Align Technology Inc (ALGN) — Q4 2019 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 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 one month. A telephone replay will be available today by approximately 5:30 p.m. Eastern Time through 5:30 p.m. Eastern Time on February 12, 2020. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13697560. 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 fiscal year outlook for 2020. 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 available on our website and at sec.gov. 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 reconciliation and our fourth quarter and full year 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 thanks for joining us. On our call today, I'll provide some highlights from the fourth quarter and full year, then briefly discuss the performance of our two operating segments, clear aligners and intra-oral scanners. John will provide more detail on our financial results, discuss our outlook for the first quarter, and share high-level thoughts about 2020. Following that, I'll come back and summarize a few key points and open up the call to questions. Our fourth quarter was a strong finish to a great year with record revenues and volumes. Q4 Invisalign shipments increased 23.9% year-over-year and marked another major milestone with our 8 millionth Invisalign patient who started treatment in December. This rate of growth is truly amazing to me, given that our 7 million Invisalign patient was just this past May, seven months ago. For Q4, iTero scanner revenues increased 20.2% year-over-year with strong growth especially from international doctors. On a sequential basis, Invisalign volumes were up 7.4% driven by strong growth in North America, EMEA, and Latin America, with all-time highs in those regions. We also saw strong growth from Invisalign Go systems across all regions, reflecting continued progress with GP dentists as well as a ramp-up from Invisalign Moderate which launched at the beginning of Q4 in North America...

Thanks Joe. Now for our Q4 financial results. Total revenue for the fourth quarter was $649.8 million, up 7% from the prior quarter and up 21.7% from the corresponding quarter a year ago. For clear aligners, Q4 revenues of $543.6 million were up 5.3% sequentially with strong Invisalign volume from EMEA and North America. Year-over-year clear aligner revenue growth of 22% reflects strong Invisalign growth volume across all regions. Clear aligner revenue growth was unfavorably impacted by approximately 1.3 points year-over-year from foreign exchange. Q4 Invisalign ASPs were down sequentially by approximately $20 to $1,240, primarily due to discounts, mix and unfavorable foreign exchange. On a year-over-year basis, Q4 Invisalign ASPs increased approximately $5, primarily reflecting price increases in all regions and increased additional aligner revenues partly offset by promotional discounts and unfavorable foreign exchange and product mix shift. Total Q4 Invisalign shipments of 413.7 thousand cases were up 7.4% sequentially and up 23.9% year-over-year...

Thanks, John. Overall, 2019 was a great year for Align and I'm very pleased with the strong performance for both our Invisalign and iTero businesses. Not only did we celebrate our 22nd year in business, but we also achieved several major milestones including our 8 millionth Invisalign patient and $2.4 billion in revenue for the first time. As we kick off 2020, we're very concerned for the safety and health of our employees, customers, doctors, and their patients in China. The wellbeing is our top priority, and we are doing what we can to ensure that they are taken care of. We're working with our local teams to donate medical supplies and provide funding to help combat the outbreak. Like SARS in 2003, the coronavirus is already having a significant impact on China and may expand to other countries around the world. I saw and experienced this impact as the CEO of GE Healthcare. We expect that like SARS emerged before it, in time the virus will be addressed and markets will stabilize, and our business in China will continue to grow. The timing of this is uncertain, but the growth opportunity for our business in China is certain. While we are mindful of the increased uncertainty in China and its impact on our Q1 outlook, it's important to remember that our business is broad and deep. We have strong growth in other regions and are seeing strong momentum in the Americas, across EMEA, and in all other countries in APAC...

Hi, good afternoon, guys. Thanks for the question. Joe, maybe just to start on China. The revenue headwind that you guided to, I think it's kind of 60% or so of your total China volume. Can you talk maybe just about what you've seen so far in January that you used to inform your estimate of the case and revenue impact and if we continue to see this play out, how should we think about how we should trend the impact going forward?

You know, Nathan, we framed it as well as we can in the first quarter. That's what we can see right now. I think our responsibility when you think about it is we're through January right now, we can take a look at our order rates. And we can responsibly make the prediction that John just did that we're going to have 20,000 to 25,000 cases that we think are going to be pressured on. The unfortunate part of this whole thing is we say we're on the dark side of the moon right now because of Chinese New Year and our order rates drop off to a point that you hardly see them. It's not just now; it's been every year since. The government there has extended the holidays for another week or so, and it could go on. We really don’t have more clarity, we just take our best guess on that 20,000, 25,000, and we're not ready to project anything into the second quarter and the rest of the year.

So, let me throw out a couple of growth rates on China just that kind of you some implied that. I mean with 20,000 to 25,000 fewer cases in Q1. It seems like you're implying that China's down 50% year-over-year in the first quarter in case volumes. And that would even be considering corona virus just sort of that there from the entire quarter from a revenue recognition standpoint. So, is that in the ballpark that we're seeing sort of that magnitude of a de-sell? Then maybe the follow-up to that first question would be more importantly what do you think about these cases, are they lost, are they delayed, are they some sort of a combination with you?

Hey Jon, this is John. I think you're in the ballpark. I think when you look at what we see from China, I mean, it's certainly last year was significant growth in Q1 and this year is obviously impacted by the coronavirus. It's difficult to say if other cases are lost or delayed. They are not happening at this time period. It's difficult for us to see afterwards after this period what is going to happen, but assume for the first quarter here we're saying that they're not going to come into the quarter.

Just a quick one on China. How is it impacting the training of the doctors in China? Obviously, it's impacting your revenues. But is it impacting the overall expansion of your business there as well so that as we think about the number of doctors and think about the number of dentists there that will be registered Invisalign users. How do we think about the impact this is going to have on that as well?

Kevin, honestly, it's a good question because that is a variable in the equation just to think of. Right now you can imagine when you have a contagion like this, you don’t want a lot of people hanging out together and the Chinese government knows that and we do too. Our training facilities are in Shanghai and also Chengdu. There is obviously there is infection rates in those areas but they are not the major provinces that have been impacted so far. But my anticipation is after the holidays you would just have to watch and see exactly what develops in the different provinces in China and what that means. If it's not a big issue in Shanghai or Chengdu, obviously we'll bring doctors and train them. But we're not in a position to even guess on that right now. But it is a great question, it's a key variable and we will certainly come back after the first quarter and let you know.

Thanks, Kevin. Next question please?

It's probably too early to tell that now. I mean like we said we're kind of in the dark side right now of the extended Chinese New Year. We'll see how things progress as we come out and make that assessment. I mean, as we've talked about a number of times in our business, there's a lot of different leverages that we can pull or not pull based on the conditions that are going on in a particular market, and we would assess that as well with China.

Thanks guys. Good afternoon. Joe, I don't have a question about China. Actually, I want to talk about the U.S. I am curious if you've seen any just curious to get your latest views around just the competitive environment between DTC and then the office, and also notice you put Frank Quinn in a new role in terms of head of the U.S. curious about the rationale behind that and whether that's a reflection of a bigger focus on perhaps the DSO channel?

Brandon, that's a good question actually. First of all, I mean you saw our growth in the Americas for the fourth quarter. It's good. It's accelerating in a GP channel and good progress in the Ortho channel. So obviously I feel good about the investments we've made in salespeople and advertising products and all that we have in those different channels and we look at that going forward we feel good about that capability. From a DTC standpoint, we've always stuck with what we said. We know that DTC will go after some of the same patients we do but we haven't necessarily felt an impact in that sense and you see us pushing hard in the sense of our product and portfolio to go after that. We talked about 100 million patients that we think want treatment from an orthodontic standpoint in North America... Frank is a great commercial leader. He has really helped the business in that way, and I thought he is a perfect pick for us to help us expand our approach with DSOs, so we're excited about Frank.

Great. Thanks. Good afternoon. My China questions also have been addressed. I'm going to go non-China for a moment. Just the question on the total ASPs. For the portion of ASP that was down sequentially due to the promotional discounts that you alluded to just curious for more color around that...

Yes, Steve, as you look at it we run promotions on a regular basis to be able to drive volume, drive behavior. We see a mix effect of that as well where in Q3 there was more ortho cases and in Q4 more GP cases but as we said, as I've said really throughout 2019 we expected our ASPs to be relatively flat throughout the year notwithstanding FX and if we looked at where things were a year ago we're up $5 and if you look at the FX impact to that, it was a negative $15...

Two quick questions. Just on the balance sheet both of them. Number one just inventory days have been creeping up throughout the year. Historically, there's been a pretty good working capital business. Can you help me understand why that's the case and what's the new normal expected there?

Hey Ravi, this is Joe. The majority of that increase is on the iTero side as we transition through products with Element 1 to Element 2 and then to 5D. There's just some timing related to that, but as we start to sell more 5D and as we increase our volume on iTero that inventory will come down. On the Invisalign side it's pretty consistent to what our growth has been.

On the cash on the balance sheet, obviously, there is a company's amazing cash generator in that way. I just want to emphasize Ravi, we're not into the general dentistry business, so don't look for us to go out to broaden the portfolio in any particular way. We're building what we talked about when I closed about a digital platform, and investing in that digital platform is where we're focused on. So we have our Investor Day in May, and we will re-approach in a sense of the share buyback and what we think we'll be doing with that cash in the future.

Thanks, everyone. That concludes our conference call today. We appreciate you taking the time. As a reminder, we did send out information today about the date for our Investor Day on May 12 in New York City. If you have any questions, please contact Investor Relations. Have a great day.