnings per share was $1.28, down $0.55 sequentially and up $0.04 compared to the prior year. Moving on to the balance sheet. As of September 30, 2019, cash, cash equivalents and marketable securities, including both short- and long-term investments, were $782.4 million, an increase of $16.5 million from the prior quarter, which is primarily due to higher cash flow from operations, partially offset by $200 million used to repurchase approximately 1.1 million shares of our stock. Of our $782.4 million of cash, cash equivalents and marketable securities, $513.9 million was held in the U.S. and $268.5 million was held by our international entities. Q3 accounts receivable balance was $531.8 million, up approximately 2.3% sequentially. Our overall days sales outstanding was 79 days, up 2 days sequentially and up 4 days from Q3 last year. Cash flow from operations for the third quarter was $234.5 million, up $138.3 million compared to the prior year. Capital expenditures for the third quarter were $26.6 million, primarily related to our continued investment in increasing aligner capacity and facilities. Free cash flow for the third quarter defined as cash flow from operations, less capital expenditures, amounted to $207.9 million. During Q3 2019, we entered into and completed an accelerated stock repurchase agreement, ASR, to repurchase $200 million of our common stock, which was completed in September of 2019. We received a total of approximately 1.1 million shares for an average price of $176.61 per share. We have $200.5 million remaining available for repurchase under the May 2018 repurchase program. With that, let's turn to our Q4 outlook and the factors that inform our view, starting with the demand outlook. Q3 was a solid quarter, and momentum has continued to build into Q4 across all regions. For international, we expect Q4 volumes across to be up sequentially, reflecting strong uptick from EMEA, as doctors come back from summer holidays. For the Americas, we expect Q4 volumes to be up sequentially, reflecting growth across all key country markets as well as momentum in North American Ortho and GPs along with increased media spend and the launch of our new consumer advertising campaign, as Joe described earlier. We expect our iTero business to be up sequentially in Q4 to reflect end of the year capital equipment purchases and investment in growing the iTero business across all regions. With this as a backdrop, we expect the fourth quarter to shape up as follows. Invisalign case volume is expected to be in the range of 400,000 to 407,000 cases, up approximately 20% to 22% year-over-year. We expect Q4 revenue to be in the range of $640 million to $650 million, up approximately 20% to 22% year-over-year. Our Q4 revenue outlook assumes no SDC volume compared to the same quarter a year ago when aligner supply to SDC contributed about $5.8 million to revenue. We expect Q4 gross margin to be in the range of 71.7% to 72.4%. Q4 gross margin is up 0.4 points compared to Q3 as we expect continued improvements in our manufacturing efficiencies associated with higher volumes. We expect Q4 operating expenses to be in the range of $318 million to $323 million. Q4 operating margin should be in the range of 22% to 22.7%. Our effective tax rate is expected to be approximately 24%. Diluted shares outstanding is expected to be approximately $79.4 million, exclusive of any share repurchases. Taken together, we expect our Q4 diluted earnings per share to be in the range of $1.35 to $1.42. In addition, we expect to repurchase at least $100 million of our stock in the open market in Q4. As we continue our operational expansion efforts, we expect capital expenditures for Q4 to be approximately $30 million to $35 million, and we expect depreciation and amortization to be $22 million to $24 million.

Before turning the call back to Joe, I want to update you on our corporate entity reorganization. On January 1, 2020, our EMEA headquarters in the Netherlands will officially move to Switzerland. Our new Swiss location will serve as the headquarters for all regional, commercial and operational activities in EMEA and will be supported by the existing network of local offices established across the region. Our new corporate entity, Align Technology Switzerland GmbH, will assume all responsibility for the sale and distribution of the Invisalign system, iTero intraoral scanners and associated Align goods and services in EMEA, previously provided by Align Technology B.V. Our local and global teams have been working diligently to ensure a very smooth transition while supporting our doctors, suppliers and employees, many of whom have decided not to relocate to Switzerland but will stay on in transitional roles as needed. I want to thank all of our employees for their hard work and dedication in supporting this major company initiative. While it is never easy to make this kind of change, especially when it impacts team members who have helped build the EMEA business and have contributed so much to our overall success, we are very excited about our new operations in Switzerland. Thanks, John, and thanks for joining our call today. Overall, Q3 was a solid quarter for us across the board with increasing momentum in APAC and North America that has carried us over into Q4. As you can see from the high end of our guidance, the implied full-year growth rate from Invisalign volume is 23.5%, with international growth in the mid to high 30s. Overall, our business remains very healthy with numerous growth drivers in a vastly underpenetrated market. We remain confident in both the enormous opportunity ahead to lead the evolution of digital orthodontics and comprehensive dentistry with our doctor customers and in our ability to execute our strategy to increase adoption of Invisalign treatment globally. With that, I want to thank you again for joining the call. I look forward to seeing many of you at our upcoming financial conferences and meetings, including the Invisalign GP Summit in November in Las Vegas.

In terms of the higher OpEx spend, are you seeing the returns from the North America, I guess, stepped-up marketing and media spend as you expected? And how should we be thinking about that level of spend into the fourth quarter just based on the responses that you're seeing from the marketing campaigns so far? And will this, I guess, contribute to the accelerating kind of volume trends in the fourth quarter as well as momentum into 2020?

Erin, it's Joe. Yes, we're seeing, as you can tell from the statistics we just recorded, we have a real large take-up when you think about doctor locator searches, which is a primary or concierge service and what they're handling. Remember, the concierge service takes those customers and then directs them directly to doctors that we have a high degree of certainty that they'll actually convert them into Invisalign. As we move into the fourth quarter, expect the same amount of investment. Also in the Americas too with the improvements you're seeing is also our sales force and the additions we put together. As we said at the beginning of the year, it usually takes at least 9 months, 6 to 9 months to see some kind of traction that we're seeing with the sales force too. So both the advertisements from a North America standpoint and the added salespeople, we think, are really contributing to that momentum we just reported.

Okay. Great. And then my follow-up, just on China, in particular. Can you speak to what you're seeing across that market, just given some of the commentary you had in the previous quarter around the softness in that geography? If you could give us an update there, that would be great.

The momentum we saw in China during our second quarter announcement has continued throughout the quarter. We experienced 26% growth in China in the second quarter and are now seeing growth in the upper 30% range as we enter the third quarter. Overall, we are pleased with the uptake and had a successful teen season there. Additionally, we've increased our workforce in China by 40%. It does take time for new hires to become acclimated and effective, but we are optimistic about our momentum in the region. While the economic situation is challenging with the slowest growth in 30 years, which presents a headwind that was also noted in the second quarter, we believe we have made the right adjustments and are focusing on strategies that will allow us to achieve continued growth.

I'm sure there will be many questions about Invisalign, which is understandable, but I’d like to shift focus to a couple of other topics. One is the iTero performance this quarter. It’s typical to see seasonal fluctuations, but I’m curious about the trends for iTero this quarter, especially considering the operational activities related to Zimmer, which likely required a significant time commitment from the sales team, alongside a product launch in an important region. Do you think there was any disruption to the commercial efforts for iTero during this quarter?

Steve, it's John. No, there's no disruption. If you look at iTero on a year-to-date basis, it's up 47%. There will be some timing variations from quarter to quarter, but we feel very good about where iTero stands. It's a crucial part of our digital ecosystem and essential to our business, so while we expect fluctuations each quarter, we are pleased with iTero's performance this year.

Okay. And then sorry, Joe, for leaving you out here, but I got a couple for John. One is on the transition in Europe, can you speak to how much duplicative costs you might have been carrying between the Switzerland operations and the Netherlands operations and what that could mean for the tax rate over time as you change the domicile of the organization? And then I wonder if you could give us an update on what you think prospectively the impact of facilities' manufacturing capacity utilization is going to be going forward on gross margins?

Yes, Steve. The changes we are implementing in EMEA are aimed at simplifying our organization in response to various tax changes and the new structures we've established. This approach enhances our flexibility regarding global tax matters. From a facilities perspective, we are focusing our manufacturing efforts where they are most effective. Our manufacturing operations in China are steadily increasing, and it's vital for us to keep treatment planning close to our customers. While there will always be a transition phase as productivity improves, we are optimistic about the investments we have made and are pleased with the current gross margins and our future forecasts.

Joe, how do you view the current state of consumer spending on orthodontics? Is it improving or declining? Additionally, do you believe the investments in direct-to-consumer models like SDC are benefiting Align or are they somewhat detrimental?

John, first of all, I think you picked up in your survey and other people do too when we picked it up is, I mean, we see good consumer spending right now from an orthodontic standpoint. Align stands out in that spending when you look at it specifically. As far as how that's driven, obviously, we've put a lot more into consumer advertising, and some of the DTC competitors have done that also. I do think that, that raises consumer brand awareness. No question. I think the consumers go to the Internet to try to answer those questions. They'll go to their doctors to try to answer those questions, too. So I can't deny, John. I think that our advertising and some competitive advertising in that sense probably does raise all boats to a certain extent.

Great. And then one quick follow-up. The utilization among your North American GPs has been kind of flat over the last couple of years. What is your thinking about the best way to drive that higher over the next year or 2?

First of all, John, I believe you understand this well since you've been with us for a long time. We onboard a significant number of general practitioners every year, about 150,000, and we provide extensive training to many of them annually. This results in a dilutive effect. The numbers we report typically range from 3.4% to 3.6% quarter-over-quarter. Regarding your question, I think the best approach is our DSO strategy, which I mentioned as a force multiplier. Collaborating with strong DSOs is beneficial because they have their own training programs for their teams. They help us optimize workflow and implement various strategies. Over the years, we've realized that tools like iGo are not just products; they function as systems. These systems work alongside GPs to identify patients who qualify, integrate seamlessly into their workflow, and instill confidence in practitioners when they engage with patients. We stand firmly behind our offerings. Ultimately, using the right products and systems while partnering with DSOs enhances our ability to penetrate the market more effectively.

Can you hear me okay?

Yes. Sure.

Great. So just a question on the gross margin, not to pick too much at what I think was a pretty good quarter, just why aren't we seeing, given the kind of pricing uptick that looks like it emerged in the third quarter, why aren't we seeing more of a flow-through on the clear aligner gross margin in the fourth quarter? And maybe if you could help us think about pricing in the fourth quarter for the ASPs. I think last quarter, you said it would be about even with the second quarter, and that's pretty much a lot better than that. So do you feel more confidence in your ability to take price here?

Yes, Robbie, this is John. As we discussed, we increased prices in the third quarter, and that is reflected in our average selling prices. We are also investing in our manufacturing and treatment plant to be closer to our customers. At times, that can offset changes, and in the third quarter, we saw little change from the second quarter. In the fourth quarter, our guidance indicates an increase in gross margin sequentially, driven by greater volume productivity that we anticipate will continue at our manufacturing sites, resulting in ongoing benefits. Regarding average selling prices, it increased to $1,260, which is a $30 rise from the second quarter. However, we expect that figure to decrease slightly. The mix was significantly high in the third quarter, so for the fourth quarter, we anticipate it will be closer to $1,245, which aligns with our previous comments about remaining relatively flat throughout the year.

Great. Can you provide some insight into the implications for the teen market? As you increase your presence in that area, you've experienced 30% growth over the last few quarters. How should we consider the shift in pricing with this more comprehensive approach?

Yes, Rob, it's Joe. You're correct that there is a mix shift happening. From the standpoint of teen growth, we are reporting strong growth globally above 30%. However, our utilization rates in that market are still significantly below our clinical capacity. Currently, we are equipped to handle nearly all teen cases. It is worth noting that the marketplace is primarily focused on comprehensive cases, particularly in orthopedics. We are confident in our portfolio's ability to support teen patients at this time, and we believe that this will help balance the average selling prices in the long run.

Joe, maybe first one for you. Just any comments, maybe I missed it, but sort of on comprehensive versus non-comprehensive growth this quarter. And then with the GP summit approaching next month, is there any plan to more aggressively sort of pursue, call it this lower acuity cases through that channel? And then I've got a follow-up.

Yes. I mean, Jon, honestly, I mean, from a comprehensive standpoint, obviously, still 70% of our portfolio more goes that way. But with the introduction of Lite, iGo, products like this, we made an adjustment on E5 this quarter, E7, all these other products. I mean that part of our product line has traditionally been growing faster and with the comprehensive thing is. Now it's a law of small numbers versus large numbers, but we do see increased growth in that area. When we look at the GP channel, we do look at the GP channel as a way to get at patients, what we call kind of a sub-acute kind of on a patient base to do that. So I mentioned iGo on the last call also as being a system that allows us to do that. Obviously, Lite does that also. So you'll see us, Jon, increasingly focused on that channel, but also think about working really closely with GPs on not just the product line, but the system itself with iTero, how to be able to do treatment planning quickly and to give the GPs confidence that when they adopt these cases, that they'll finish and they'll finish well. Those are the 3 critical variables we know we have to hit to really drive significant growth.

Got it. Very helpful. And then just maybe John, the reorg for this year, is there sort of a refined number? Is that 1.5% or 2%? Or is it still in that range? And then sort of part B to that question is it follows up on Ravi's. Just to be as specific as possible, the gross margin is in sort of flattish Q3 to Q4, is it a globalizing the supply chain headwind? Or is it more aligners per case headwind? And I'm asking that because the more aligners per case, that probably continues with teen, et cetera, but the globalizing supply chain, that seems more of a '19 event than a '20 event. So any more detail you can give around gross margin would be helpful.

Yes, Jon, it's really both. I mean, when you look at, especially as we do and work with our doctors doing more and more complicated cases, as comprehensive grows and Invisalign First and teen and so on, those end up being more aligners and end up impacting our gross margin. The globalization that we're doing, that's much more short term. As we said, getting close to our customers is very, very critical to us. Treatment planning, manufacturing. But as you get more and more capacity there and scale that, you see productivity improvements.

Did you take the same price increases internationally as you did domestically? That's the first quick one. And then just looking at the trend, quarterly trend in case growth and overall revenue growth, is seasonality shifting as international sales grow as a percentage? And how should we think about that going forward?

Kevin, Joe. On the pricing piece, yes, it's about the same. I think there's some mix and tucks on Lite versus comprehensive. But basically the same price increase globally across the board. On the revenue growth, the seasonality of it. I think the biggest thing that you can think of, there's really a couple of trends in this business is, one, in North America, you move into the third quarter, it's teen season and GPs tend to decline. But the biggest mix is in Europe, where you basically go down for vacation, I mean, lights go out for us for a long period of time, and then obviously come back in September. And then you got China on the other side that kind of compensates for that in the past. So those are the big, I would say, countercyclical or cyclical movements that we have in the business.

I have two questions, Joe. For the first one, last quarter you shared some insights regarding the competition from doctors and some of the discounting happening in the field. Can you provide an update on the trend for the current quarter and what you are observing? Is there anything surprising or different from last quarter in that regard? I also have a follow-up.

Richard, my previous comment about the doctor-directed to DIY model primarily focused on North America and some young adult segments. We actually observed that stabilize and improve in the third quarter at the order endpoint. We saw positive momentum in that area.

Okay. And I was just referring to the more traditional competitors that recently started launching products where there might be some trialing. That's what you're referring to as improving, not the DTC...

No. Actually, I'd say both. I mean the traditional competitors that are out there, we acknowledged them last quarter, which we thought we had to, but there's no fundamental change in that, what we saw in the second quarter versus what we saw in the third quarter.

Rich, I'll keep my comments kind of in this year. But I'd say, what China shaped up to be is pretty much what we called in the second quarter. We said the teen season is going to come in China. We thought that would be a lift. We've hired the salespeople. We're looking for that to take hold and be able to move the business forward. And so to say we have better visibility, I think we have the same visibility that we had quarter-to-quarter. Actually, from an execution standpoint, I just think the steps that we've taken with some of the pressure on consumer demand that we reported in the second quarter, the operational steps that we took in China on the ground, we're seeing a good result for it and we feel good about it.

Maybe just a couple of housekeeping items. Joe, any update on the timing of the U.S. approval for the 5D scanner? And then any color you can share with us as far as mandibular uptake in the U.S.?

Brandon, on the 5D scanner, the FDA is the FDA, and we feel confident we'll get through here. Early part of next year would be my best forecast in that sense. I could tell you, from a 5D standpoint, the uptick around the world has been good. The carries detection piece to be able to see cracks or deterioration in teeth has been terrific. And so it's really been a changing aspect to the clinical GP practice to be able to see carries in a way that you really can't see them without a near-infrared technology. So we're actually really excited about that. And we're excited to get it into North America.

Joe, I want to return to the topic of China. You mentioned last quarter that we would lose some momentum with the teen demographic as we move into the fourth quarter, transitioning to more adult patients. However, as you've indicated on this call, it seems you're beginning to see positive results from the new sales team additions and other initiatives in that market. Should we view the 26% figure you mentioned this quarter from Q2 as the baseline moving forward? Do you believe we can expect similar results or even better, considering these recent efforts?

Jeff, obviously, we think we did well in the third quarter in China. Some of it was obviously the teen season. But actually, we had some pretty good adult growth, too. We're moving out of teen season there. As we talked about, the momentum going into the fourth quarter has been good there, too. As far as the baseline, Jeff, goes or whatever, hey, China is a growth market for us. We wouldn't be putting manufacturing in over there. We wouldn't be putting treatment planning, we wouldn't make the investments we're making, unless we feel that China is going to continue to be the second largest market that we're growing with. So I think that's the way you have to think about it going forward.

Well, thank you, everyone, for joining us today. This concludes our conference call. We look forward to seeing you at upcoming conferences and, of course, at the GP Summit in November. If you have any follow-on questions, please contact Madeline Homick in Investor Relations.