Align Technology Inc (ALGN) — Q2 2020 Earnings Call Transcript

Thank you everyone and thank you for joining us. Joining me today is Joe Hogan, President, and CEO; and John Morici, CFO. We issued second quarter 2020 financial results today via GlobeNewswire, which is available on our website at investor.aligntech.com. On April 1st, 2020, we completed the acquisition of privately held exocad Global Holdings GMBH exocad. To reflect this addition, the acquisition of exocad into our operations as of Q2 2020, we have renamed the Scanner and Services segment to Imaging System and CAD/CAM Services or Systems and Services. 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 August 5th. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13705887 followed by pound. International callers should dial 201-612-7415 with the same conference number. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events and product outlook. These forward-looking statements are only predictions and involve risks and uncertainties that are described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission available on our website and at sec.gov. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statement. We have posted historical financials including the corresponding reconciliations, including our GAAP to non-GAAP reconciliation as applicable. And our second quarter 2020 conference call slides are 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. I am pleased to report Q2 results and continued progress across all regions and customer channels that reflect our COVID-19 recovery efforts and those of our customers. Practices across every region have reopened and are seeing patients and many of those practices are embracing digital treatment in new ways and more purposefully than ever before. In particular, Invisalign providers are using the virtual tools we expedited over the last few months to minimize in-office appointments and deliver doctor-directed personalized treatment that meets the needs of the moment—trusted, safe, convenient, and reflecting the digital option. The initiatives we have prioritized globally over the last few months, including support for doctors to ensure treatment and business continuity, a shift to online education and training, ramping availability of virtual tools to keep doctors and patients connected throughout the treatment, and continued investment in consumer marketing, and concierge programs, and personal protective equipment or PPE, are helping doctors navigate this evolving environment and come back stronger as their practices have reopened. We have received consistently positive reactions and feedback from doctors in support of our efforts over the last few months. While it's too early to know for sure how extensive and sustainable the digital transition will be, interest in digital solutions is building even among doctors who were not early adopters or advocates prior to the pandemic. The positive feedback and momentum is not just around Invisalign treatment; it includes digital workflow around iTero scanners and general dentistry. Doctors are telling us that iTero is central to their practice and to their practice workflows and it’s key to driving digital treatment. With that let me turn to results. For Q2, total revenues were $352 million, down 36% sequentially and down 41% year-over-year reflecting significantly lower sales in Invisalign clear aligners and iTero scanners due to a full quarter's effects of the COVID-19 pandemic on practice closures. Revenues from clear aligners were $298 million and Imaging System and CAD/CAM services were $54 million. On a year-over-year basis while clear aligner shipments were 222,000 cases down 41% year-over-year, we are pleased with the continued progress we have seen from our recovery efforts throughout the quarter. For the quarter, we shipped Invisalign cases to approximately 48,000 doctors, of which 3,000 were first-time customers reflecting lower doctor activity due to practice closures primarily in the Americas GP channel. We also trained approximately 3,500 new doctors in Q2 including 2,350 international doctors. While our inability to hold in-person courses due to COVID-19 resulted in fewer trained doctors in the second quarter, we continued with a significantly larger number of Invisalign doctors through online virtual education courses, summits, and forums. For the teen market in Q2, 71,000 teens and preteens started treatment with Invisalign clear aligners, representing 32% of total cases shipped, reflecting growth from APAC across comprehensive products. By the end of the quarter, we started to see recovery in the Ortho channel with increases in Invisalign comprehensive treatments in the teens and preteens segment across most regions, with positive growth predominantly in APAC in the teen segment. Invisalign first continues to accelerate among young patients as well and reflects greater resiliency as parents continue to prioritize orthodontic treatment for their kids. Overall, both non-comprehensive and comprehensive shipments were down, but with increased adoption of our moderate product among the Ortho channel. Last week, we held our Teen Forum-Virtual Edition, taking what was a popular teen-intensive program for orthodontists launched last year and recreating it as a virtual experience. In order to facilitate broader attendance among our customer doctors, we scheduled two teen virtual events. The first took place on July 17th and the second will be held this Friday. The program is designed to help doctors understand the highly visual online and on-demand world of today’s teens and provides the know how, tools, and confidence to differentiate and grow their Invisalign teen practices. Approximately 800 customers have registered for this full-day session that combines live and on-demand sessions, clinical practice investor presentations, panel discussions, and invaluable insights from experts with successful teen practices. Now let's turn to the specifics around our second quarter results starting with the Americas. For the Americas region, Q2 Invisalign case volume was down 53% sequentially and down 52% year-over-year reflecting significantly fewer Invisalign case shipments due to the impact of COVID-19. For Q2, reported utilization was down for NA Orthos and GP both quarter-over-quarter and year-over-year, however utilization increased in June especially among certain orthodontists doing more Invisalign treatments with teen shipments recovering faster in North America in late May and through June. As part of our recovery programs, we enabled doctors to switch their patients into Invisalign treatment by buying their wires and brackets. This program was well-received, and as a result, doctors converted approximately 2,500 wires and brackets cases to Invisalign clear aligner patients. In the GP segment, the timing of office openings and case prioritization are slow to recovery in this key segment as compared to the orthodontic segment, but the GP segment is catching up. In terms of timing of the recovery in the Americas, the US continues to lead, followed by Canada and LatAm corresponding to the timing of the pandemic-related shutdowns and reopenings in each region. For international business, Q2 Invisalign case volumes were down 17.2% sequentially reflecting a significant decrease in EMEA again due to the impact of COVID-19, partially offset by growth from APAC which was ahead in the recovery curve in China, Taiwan, Hong Kong, and South Korea. On a year-over-year basis, international shipments were down 27.1% reflecting a decline in EMEA partially offset by slight growth in APAC. For EMEA, Q2 volumes were down sequentially 44% and down 46% on a year-over-year basis across all markets with more softness in the GP channel compared to ortho. We continue to see momentum within Invisalign first for Invisalign treatment in young patients. Overall we saw slower deceleration in teen shipment growth than adults driven by Germany and France. The expansion market had less decline and only accounted for five points decline in EMEA. We also rolled out a recovery 360 program in EMEA with over 3,700 Orthodontists enrolled resulting in a stronger partnership perception by our customers including an increase in our Net Promoter Score or NPS. Using a combination of our adapt consultants, which I'll be describing more later, and territory managers, we held practices with the workflow and scheduling, increased our doctors' engagement with their patients through the use of education and communication tools, and provided business viability and access to sustainability materials to the doctors. In May, over 1,400 attendees from three regions and 75 countries participated in our virtual Invisalign scientific forum in EMEA. At the end of June, we held a virtual GP growth summit with over 1,300 doctors from over 42 countries who signed up to gain insights on business, dentistry, health, and chain management. During the summit we launched our GP recovery program and we received great feedback on the tools and approach we provide to support business recovery. During the quarter we also offered over 150 online and on-demand education events which reached over 20,000 GPs cumulatively. In July we launched the Invisalign Gold Plus system in the UK, Nordic, and Benelux which offers a wider treatment options, enables dentist to treat more patients with confidence, and can be easily integrated into a wide range of restorative treatments in their practice. For APAC, Q2 volumes were up sequentially 41% reflecting improving trends as practices reopened and got back to business, as well as COVID-19 recovery measures we implemented in China. On a year-over-year basis, APAC was up 3.4% compared to the prior year and was the only region up year-on-year. As mentioned earlier, we saw positive growth in APAC in teen shipments led by China reflecting a strong uptick recovery program. In the GP segment, we saw growth in the non-comprehensive cases with Invisalign Gold and the launch of new products in China continuing to further demonstrate doctor confidence in treating young patients with Invisalign. Throughout the region, Japan, Taiwan, and South Korea successfully managed recovery efforts and performed better than expected. During the quarter, we reached a major milestone with our 1 millionth Invisalign patient in APAC, an athlete in modern fencing who is being treated by Dr. Yogart in Tokyo, Japan. Earlier this month, we held the Invisalign Teen forum in China in a virtual format broadcast of four venues in Beijing, Shunde, and Wuhan to approximately 8,000 participants. The forum focused on the innovations and applications of digital technology in clear aligners as well as theories in clinical practices for teen patients. The forum brought together outstanding orthodontists from leading dental colleges from approximately 30 academic institutions. We believe that our global clinical education programs are the best in the industry and have been even more valuable to doctors throughout the pandemic. We launched a new improved digital learning environment for our doctors this year offering a comprehensive learning platform with role-specific content for orthodontists, general practitioners, and their teams. The improved functionality enables more online learning opportunities with spotlight features for what's trending now, recommending learning paths based on doctors' experiences in extended categories including digital treatment planning, comprehensive dentistry, and team education. To date, over 85,000 doctors have access to recorded lectures and completed self-paced learning models and watched how-to videos in over 3 million sessions. Among the ortho channel, over 30,000 unique users have engaged with the digital learning site with an additional 50,000 unique users from the GP channel. We are encouraged by the digital training utilization rates among our doctors which has helped them continue their Invisalign treatment learning journey during the pandemic. Feedback from the participants describes the courses as engaging, providing broader reach to online events, and a strong desire that Align continues to provide these virtually. They also acknowledged Align’s agility in providing relevant tools and content to help them during the lockdown. We see this as an ongoing opportunity to enhance doctor learning with direct feedback and continuous improvement. Building on the benefits of clinical education and training today, we announced a global launch of the Align digital and practice transformation or ADAPT service. This is our first customized consulting services support offering for doctors and was developed based on years of learnings from practices that saw strong growth and practice transformation when changing their practice to digital. Initially available to Invisalign and iTero doctors in select segments of the EMEA market and then in the US, the global program is now generally available in EMEA and APAC regions and will be available in the US in the second half of this year. The ADAPT program is an expert independent fee-based business consulting service offered by Align to optimize clinics, operational workflow, and processes to enhance patient experience and staff satisfaction, which will translate into higher growth and greater efficiencies for orthodontic practices. The goal of the ADAPT program is to support digital practice transformation for doctors and their staff. ADAPT is designed for orthodontists with approximately 200 total cases starting per year who are seeking to build their future business. Driven by a team of independent business consultants, analysts, and program support specialists, ADAPT offers a customized on-site consulting service to each participating practice. The program combines a review of business operations and practice workflow data with Align's expertise and digital workflow optimization, practice support, business transformation, marketing, and clinical education support. The pilot version of the program has been successfully developed across the EMEA, the United States, and Asia Pacific region over the last 12 months. As a result of the ADAPT service, participating practices improved profitability by 15% within six months of implementation and increased practice revenue up to 20%. Our consumer marketing is focused on building the clear aligner category and driving demand for Invisalign treatment through a doctor's office. In Q2, we saw strong digital engagement globally with more than a 70% increase in unique visitors as well as leads. Other key metrics showed increased activity engagement with the Invisalign brand and are included in our Q2 quarterly presentation slides available on our website. We're pleased with the strong engagement and activity we have seen on our customer platforms over the last few months. I believe it speaks to the strength of the brand and consumer interest in treatment even during the challenges of the last few months. In Q3, we're coming into what is typically the strongest part of the teen season with teens and younger kids home from summer break and likely to start treatment before heading back to school. While back-to-school looks very different this year in many countries including the United States, this is still a time when orthodontic practices are focusing on younger patients. Teens are the most critical part of orthodontic practices and have huge influences on the drivers of practice growth. That matters now more than ever as we partner with practices in this recovery. One of the most important ways we partner with customers is by creating demand for Invisalign treatment and driving teens and parents to the practices for great outcomes and treatment experiences. We have just launched a new teen-focused consumer campaign designed to do just that by reaching teens and moms where they are most engaged on digital platforms, social channels, and later this year on national cable TV channels where they spend the most time like Instagram and Twitch for teens, Instagram, Facebook, and people.com for moms. We're going to leverage influencers that teens and kids follow, like Charlie D’Amelio. We recently established a new partnership with Charlie, who is a dynamic kid and accomplished dancer who has a combined following of over 90 million fans on TikTok and Instagram. She's about to become a new Invisalign patient and ambassador for our brand. She'll be sharing her treatment journey in a way that is relevant to teens across social platforms. Our new campaign will get to the heart of what Invisalign is and what it isn’t, using straightforward language that teens respond to. Our goal is to tell teens why parents consider Invisalign is more advanced and comfortable than traditional braces, emphasizing that this is not your parent's braces. We also want to ensure that they know that doctors are front and center in the Invisalign treatment because it's time to be very candid about the benefits of digital orthodontics and Invisalign treatment specifically. For our assistance and services business, which now includes exocad, Q2 revenues were down 22% sequentially. We are pleased to see the momentum with Element 5D Imaging Systems in North America and APAC along with sales of iTero element one scanners in China and significant sales of the flex scanners in EMEA. On a year-over-year basis, system and services revenues were down 48% slightly offset by the inclusion of exocad CAD/CAM services. Cumulatively, over 24 million orthodontic scans and 5.5 million restorative scans have been performed with iTero scanners. For Q2, total Invisalign cases mid of the digital scanner in the Americas increased to 86% from 77% in Q2 last year. International scans increased to 72%, up from 61% in the same quarter last year. We're pleased to see that within the Americas, 96% of cases submitted by North American orthodontists were submitted digitally. We also recently announced that the iTero Element 5D Imaging System was awarded best new technology solution for dentistry in the 2020 MedTech awards. The annual program honors outstanding health and medical technology products and companies. We also received an award for Dentistry IQ naming the iTero Element 5D Imaging System as number 10 of 14 products and services to help dentists rebound from COVID-19. With that I turn the call over to John.

Thanks, Joe. Now for our Q2 financial results. Total revenue for the second quarter was $352.3 million, down 36.1% from the prior quarter and down 41.3% from the corresponding quarter a year ago. For clear aligners, Q2 revenues of $298.3 million were down 38.1% sequentially and down 39.9% year-over-year due to volume decreases across most regions, driven by North America and EMEA and LATAM partially offset by APAC. Clear aligner revenue growth was impacted unfavorably from foreign exchange of approximately $6 million or approximately one point year-over-year. Q2 Invisalign ASPs were flat sequentially at $1,255 primarily due to promotional discounts and unfavorable foreign exchange mostly offset by increased revenue from countries with higher list prices and increased other case and revenue revenues. On a year-over-year basis, Q2 Invisalign ASPs increased approximately $25 primarily reflecting price increases in all regions and additional lines of revenue, partially offset by promotional discounts and unfavorable foreign exchange. One example of our crisis recovery program that we have implemented in Q2 was a switch program that enabled doctors to switch wires and bracket patients into Invisalign clear aligners. Total Q2 Invisalign shipments of 221.9 thousand cases were down 38.3% sequentially and down 41.2% year-over-year. Our system and services revenues for the second quarter were $54 million, down 22.2% sequentially and down 48.1% year-over-year due to volume decreases across most regions except APAC. Promotional discounts and a decrease in service revenue were partially offset by exocad revenue. Moving on to gross margin. Second quarter overall gross margin was 63.7% down 7.9% sequentially and down 8.3 points year-over-year. On a non-GAAP basis, excluding stock-based compensation expense and amortization of intangibles related to exocad, overall gross margin was 64.4% for the second quarter, down 7.4 points sequentially and down 7.8 points year-over-year. Q2 gross margin reflects Align's decision to maintain our headcount and salaries across our operations in anticipation of a volume pick-up as the COVID-19 pandemic subsides. This decision also enabled us to manufacture nasal test swabs for hospitals and PPE for use by our own employees and our doctors as they reopen their practices. We also postponed iTero subscription fees for one month in the US and parts of APAC. On a year-over-year basis, Q2 gross margin includes approximately 0.7% impact from unfavorable foreign exchange. Clear aligner gross margin for the second quarter was 64.5%, down 8.5 points sequentially and down 9.2 points year-over-year due to lower volumes driving higher cost per case and increased freight costs from a higher international shipment mix. On a year-over-year basis, the decrease in clear aligner gross margin was partially offset by an increase in Invisalign ASPs and continued efficiency improvements. Systems and services gross margin for the second quarter was 59.2%, down 2.6 points sequentially and 4.4 points year-over-year due to lower ASPs and lower volumes with higher cost per unit and amortization of intangible assets related to the exocad acquisition, partially offset by lower service support costs. Q2 operating expenses were $297.3 million, down sequentially 8.4% and up 60.2% year-over-year. The sequential decrease in operating expenses reflects lower travel spend, decreased compensation related to commissions, and lower marketing and media spend, partially offset by higher exocad acquisition cost. Year-over-year, operating expenses increased by $41.5 million; this is mainly caused by the $51 million favorable litigation settlement received in Q2 2019 offset by cost control measures in Q2 of 2020. On a non-GAAP basis, operating expenses were $265.6 million, down sequentially 11.9% and down 7% year-over-year due to the reasons as described above, offset by exocad costs. Our second quarter operating loss was $73 million, down 204.4% sequentially and down 141.4% year-over-year. Our second quarter operating margin was negative 20.7%, down 33.4 points sequentially and down 50.1 points year-over-year. The sequential decrease in operating income and operating margin are primarily attributed to lower revenues and gross margin as a result of lower volume from COVID-19 impacts. Operating margin was unfavorably impacted by approximately 0.9 points year-over-year from foreign exchange. On a year-over-year basis, the decrease in operating income and operating margin primarily reflects lower gross profit on lower volumes from the impact of COVID-19, in addition to the prior-year quarter included the $51 million favorable litigation settlement. On a non-GAAP basis, which excludes stock-based compensation, acquisition-related costs and amortization of intangibles related to exocad, operating margin for the second quarter was minus 11%, down 28.1 points sequentially and down 35.6 points year-over-year. Interest and other income and expense net for the quarter was an expense of $0.5 million, including a $1 million hedge loss related to the exocad acquisition. Excluding the hedge loss, interest in other income and expense net was $0.5 million income on a non-GAAP basis. Regarding the second quarter tax provision, our GAAP tax rate was 44.8%, which includes a tax benefit related to the impact of changes in the jurisdictional mix of forecasted income to GAAP profits recorded last quarter. The second quarter tax rate on a non-GAAP basis was 27.8% compared to 33.2% in the prior quarter and 25.3% in the same quarter a year ago. The second quarter non-GAAP tax rate was lower than the first quarter’s rate primarily due to changes in jurisdictional mix of forecasted full year results. The second quarter net loss per diluted share was negative $0.52, down $19.73 sequentially and down $2.35 compared to the prior year. On a non-GAAP basis, net loss per diluted share was negative $0.35 for the second quarter, down $1.08 sequentially and down $1.84 year-over-year. Moving on to the balance sheet. As of June 30th, 2020, cash and cash equivalents were $404.4 million, a decrease of approximately $386.3 million from the prior quarter, which is primarily due to the acquisition of exocad, partially offset by a free cash flow improvement. Of our $404.4 million of cash and cash equivalents, $160.2 million was held in the US and $244.2 million was held by our international entities. Q2 accounts receivable balance was $473.3 million, down approximately 11.2% sequentially. Our overall days sales outstanding, DSO’s, was 121 days, up 34 days sequentially and up 44 days as compared to Q2 last year due to doctor office closures that resulted in slower accounts receivable collections. We expect DSOs to remain relatively high as doctors’ offices return to normal business activity. Cash flow from operations for the second quarter was $59.9 million. Capital expenditures for the second quarter were $34.4 million, primarily related to our continued investment in increasing aligner capacity and facilities. Free cash flow, defined as cash flow from operations less capital expenditures, amounted to $25.5 million. Under our May 2018 repurchase program, we have $100 million still available for the repurchase of our common stock. Now let me turn to our outlook. Since the last time that we talked, the orthodontic and dental market had continued to evolve in response to government regulations and safety guidance from local, regional, and national health officials. We believe that all of our markets have bottomed out and are recovering, albeit at different rates and different times corresponding with regional outbreaks and recoveries from COVID-19 preventative measures, as we're now seeing improvements in consumer and doctor activity. Nevertheless, we're mindful that the demand environment remains uncertain. There may be additional waves of infection and governments around the world may strategically choose to shut down cities, states, and countries again, forcing people to shelter in place and practices to close again; therefore, we're not providing any forward-looking guidance. While our management team understands the markets remain fluid, we continue to focus on taking care of our employees, customers, and shareholders. For our employees, we are committed to protecting them and do not intend to implement furloughs or salary reductions. For our customers, we will continue to be supportive of those impacted by COVID-19 and are committed to helping slow the spread of the virus by providing PPE to doctors. We continue to release products, tools, and promotions to help our doctors recover from the crisis. For our shareholders, we will continue to invest in our strategic initiatives to grow in a vastly underpenetrated market and position our company to capture growth as the market returns to normal. This includes continued investment in Align’s end-to-end digital workflow as well as increased investment in the Invisalign brand and consumer demand creation as you heard Joe describe earlier. We will continue to add resources in markets that give us a good return. I’m very proud of what Align has accomplished while maintaining our financial discipline during this pandemic. We finished Q2 with $404.4 million in cash and cash equivalents, closed the purchase of exocad for $430 million, and still delivered free cash flow of $25.5 million despite having the lowest volume Align has had in a very long time. Our cash flow reflects the strength of our business model, the strength of our balance sheet, and our strong operational focus. I’m also pleased to share that we have established a new line of credit of $300 million with a consortium of banks led by Citibank. This new line replaces our line of credit with Wells Fargo. As a market leader in clear aligners and digital dentistry, we are well positioned to continue investing strategically for the future. With that I'll turn it back to Joe for final comments.

Thanks, John. In summary, we're pleased with our progress last quarter and by the customer responses to the actions we’ve been taking to support their practices and patients. We have developed a careful recovery approach that accounts for the safety of our employees, our customers, and their teams, and their patients, and are committed to helping doctors navigate this evolving environment and be successful. One of the biggest lessons we have learned over the last few months is about the critical importance of digital technology. Align has always been a proponent of digital treatment to think about all these things that digital platforms and virtual tools have enabled during the crisis: the people in the businesses, and the customers who stayed connected, the way we were able to adapt to working from home, the rise of teleconsults, the AI that modeled the virus patterns, and informed health experts, and so much more. Consider also the companies that have thrived—most of them digital at their core: Amazon, Apple, Zoom, and Netflix just to name a few. The advantages of digital are much more magnified to practitioners and consumers. This became even clearer in our industry when practices were shut down for months. Over and over we heard, 'I’ve been able to help my Invisalign patients progress,' but I had to just try to keep my patients in a holding pattern with wires and brackets. Treating orthodontic cases has amplified the clear benefits of digital technology in clear aligners. This pandemic has emphasized the benefits of digital technology across many facets of our lives and businesses. Our acquisition of exocad adds additional digital workflows that play in the GP space and lab space. We're all excited about the exocad team and what our investment brings to this new world of digital dentistry. Align’s digital platform has made it possible for thousands of doctors and patients to continue Invisalign treatments throughout the global disruption. Thanks to the digital orthodontics of Invisalign aligners, iTero digital records and simulations, digital treatment planning, and virtual monitoring and care. At Align we have always believed that digital orthodontics is the best option for teens and adults. As you can see from a peek at our current teen campaign, we’re going to feature this going forward. What’s clear to us is that the momentum we’re seeing in the business and in the dental and ortho practices reflects more than just one thing or one new product or tool or one program or action. It reflects continued improvement and continued execution of our core strategy across our business in every region. We’re going to continue to stay the course while remaining vigilant and agile. We feel good about the progress that we have made and as we continue along the recovery phase of the COVID-19 crisis in many regions, we are focused on what we can control and impact. We are in a unique position to continue investing in a huge underpenetrated market, to extend our lead, and accelerate growth. With that, I want to thank you again for joining our call. I look forward to updating you on our progress as the year unfolds. Now I’ll turn the call over to the operator for questions.

Thanks. Good afternoon. Thanks for the question. Joe, you highlighted the improvement that you saw in June. I understand sort of the rationale for not providing guidance for 3Q given the situation, but can you maybe help us better understand kind of where the business is at so we have a better sense of what the jumping off point is as we think about the back half of the year?

Yeah, I mean we saw dramatic improvement between April and June. Obviously, we were kind of in the jaws of COVID-19 with all the shutdowns in April. May was a little better, and then we’ve seen strong momentum as we’ve moved into June. So I think you can look at that as a significant improvement in our business overall.

Okay, great. And then you highlighted the 3,000 customers that were new to Invisalign this quarter. Can you maybe just talk about how that compares to what you see in a typical quarter and kind of what you’re doing to ensure that those doctors become long-term customers of Invisalign?

Yeah, I mean that’s terrific for us. When you think about COVID-19 and what the business has faced, that 3,000 customers is fantastic. You don’t typically look for new customers coming in during that time; you’re looking for utilization rates on your current base. We felt great about that 3,000, and obviously that got stronger as the quarter went on.

Hi. Can you talk about whether you think Asia is a good path to think about in terms of recovery, or do you see significant differences in that geography that should prevent this from extrapolating?

Yeah, I think Asia is so diverse in itself. It’s hard just to extrapolate Asia, Elizabeth. I mean obviously China was kind of first out of this thing, but China has had a bumpy road also with the recent issues in Shanghai and different areas. Every one of these regions has its own unique footprint and its own unique model in a sense of how they’ve dealt with the virus. But we’ve seen significant improvement in almost every region around the world.

Okay, and I think you commented also on your cost structure in terms of not furloughing staff. Is there any other major changes to the cost structure in the third quarter or maybe just in the back of the year generally that we should think about as we’re updating our models?

Hi, Elizabeth, this is John. We continue to believe in our model. It’s a vastly underpenetrated market. We're going to make strategic investments to better grow in that market. Whether it’s R&D, sales, or marketing we will continue to make those investments where we see a return.

Hi, good afternoon. Thanks for the time here. I wonder first, Joe, could you give us any more color on the breadth of uptake of some of the new digital tools that you referred to and the extent to which practices are making these changes and converting over to something of a virtual experience? I mean is this— is this 2% of your customer base? Is it a lot bigger than that? Any color is really very helpful there?

Steve, when we talk about the digital platform, it really starts with iTero on the front end. Even in a downturn like we saw with COVID in the capital equipment business, iTero showed up well and particularly with 5D in different areas. But that’s the front end of this whole piece that we talk about on the digital platform. When you think about the whole breadth of a global digital platform, we added virtual care, so that doctors could talk to our patients remotely and be able to track treatment. We had several doctors actually close treatment cases remotely with our virtual treatment capability. And that really extended the effectiveness of the doctors and the effectiveness of the digital treatment in that sense too. There is a lot of imaging that we do now in our treatment planning, so it’s not just tracking patients, it's also having images and different things that you can share with the patient regarding where they should be around treatment. It's a broad digital platform we're talking about. I mean we had tens of thousands of people on our virtual care platform as we rolled that out in a matter of 30 days. We’ll continue to update that platform with AI and make it much more predictive so that doctors don't have to look at every patient. We have a strong roadmap in that sense too, so it’s the breadth of the digital platform, and how it covers everything from starting with the consumer, turning them into a patient from iTero, all the way to the back end being able to monitor and treat those patients.

Just one more from me. What I'm trying to get to here is some perspective on what the underlying trend is and I appreciate that you don't want to talk about the exit rate leaving 2Q and you're not going to give guidance for 3Q. But what if I said let's imagine a scenario where we don't have another wave of lockdowns and practices are operating in what is admittedly a challenging environment. Can you grow in 3Q or the back half of the year? Can you speak at all to what the business would look like in that situation if we don't get more lockdowns?

Steve, I’d say we're incredibly optimistic in this scenario that you painted, where we don't see another COVID shutdown in a major market that lasts a long period of time. Based on the recoveries that we’ve seen in the latter half of May and then the strong recovery in June, we feel really good about the future of this business in the third and fourth quarter and beyond.

John, anything to add?

Hey guys. Good afternoon, hey. Joe, I hope you can hear me okay. A similar line of questioning, just sort of emanated with emails about sorts of trends. So let me try to frame it this way. I think with slide 8 you guys have an increase in North American utilization for June. I just want to be clear that was for both orthos and GPs up the slide. It was hard to tease that out. And if that’s the case, Joe, was that pure? In other words, I’m getting questions on practices reopened in May and obviously there is a lot of backlog. So you’re saying North America grew in June, but was it pure? Was it a benefit of backlog? And maybe you could comment if that growth continued into July would be very helpful for North America.

Hey John, this is John. Some of that is backlog, and some of it is additional growth that they would have. So the utilization has improved as those doctors have come back to work and they’re seeing patients. That’s true in North America and that’s true in all countries where we see those doctors’ offices opening up, so it's hard to tell how much is backlog versus how much is more run rate going forward, but we’re a combination of both.

And the second part of the question is, Joe, I’ve got you. That increase or the year-over-year growth in North America, does that continue into the month of July?

That momentum continued to be strong, John.

Okay, fantastic. And the second part of the question, go from very near term next month to sort of 18 months out, 24 months out. John, just as we think about the model longer term, I think the Street has you guys from a 2021 perspective. Revenues are higher in 2021 than in 2019. Let’s put away 2020 for a whole host of reasons, but let's look at 2010 versus 2019. Structurally if revenues are higher by x%, should the margin structure also be higher? I look back to 2019, you had some one-time costs and legal etc. You reset the base. But if that were the case, I'm just trying to figure out if you think the margin profile would also follow when we look at the earnings power? Thanks guys.

Yeah, thanks, John. So as we look at investing, we believe in our long-term model, a long-term growth model, and that has up margins at the 25+% so that's how we look to keep investing. As you get some benefit through the expansion and other things you might get some leverage as you go, but we believe in that long-term model and that's how we look forward on our investments.

Hi, thanks for taking the question. I hope everyone is well. So I just first wanted to ask you gave us some sort of inclination about what the COVID impact was in Q1. Anything that you can provide color-wise on that for Q2?

Yeah, I think, Ravi, obviously April was tough as you came out of March into April. We saw some stabilization in May and then good progress in June overall, so it was just a complete kind of beginning and end of the quarter overall. And like we just mentioned, by John, that continued into July as well.

Okay, I guess it's going to be hard to get a dollar figure out of you guys. How about just on ADAPT? I'm curious about the business model here when you're talking about an increase in utilization. Can you help us think about how you plan on monetizing that? Is there some sort of profit-sharing or revenue-sharing that comes to the increased caseload? When does that kind of start to flow through the P&L? Should we expect this as a 2021 event or is this a small program that shouldn't really materially impact revenue? Thanks.

Ravi, this is John. So you talk about that ADAPT program that we spoke about? Look, we believe the digital transformation is the way we see that in testing that we have done to be able to help practices be more efficient moving from analog to digital. We believe in the platform and believe in that process, and these are initiatives that we will take to help the practices. It will be a service for a fee, and those doctors, those practices will see the benefit. We have seen it time after time with those practices that they have seen improvement in their efficiency and profitability, and we want to provide that service.

What kind of an upfront payment?

Well I think the way we have built that will probably be different by region, but it is not an easy transition for practitioners to go from analog to digital. We have known that’s been one of the friction points for customers wanting to obviously go digital from a dentistry standpoint, orthodontic standpoint, so we have learned a lot and we're using those learnings for customers to reach out and really want to make a commitment for digital transformation. We filed last year in every region and we rolled it out full force now.

You guys mentioned the braces buyback program which had some success with 2,500 patients. I was curious whether that program is something that is going to turn into substantially larger numbers in the remainder of 2020, or is that maybe a smaller part of the overall picture? Also, did you do that just in North America, or are you planning to do that in most regions? Thanks.

We have been doing that program in different countries in Asia for a while. So we thought it was a good time in North America, obviously, because some doctors were trapped with large numbers of brackets patients and their inability to help them. We will continue that; we’ll continue through this quarter. Whether we continue or not, it will really be based on what consumer needs are and what doctors need are, but we'll make that decision when the time comes. We're just trying to help in the moment with doctors being able to control their practices and help the patients.

Okay, finally, my pre-teen daughter was wondering if you can say hi to Charlie D’Amelio for her when you get a chance.

Got it, got it. Surely better than what I will be saying. Okay.

Good afternoon, thanks for taking that question. Just for starters, as we think about the recovery here in Q2, I look at the adult number on a worldwide basis as it was down 45%, the teen was down 32% per my math. But obviously in the US or North America, that number was much lower. So with the higher unemployment rates with more people kind of staying at home, how does the adult market in the US recover during the back half of the year?

You know, I think it's honestly hard to call that, and obviously, this is a seasonal time for teens. We know we'll get a strong signal here in the third quarter. But we are a lot optimistic about adults; I think there is just talking to different people in the marketplace and you notice a lot of people with time on their hands wanting to do elective procedures that they didn't have time to do before. We’re picking this stuff up all around the country. Unlike 2008, where a lot of things folded up because people were worried about their personal wealth, people are sheltering in place, socially distancing, and especially our demographic that we work through right now seem to have more time on their hands to be able to pursue these kinds of things, so we’re also optimistic on the adult segment going forward in the third and fourth quarter as well.

Okay, thanks. And then a follow-up question, Joe, just to your point about all this enthusiasm that you are seeing going forward in holding SG&A higher. Gross margins are taking a hit right now because you are keeping folks in place. You have all this optimism. The doctoring number was down a little bit, but obviously that’s COVID related. Can you just illuminate a little bit more, where all this enthusiasm and optimism come from as we start thinking beyond this year?

Matthew, you asked the million-dollar question, right? We think obviously our story has always been that we’re way under-penetrating this marketplace based on what consumers want, based on what our technology can do from a clinical standpoint. The consumer experience that's going on, I think we all think that COVID has really shined a light on this of much less invasive treatment, much easier in this sense of location standpoint, with much better workflow for doctors to keep track of their patients. So, if anything, this is a time, if this could happen—we're not telling you that this is a tipping point—but we certainly see this isn't hurting our story and it's supported out there not just in the United States but broadly around the world.

Hey, John. Just following up on Matt's question. If you could give us your sense of how you view the attitude of the consumer right now, they have the sort of forced deferral as practices shut down but now the practices are reopened. What is your sense about the willingness of consumers to step up and make this purchase? Does it feel like business is normal or still very much in a wait-and-see mode?

Well, it feels like, you know, to it a teen season. We called this elective procedures, but teens have a certain clinical window that they fit into, and it's always a timeframe with parents. We're very optimistic that that kind of teen focus and growth will continue in the third quarter, in China too, in the United States, and different places. This is different from 2008, from what we feel is consumers seem to have more optimism in the sense of economy. You see it in the stock market right now, and they have more time on their hands with many people not working from offices. So we're optimistic again that there is money out there and there is a willingness of patients to pursue these elective treatments. I think you also have to look at the static market from a surgical standpoint and see what’s going on there too. It seems to support that kind of an idea also. This is different than what we have seen in past recessions for sure. I am not an economist; neither is John. We're good at visualizing in this business and that's where we can only reiterate to you the signals we are seeing in the marketplace. But right now, as this comes back, we know that all dental offices are not completely up to speed, but that is not necessarily based on demand. That’s based on the way they have to face these patients through their practices and make sure that they keep their staff safe and they keep patients safe too.

Great. Thank you. And then one last one, you mentioned being still very much committed to innovation. Can you give us an update there? How is the mandibular advancement being adopted and any update on palate expansion?

Yeah, it’s hard to take a second quarter on MA and give you a trend because it was a pretty hard hit overall. Obviously, bringing shock on my numbers. I would say overall mandibular advancement continues to go well, we pair with our team first product, Invisalign first product line, which is doing extremely well. The way to look at that is our Teen first product, Invisalign first being the most uptake and fastest uptake with mandibular advancement right behind it.

Great, and any update on palate expansion?

We have all the protocols we know how to do it; we're trying to find manufacturing capabilities that can scale with what we have in the middle out there. That sounds trivial, but in a business like this where you have a credible amount of volume you have to put through, we still have some work to do in that skill set more.

So what qualifies its question here if I could? When I saw that like John Block's question on the North American number, it depends on how you read the sentences in your slide deck. Was North America up year-over-year in June? And then if I take your April, May, June comments and May a little bit better than June, it seems like June on the kind of global revenue basis had to be down only 10% to 20% or so. I don't know if you’ve talked to that at all, but when I look at the street down 20% in 3Q, it seems like you sitting pretty comfortable with the street kind of the $486 million revenue number, where that right now? So just any help you can give us again. We want to make sure we get kind of that 3Q at least ballpark accurate.

Yeah, just to clarify, year over year, not just total, not from a June standpoint, but we did see improvements overall.

Is that year-over-year in June?

Yes.

Okay, the revenue is down 20% in the third quarter from a global perspective. It seems like in June you were likely down less than that 20%. I can't see the comments from April, May, and June, so I wanted to gauge your comfort with the $486 million figure for the third quarter. I understand you're not providing guidance, but I would assume you’re not too worried about that number?

We'll give you an A for trying. That’s a good one, Jeff.

That’s was a good one, John. We're not guiding but trying to give you as much information as we can while doing surveys and other work. We don't want to provide future guidance, but just want to give you the information we talked about. It’s hard to read signals through the noise right now, and that’s okay.

Totally understood. Last question. Just on the virtual tools as some doctors come back. We're talking to on the therapy and hey, I have had patients that I haven't seen in three months or so progressing. There may be going to go to a Q3 month instead of every two months follow-up schedule with their clear aligner patients in that. I mean it seems like to me we're getting here if I’m down on even some of these really messed up teen cases, oh, three hours, four hours for tools may be take that lower time. Just talk of the efficiency and throughput advantage of that’s going to have braces. That's going to be the real driver even more sales than others digital and what have you. It’s just the efficiency improvements are getting so good here in clear aligners.

Yeah, I would say when we say all that digital, it’s just what allows them to drive the efficiency you're talking about. When you have this kind of digital tools, allow you to monitor patients to communicate with patients one on one, or any kind of AI can tell the patient whether they are off-track or on track. That interaction encourages patients, because the most important variable in Invisalign treatment is compliance—making sure that they have their aligners intact. If doctors are watching and we are keeping up, it helps. What doctors find out over time is that they don’t have to see these patients like every three weeks like they do with wires and brackets. Obviously, there are PPE and everything else associated with staff working through these patients. If the patient doesn't have to come in for a clear aligner standpoint, you can either give them all their aligners upfront or give them more aligners that allow them to continue treatment without having an actual doctor’s visit. It’s just tools. They are the kind of tools that we use now and from a business standpoint that we have, but it also applies from a clinical standpoint to keep track of patients and allow doctors to be more productive.

Understood, thanks.

Yeah, thanks, Jeff.

Hi, thanks for taking the question. I was just curious, the Switch program that you guys launched this quarter, has it been more effective in teens or adults? And then I have a follow-up.

Yeah, Rich, this is John. It is a program, as Joe said, that we had in Japan and other places as well. It is something that our doctors and many of their patients who were stuck in treatment, and teeth were moving wanted to make the switch to this. It is not necessarily a teen versus adult. It's just patients who want to progress with treatment and did not want the uncertainty of the current environment that they are in. They went to their doctors, and their doctors wanted to be able to switch them over and we made it so that they could do so.

I think Richard, what you are hearing from both of us is, in this case we're not quite sure exactly how many teens and adults were on the Switch program. It is a good question, but you can guess statistically that the orthodontic market in the United States is 80% teens and 20% adults. So, you can guess the majority of Switches were probably teens. But let me get that data back to you.

And the bigger question there that I'm trying to get at with some of the things that you're talking about in a post-COVID world and all of the benefits that now kind of pile on to aligners versus wires and brackets. I was trying to ask the question through the Switch program to see if it would—to test whether you are actually seeing in the marketplace any inflection point for teens. Is that fair to say that maybe COVID has resulted in the much-anticipated inflection point for teens?

It's fair that it helped. I cannot tell you that the inflection point is here, but we certainly see a lot of uptake and interest and a digital workflow and our digital methodology in light of COVID-19. Our experience has been when doctors can really convert most of their practice. That’s why ADAPT—once you get over 50%, 60% digital, your practices change significantly. Consumers like it better, doctors tend to like it better. We talk about higher margins, and also a dramatic increase like a 20% increase from a revenue standpoint. So, yeah, this is certainly a push; COVID is certainly been a push for this. We are cautious; we don't want to talk about a crisis that’s just terrible for people, and actually enhancing our business, but the fact is it promotes a workflow and a capability that's much more convenient at this point in time, given the COVID threat.

Hi there, thanks for taking the question, guys. I have a couple of quick ones. In your prepared remarks, Joe and John, you obviously talked about the third quarter and how that's typically the strongest part of the teen season. Typically you see the nice little bolus in the summer as everyone kind of stays home. I'm just curious with the strength that you saw in 2Q, do you think there could have been any sort of pull forward in teens in the quarter? Just looking at for the last couple of months, everyone’s been home anyway. So any expectations of maybe a little bit of a lull in 3Q or should we expect further pick up from current levels?

I think, Michael, when you ask a question like that, you need to think of our business and how broad it is and global it is today. There's a lot of mitigating factors, right? So we cannot tell you if there is a backlog of patients that have come in sooner or whatever; we just know it’s teen season in United States, and in Canada too. We mean, June was indicative of a good increase in the sense of teens looking for treatment, and we think that will continue.

Great, thanks. And then another quick one. I realize you don't want to talk about the exit run rate or anything like that, but I think a lot of the assumptions go forward are that there are no further lockdowns, there are no further strategic sort of quarantine measures implemented. But I just want to ask, in the recent weeks, in the Sunbelt like Texas, California, and Florida, have you seen any fluctuation in volumes? Any early indications there? I guess I’m kind of asking, on the one hand, you have a full recovery of the economy; on the other hand, you have a full locking out. What if we were somewhat in the middle? Are you seeing any indications there?

Mike, I think you look at every area as different. We are seeing different paces of recovery for the various regions and locations and practices. Some practices are open, but then somebody within the practice develops COVID, and it shuts down. So it varies across. We're doing everything we can to make sure that those doctors have their PPE, they have promotion, and they have tools in place to help drive volume. But it's very dependent on those specific areas, not just in the U.S., but we're seeing this across the other regions as well.

Mike, right, it's back to Joe again, too. I just want you to know we have great enthusiasm for teens and no matter where it is around the world, but we can't tell you if there is a surge of teen patients based on a lot of teens not being in school. We cannot tell you if it’s a backlog or whatever, but we can tell you we're enthusiastic about the season and that June was a good indication that it's heading in the right direction.

Great, thanks. Can I ask a quick clarification? Okay, just this has come up a dozen times in the past five minutes. Your response to Jeff's question on June. Do you mean absolute case volume was up in North America in June or utilization is up in June?

Utilization.

Okay, thank you so much! Thanks.

Joe or John, just a question on China. If you could speak to growth specifically in 2Q. I know it is still down year-over-year, were there any other reasons kind of outside the three that you listed, Japan, South Korea, and Taiwan, that were ahead of your internal expectations?

No, I cannot say that there was really—I mean, we didn't talk a lot specifically about that but Japan, Taiwan, and Korea were exceptions because there were hardly a blip in a sense of what we saw and how they were affected with COVID. But really, every other country in APAC and most countries around the world—we’ve seen declines in the markets due to COVID's impact.

Okay.

I think so.

John, any chance you could share with us the exocad contribution in the second quarter or to results? Or should we just wait for the Q4 for that?

Yeah, I think we talked about it in the scanner and services segment that we have, and I think you can wait for the Q on that, but it's—we acquired and it is part of our business, and we will put more details into the Q.

I think that's the last question. So thank you everyone for joining us today. This concludes our conference call. If you have any follow-up questions, please follow up with Investor Relations. Have a great day.