Align Technology Inc (ALGN) — Q3 2020 Earnings Call Transcript

Thank you. Thank you for joining us everyone. Joining me on today’s call is Joe Hogan, President and CEO; and John Morici, CFO. We issued third-quarter 2020 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 PM Eastern Time through 5:30 PM Eastern Time on November 4. To access the telephone replay, domestic callers should dial 877-660-6853, with conference number 13710706, 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 financial statements, including the corresponding reconciliations, including our GAAP and non-GAAP reconciliation, if applicable. And our third-quarter 2020 conference call slides are on our website under Quarterly Results. Please refer to these files for more detailed information. With that, I’ll turn the call over to Align Technology's President and CEO, Joe Hogan. Joe?

Thanks, Shirley. Good afternoon, and thanks for joining us. I'm pleased to report stronger than expected results with record third-quarter revenues up 21% year-over-year, reflecting strong momentum across all regions and customer channels for both Invisalign clear aligners and iTero scanners and services. During the quarter, we continued to support doctor recovery efforts with products, programs and virtual tools and training that helped more doctors transition their practices to digital technologies and drove record utilization across the Invisalign portfolio. Capping off a record quarter is an achievement of our 9th million Invisalign patient milestone. We also saw a strong response to our new teen and mom-focused consumer campaign with a 118% year-over-year increase in total leads, garnered 3.3 billion impressions, an uptick in consumer engagement from new social media influencers like Charli D’Amelio and Marsai Martin, and a 26% increase year-over-year in teenagers using Invisalign clear aligners. Our overall revenue momentum has continued into October, and we are encouraged by positive feedback from Invisalign practices regarding the benefits of digital orthodontics starting with an iTero scanner for Invisalign treatment, especially in this COVID environment. For Q3, total revenues were $733 million, up 108% sequentially and up 21% year-over-year, reflecting a sharp rebound in sales for both Invisalign clear aligners and iTero imaging systems as practices around the world reopened and got back to work treating existing and new patients. Q3 revenues for clear aligners were $621 million, up 20% year-over-year, and imaging systems and CAD/CAM Services were $113.4 million, up 24.5% year-over-year. Q3 Invisalign shipments were a record of 496,000 cases, up 28.7% versus prior year and up 124% versus prior quarter, reflecting strong recovery across all regions. During the quarter, we saw increased demand for new cases as restrictions eased and doctors ramped up their practices. This is in contrast to Q2, where doctors’ primary focus was to maintain continuity of patient care for their existing patients through additional aligner shipments and replacement aligners. John mentioned this in his comments last quarter, and we'll touch on it again today. For the quarter, we shipped Invisalign cases to a record 70,000 doctors, of which 5,800 were first-time customers, reflecting increased doctor activity as practices have reopened. We have also trained approximately 6,500 new doctors in Q3, including 3,200 international doctors, reflecting increased doctor engagement through our online virtual education courses, summits and forums. Across the business, we believe there are several factors contributing to our strong performance, starting with pent-up demand. Many of our doctors indicate that they are making good progress in working the backlog of patients from office shutdowns. Pent-up disposable income remains a key factor as consumers focus on feel-good investments, while many other quality of life options are low. In our new normal, there are far fewer trips abroad, fewer flights, less money spent on gas, dry cleaning, etc. More people can afford to allocate that spending to Invisalign treatment, especially when they're working remotely and critiquing themselves on camera so much of the time. That's the Zoom effect that we've heard about across multiple sectors. As we look at our customer channels, we feel the strategy to dedicate sales representatives by specialty alignment is bearing fruit, particularly in the GP Dental segment. Sales reps were able to partner with a wider range of providers within their designated specialty during the downturn and assess mindset and specific needs during the recovery and tailor plans to thrive beyond COVID. A digital mindset has been key, and we believe this is the largest influence in the ortho market, and the one we've been laying the foundation for over the last several years.

Thanks Joe, now for our Q3 financial results. Total revenues for the third quarter were $734.1 million, up 108.4% from the prior quarter and up 20.9% from the corresponding quarter a year ago. For clear aligners, Q3 revenues of $620.8 million were up 108.1% sequentially and up 20.2% year-over-year due to Invisalign volume growth in all regions, driven by North America, EMEA, APAC and LATAM, partially offset by lower ASPs. Historically we have raised prices by approximately $50 per case in the third quarter. Given our continued commitment to helping our customers in their recovery efforts, we did not implement a price increase this year. Q3 Invisalign ASPs were down sequentially $75 primarily due to a higher mix of new cases versus additional aligner shipments as Joe mentioned earlier. Recall Q2 ASPs benefited from more additional aligner shipments as doctors were focused on maintaining treatment progress for existing Invisalign patients. This trend reversed itself after practices reopened in Q3 and demand for new cases ramped up significantly. As a result, our deferred revenue balances increased $93 million from Q2, of which the majority of this increase is related to clear aligner, and will be recognized with future additional aligner shipments.

In summary, we are certainly pleased with our progress in the third quarter. We have taken a very thoughtful approach to recovery and we have persevered in large part by living the values that are important to us as an organization; agility, customer and accountability. In a time of great uncertainty, when swift actions have been required, we have responded like no other company in our industry. Most importantly, we have followed our guiding principles and supported our employees and customers, protecting employee jobs and salaries and working to support the needs of our teams globally, and supporting our customers with PPE, extended payment terms, postponed subscription fees for iTero, and numerous programs to help them through this crisis.

Thanks, and good afternoon. Joe and John, obviously, great to see the volumes come back so nicely. It sounds like the momentum continued in October. Could you maybe just kind of help us understand kind of the cadence of growth that you saw over the quarter? And any comments on how October has fared so far, maybe relative to the type of case growth that you saw in 3Q?

Yes, Nathan, thanks for the question. Look, we just built through the quarter. Every month we saw actually continue to enhance momentum. And the short answer to your question is, we’ve seen that build in October also.

That’s great. And Joe, obviously, you kind of talked through in detail about what has kind of driven the stronger utilization that you’ve seen and the value of digital treatment. When you kind of take a step back and kind of think longer-term, how has that kind of changed your outlook or influence your kind of multi-year outlook for kind of what you could see from this business over the next several years going forward?

Nathan, you’ve known John and me and Shirley long enough. I mean, we’re incredibly enthusiastic about this business and bullish about this business. And you can see we’re even more so as obviously we deliver the kind of results we have in 3Q. I think you always have to keep in mind two things here. One is, we’re in a very volatile environment. We understand that and we’ve done some things. We feel that’s really helped our doctors through this and made the company stronger coming out at the other end. But always remember, we’re completely underpenetrated in this marketplace, right? We’re still less than 10% penetrated from an orthodontic procedure standpoint, let alone those 300 million patients we talk about there that should receive orthodontic treatment that aren’t receiving orthodontic treatment. So we remain incredibly bullish with a digital format to be able to go after those patients and be able to continue to drive the growth of this business.

Thanks, Rich. Next question…

Great, thanks. So, can you speak to some of the contributions from the recovery efforts in switching brackets and wires patients? Or are you continuing to see those contributions and efforts into the fourth quarter? And do you think that will drive the Board’s longer-term shift here? Do you have any indication based on the responses? I guess you’ve seen from practitioners how sticky that is? Thanks.

Well, it’s – overall – hey, it’s Joe. I mean, overall, it’s pretty sticky when we buy their wires and brackets inventory back. And then we introduced in the programs like ADAPT and different things that really allow them to begin a digital transformation within their practices. So I feel that part is very sticky. I can’t sit here and naively say that everyone who starts to move digital in this crisis is going to stay digital. But I can tell you that we have the tools, being able to drive consumer demand and consumer awareness and all those things, helps us to maintain that stickiness. And I think over time, we’ll just have to see how sticky it is as we come out of this COVID crisis.

Okay, great. And then on ASPs in the quarter, I guess, is that the run rate we should be thinking about? I know you didn’t take the price hikes, but any other mix dynamics as we think about the next quarter and beyond?

Hey, Erin, this is John. Yes, the mix that we saw – we talked about some of the dynamics of all those new cases coming in and we saw that. We also talked about not having a price increase given the conditions that we’re in. We’ll evaluate going forward as to any changes we might make in pricing and so on. But I think from a run rate standpoint, this is a good starting point for going forward.

I wonder if you could expound a little bit on some of the numbers that you’ve given here at this quarter, and I believe you did in the prior quarter as well around not just the training numbers, but some of the data that you gave on people who are not just getting trained, but who are new to Invisalign. I’m sorry, I don’t know, maybe some do. But what were those numbers a year ago? And do you have visibility into what those training numbers look like out into 4Q or even beyond?

Yes, Steve, this is John. I think when you look at being able to train like we can now with much more virtual being able to have that remote training as well as where you can in person gives us a lot of flexibility going forward to be able to expand out our training. So there’s a lot of new capabilities, a lot of new tools that we’ve introduced this quarter to be able to help our customers and train new customers as well as our sales team be able to reach those. So it’s a key part as you know to our growth and we’re going to continue to find ways to be able to connect with new doctors to be able to get them to understand the benefits of Invisalign and ultimately have them use it more and more to grow.

Yes. Well, I think it’s a couple things, Jon. Obviously, COVID has been an added incentive to move people out of analog into digital because of fewer touches and being able to maintain continuity of treatment, even if things are shutdown. So there’s no question, we saw our share of chair increased in that sense. I think also when you see new products like Invisalign First and those things we’ve introduced in the last few years, that’s – as you know well, that’s extended our reach from a HDM point within that specific demographic. That’s helped us also.

Thanks, Jon. Next question, please.

As we think about the outlook for 4Q and as we come out of COVID more broadly, are there any – I know you guys obviously didn’t cut costs, kept the sales force, because you maybe foresaw some of this growth coming back. Is there anything in terms of investments of the ramp back that we should be considering?

Well, I think there’s just continuity of investments is the way I’d answer your question. They’re not new investments. We’ll continue to invest in the consumer side, pretty dramatically. You’ll see that we’re doing that all around the world. It’s not just in the United States or Canada. We’re also – you’ll see investments in Europe and also Asia to a degree that we haven’t made before. We have a series of new products that we’re investing in. We kept that momentum in the third quarter and where we hired engineers to keep that moving. And then these specific programs for doctors like ADAPT that we’re talking about, and AIF and different things, they’re really an important part of this because you have to make sure that these workflow changes, and the way ClinCheck works, like ClinCheck Pro and whatever, they have to be introduced to docs and we got to have the high touch kind of a system to give them the confidence in those programs.

Thanks, Elizabeth. Next question, please.

To take a pivot to G8 for a second, and remembering correctly prior versions of the systems have been seen as the step function advancements that have opened the door to more cases and more comfort with doing the system. With G8, just curious in terms of number one, how do you see it kind of increasing the addressable market for the number of cases you can treat? I mean, is this opening up doors that couldn't be done before by the sort of average dentist? And number two, do we have any sort of IP protection around this?

Yes. Hey Ravi, good question. First of all, when you think of how we got the G8 is, we've done 9 million patients, right. And probably deep bite cases are 30% of those cases and G8’s around deep bite. And when you do deep bite, there's a lot of extrusion in deep bite, now I don’t want to get to clinically into this thing but extrusion means you're pulling the tooth down or pushing a tooth up. And those are the most difficult movements that we make. They're the hardest movements to do. When we talk about IP, it has to be with the specific kind of attachment, it's where you place that attachment. It's that interface of that attachment with the aligner and how the aligner – actually that's what we call it the activated part of this thing. And I'd say do we have IP around that? Sure, we do. Do we have IP around doing a deep bite case? No, but our products are specifically geared to be able to do that. And so we use a lot of AI and machine learning to mine that database to figure out where these deep bite cases weren't finishing as fast as they could be at times. And the new G8 supposed to make this better it's been tried in different areas. And in the end, what it does it gives doctors more confidence to be able to get into those cases and though they can finish them the way they want to finish them and that's the purpose of the product.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Our first question comes from Nathan Rich with Goldman Sachs. Please proceed with your question.