Align Technology Inc (ALGN) — Q4 2020 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 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 P.M. Eastern Time through 5:30 P.M. Eastern Time on February 17. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13714292 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 to non-GAAP reconciliation if applicable, and our fourth quarter and full year 2020 conference call slides are on our website under Quarterly Results. Please refer to these files for more detailed information. And with that, I would like to turn the call over to Align Technology's President and CEO, Joe Hogan.

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 Systems and Services. John will provide more detail on our financial results and share additional color on business trends. Following that, I'll come back and summarize a few key points and open the call to questions. Our fourth quarter was a strong finish to the year with record revenues and volumes from both Invisalign aligners and iTero scanners, as well as increased gross margins, operating margins, EPS, and cash flow. Our fourth quarter performance is driven by strong year-over-year growth across customer channels and regions and continued momentum sequentially. During the quarter, we achieved a major milestone in EMEA with the shipment to our 2 millionth Invisalign patient that will be amplified with the EMEA-wide campaign that will launch next month. This milestone reflects strong acceleration in Invisalign adoption and growth. For Q4, total revenues were $834.5 million, up 13.7% sequentially and up 28.4% year-over-year. Q4 '20 Clear Aligner revenues of $700.7 million were up 12.9% sequentially and increased 28.9% year-over-year. In Q4, we shipped a record 568,000 Invisalign cases, an increase of 14.5% sequentially and 37.3% year-over-year. Q4 reflects increased Invisalign adoption from both adults and teenagers, which were up 36.7% and 38.7% year-over-year respectively. Our Teen and Mom-focused consumer campaign generated a 77% year-over-year increase in unique visitors to our website and a 76% increase in leads generation. In addition, Invisalign social media influencers like Charli D'Amelio, Marsai Martin, Christina Milian, Tisha Campbell-Martin, Rachel Zoe, Tiffany Ma, and Tahj Mowry continued to deliver exciting new content and increased engagement for the Invisalign brand with consumers and among their millions of followers. Our digital platform continues to gain traction as doctors' use of iTero scanners increases. Our Consumer and Patient app was rolled out to more than 50 markets, resulting in more than a 2.5 times increase in app downloads and monthly active users in 2020 versus a year ago. Our patient feature usage continues to increase, for example, Invisalign Virtual appointment was used 68,000 times. Our insurance verification feature was used 26,000 times, and more than 30,000 patients enrolled in Invisalign Virtual Care in 2020. Our new consumer website was rolled out to more than 40 markets around the world and is driving increased effectiveness in lead generation. We also launched an improved new doctor recruitment website in the U.S. and Canada to support our digital conversion journey. This will be expanded to other markets in the next few months. From a product perspective, growth was strong across the Invisalign portfolio, especially for non-comprehensive cases including Invisalign Go and Invisalign Moderate. There are also more doctors engaging with us through the Align Digital and Practice Transformation or ADAPT program, as more practices are moving towards digital practice optimization. As you'll recall, ADAPT was piloted over two years ago and is being commercialized as a standalone service providing the relevant workforce, clinical, and marketing support to enable doctors to digitally transform their practices. In Q4, we shipped a record 77,000 Invisalign doctors worldwide of which a record 7,300 were first-time customers. We also trained over 6,400 new docs in Q4, including over 3,900 international doctors. Q4 '20 System and Services revenues of $133.8 million were up 18% sequentially, driven by momentum in the Americas and EMEA, and up 26% year-over-year, reflecting strong growth in EMEA and Asia Pacific. Our results reflect continued strong uptake of the iTero Element 5D, the only intraoral scanner with caries detection which is scaling rapidly across each region and represented approximately a third of iTero volumes in Q4. Innovation remains a cornerstone of our business. Today, we announced the availability of the iTero Element Plus Series, which expands our portfolio of iTero Element Scanners in Imaging Systems to include new solutions that serve a broader range of the dental marketplace. The new iTero Element Plus Series of scanners in Imaging Systems builds on the success of the award-winning iTero Element family and offers all of the existing orthodontic and restorative digital capabilities doctors have come to rely on, plus faster processing time and advanced visualization capabilities for a seamless scanning experience in a new, sleek, ergonomically designed package. We announced the launch of our next-gen ClinCheck Pro 6.0 proprietary treatment planning software with in-face visualization and our Invisalign G8 improved predictability in our last earnings call. Their availability is being expanded across all regions. Further, we launched several enhancements to our treatment planning, including improved Final teeth position and Auto segmentation. We also added several new features to our Virtual Care tool. For the full year 2020, total net revenues were a record $2.5 billion, up 2.7% year-over-year. Clear Aligner revenues of $2.1 billion were up 3.7% reflecting a record $1.6 million Invisalign shipments and growth of 7.9%. During the year, 30.3% of total Invisalign cases or nearly 500,000 teens or younger started Invisalign treatment. This is up 11.5% from 2019. System and Services revenues were down slightly compared to 2019. 2020 was a year unlike any other that we've experienced. The COVID-19 pandemic and its impact have been life-changing, marked by loss and separation, recovery and renewal, record highs and lows, and significant milestones and accomplishments. Even in a time of huge disruption, we all had to adapt, evaluate priorities and develop new ways of doing things both personally and professionally. Through it all, Align's priority has been the health and well-being of our employees and their families and our doctor, customers and their staff. And that remains a constant. Despite the swift onset of the pandemic and the uncertainty through 2020, we didn't hold our plans or change our strategy for continued growth. We completed the acquisition of exocad, accelerated our investments in marketing to create Invisalign brand awareness and drive consumer demand for our doctors' offices. Accelerated new technology to market with virtual tools that enable our doctors to stay connected with their patients, provided PPE to those in need and supported doctors and their teams with online education and digital forums that went beyond products to help them navigate the uncertainties of the pandemic. As a result of our continued strategic focus and investments, we exited the year stronger than we started and 2021 is off to a great start. Now, let's turn to the specifics around our fourth quarter starting with the Americas. With the Americas region, Q4 Invisalign case volume was up 12.7% sequentially and up 34.1% year-over-year, reflecting increased utilization of Invisalign treatment for both orthodontic and GP channels. Our continued investments in digital marketing and sales programs and focus on market segmentation are helping drive strong growth of Invisalign Clear Aligners and iTero products. During the quarter, we continued offering sales initiatives to our doctor partners to help drive adoption of Invisalign and iTero products. The Bracket BuyBack Switch program, which we launched in North America in Q2 '20, continues to drive conversion from wires and brackets to Invisalign clear aligners. During Q4, this program has resulted in about 10,000 new cases similar to Q3. We believe this is also causing a halo effect with patients switching from wires and brackets to Invisalign clear aligners with increased awareness of the benefits of Invisalign treatment and how it is less disruptive to their lives with the outcome of a beautiful smile through an Invisalign trained doctor. The Teen Awesomeness Centers programs direct patients to Invisalign doctors who are experts at treating teens and are seen as the go-to docs for treatment. We continue to see growth with Invisalign First for treatment in younger kids, driving increased comprehensive treatments within North America Ortho channel. Latin American volume was also up year-over-year, led by strong growth in Brazil and Mexico. We believe the market for orthodontic treatment is huge in Latin America as we continue to grow our presence across the region. We saw increased utilization in the GP channel with Invisalign Go and the continued adoption of Moderate. The GP Accelerator program designed exclusively for general practitioner dentist provides an all-encompassing support plan based on practice needs that is centered around maximizing iTero integration, clinical support needs, and implementing new marketing strategies. We also see increased utilization with GP dentists that have enrolled in the iPro program as well as with doctors that have installed the iTero scanner. DSO utilization also increased and continues to be a strong growth driver led by Heartland and Smile Docs. For the full year, Americas Invisalign volume was up 3.6%. For our International business, Q4 Invisalign case volume was up sequentially 6.7%, led by strong growth in EMEA as doctors returned from the summer holiday season, offset somewhat by seasonally slower period in China. On a year-over-year basis, International shipments were up 41.1%, reflecting increases throughout both EMEA and APAC. For the full year, International Invisalign volume was up 13.3%. For EMEA, Q4 volumes were up sequentially 47.9% and 48.3% on a year-over-year basis across all markets, with strong performance across both Ortho and GP channels. Within the GP channel specifically, we saw acceleration in both utilization and shipments with Invisalign Go. We also saw acceleration in both core and expansion markets, with growth in our core markets, led by Iberia, UK and France, along with continued growth in our expansion markets, led by Central and Eastern Europe and the Benelux. We introduced the Ortho Recovery 360 Program in EMEA last quarter to support our orthodontists as they started reopening their businesses. As of Q4, 3,200 orthodontists have enrolled in the program. During the quarter, we launched the Recovery II Program with a refreshed website featuring all digital tools, growth programs, and education events for EMEA doctors to support their relief efforts during COVID-19. We also held our Digital Innovation Forum at the beginning of December where approximately 900 doctors, both Ortho and GP, attended the two-day forum event with keynotes on the digitization of dental practices. We also continued our Digital Excellence Series of webinars launched by the iTero team. Throughout the quarter, the following digital innovations were also launched across EMEA: Invisalign G8, ClinCheck Pro 6.0, and Invisalign Go Plus, to help drive Invisalign clear aligner utilization. To support our GP doctors, we launched our GP Recovery 360 program last quarter, with over 2,700 GPs enrolled so far. We continued to offer online and on-demand education events, which reached over 15,000 GPs cumulatively. For the full year, EMEA Invisalign volume was up 12.6%. For APAC, Q4 volumes were down sequentially 14.7%. Notwithstanding typical Q4 seasonality in China, following a strong Q3, we had strong growth in Japan and ANZ and Southeast Asia. On a year-over-year basis, APAC was up 30% compared to the prior year, reflecting continued strong growth across the region. We were pleased to see growth in the Adult segment with non-comprehensive cases with the Invisalign Moderate product in the GP channel. In the Teen segment, we also saw an increase in utilization amongst Invisalign doctors, and we saw continued acceleration from Japan and ANZ. For the full year, APAC Invisalign volume was up 14.3%. Last year, we launched a new and improved digital learning environment for our doctors offering a comprehensive learning platform with role-specific content for Orthos, GPs, and their teams. The improved functionality enables more online learning opportunities with spotlight features for what's trending now, recommended learning paths based on doctors' experiences, and expanded categories including digital treatment planning, comprehensive dentistry, and team education. For the year, over 127,000 doctors have accessed recorded lectures, completed self-paced learning modules, and watched how-to videos, with new certified doctors viewing more than 1.4 million pages of content. Among the ortho channel, over 47,000 unique users have engaged with the digital learning site with an additional 80,000 unique users from the GP channel. As we've mentioned, we are seeing good adoption of the ADAPT program, which is an expert and independent fee-based business consulting service offered by Align to optimize clinics' operational workflow and processes to enhance patient experience and customer and staff satisfaction, which will in turn translate into higher growth and greater efficiencies for orthodontic practices. As a result, the ADAPT service participating practices in Q4 improved profitability significantly after implementation. Our consumer marketing is focused on capitalizing on the massive market opportunity to transform 500 million smiles, educating consumers about the Invisalign system and driving that demand to our Invisalign doctor offices. In Q4, we saw strong digital engagement globally with more than a 77% increase in unique visitors, 108% increase in doc locator searches and 76% increase in leads created, driven by our global adult and mom-focused campaigns and teen-focused influencer content. Our US Mom/Teen multi-touch multimillion dollar campaign with influencer-led YouTube videos, a mom-focused TV spot, a custom Twitch activation, and mega teen sensation Charli D'Amelio continued to perform very well and garnered 2.7 billion impressions in Q4. The statistics I shared previously speak to the successful reach of this marketing campaign is having to not only drive demand with consumers but also in educating them on the benefits of Invisalign treatment through a doctor's office. In Q4, we also launched media tests in the EMEA region in the UK, Germany, and France and in the APAC region in Australia and Japan. These have worked very well and resulted in a more than six-times increase in leads in EMEA and a three-times increase in leads in APAC. Several key metrics that show increased activity and engagement with the Invisalign brand are included in our Q4 quarterly presentation slides available on our website. Align is always looking for new opportunities to reach consumers and be relevant to potential patients wherever they work, live, and play, which is why we announced that the Invisalign brand is the Official Clear Aligner Sponsor of the National Football League, the NFL, and 11 NFL teams, including the Tampa Bay Buccaneers and the Kansas City Chiefs. The NFL league partnership, designed to expand our reach with consumers, generated over 150 million impressions in 2020, helping to drive awareness of Invisalign clear aligner treatment at a national level while the team agreements are designed to help us engage within key markets and connect consumers with doctors in those markets. For our Systems and Services business, Q4 revenues were up 18% sequentially due to higher shipments and services revenues. We continued to see momentum with the iTero Element 5D Imaging System, gaining traction in all regions with significant Element Flex sales in EMEA. On a year-over-year basis, Systems and Services revenues were up 26% due to higher shipments and services. For the year, our Systems and Services total revenues were down 2.8% year-over-year. Cumulatively, over 31.4 million orthodontic scans and 6.7 million restorative scans have been performed with iTero scanners. For Q4, total Invisalign cases submitted with a digital scanner in the Americas increased to 84% from 79.5% in Q4 last year. International scans increased to 73.7%, up from 64.7% in the same quarter last year. We're pleased to see that within the Americas, 94.8% of cases submitted by North American orthodontists were submitted digitally. We're also proud to share that iTero Element intraoral scanners are the winners of the 2020 Dentaltown Townie Choice Award for Digital Impressioning category. Also, during the quarter, the National Association of Dental Laboratories judging panel selected the iTero Element 5D as the winner of the 2020 Journal of Dental Technology WOW! Award. The award represents the recognition of our commitment to enhancing patient engagement and communications that support efficient laboratory production. For exocad, during the quarter we launched two of the largest software releases in history, DentalCAD and exoplan. DentalCAD3.0 Galway includes over 90 new features and over 80 enhanced functionalities with significant improvements to reduce design time, such as Instant Anatomic Morphing. exoplan 3.0 Galway includes over 40 new features and over 60 enhanced functionalities that support planning of edentulous cases, including the design of surgical guides. During the quarter, exocad also added two new large implant manufacturers as OEMs for exoplan in Brazil. With that, I'll now turn it over to John.

Thanks, Joe. Now for our Q4 financial results. Total revenues for the fourth quarter were $834.5 million, up 13.7% from the prior quarter and up 28.4% from the corresponding quarter a year ago. For Clear Aligners, Q4 revenues of $700.7 million were up 12.9% sequentially and up 28.9% year-over-year reflecting Invisalign volume growth in all regions, partially offset by lower ASPs. Clear Aligner revenues growth was favorably impacted by foreign exchange of approximately $5 million or approximately 0.8 points sequentially and on a year-over-year basis by approximately $10.3 million or approximately 1.9 points. Q4 Invisalign ASPs were down sequentially $15 primarily due to increased revenue deferrals related to a higher mix of new cases versus additional aligners, partially offset by favorable foreign exchange, and lower promotional discounts. As we mentioned last quarter, we did not implement a price increase in 2020 given our continued commitment to helping our customers in their recovery efforts during the pandemic. On a year-over-year basis, Q4 Invisalign ASPs decreased approximately $75 primarily due to our decision not to raise prices last summer, increased revenue deferrals for new cases versus additional aligners, and higher promotional discounts, partially offset by favorable foreign exchange. As a result, clear aligner deferred revenue on the balance sheet increased $83 million sequentially and $195 million year-over-year and will be recognized as the additional aligners are shipped. Total Q4 Clear Aligner shipments of 568,000 cases were up 14.5% sequentially and up 37.3% year-over-year. Our System and Services revenues for the fourth quarter was $133.8 million, up 18% sequentially due to an increase in scanner sales and increased services revenues from our larger installed base and higher ASPs. Year-over-year, System and Services revenue was up 26% due to higher scanner sales, services revenue, and the inclusion of exocad's CAD/CAM services, partially offset by lower scanner ASPs. Imaging Systems and CAD/CAM Services deferred revenue was up 30% sequentially and up 69% year-over-year primarily due to the increase in scanner sales and the deferral of service revenues, which will be recognized ratably over the service period. Moving on to gross margin. Fourth quarter overall gross margin was 73.2%, up 0.4 points sequentially and up 0.5 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 73.6% for the fourth quarter, up 0.3 points sequentially and up 0.7 points year-over-year. Clear Aligner gross margin for the fourth quarter was 74.9%, up 0.1 point sequentially due to lower additional aligner volume, partially offset by higher warranty, other manufacturing costs and lower ASPs. Clear Aligner gross margin was up 0.7 points year-over-year primarily due to favorable product mix from increased iTero scanner absorption as a result of increased manufacturing volumes partially offset by lower ASPs, higher warranty costs and other manufacturing costs. Systems and Services gross margin for the fourth quarter was 64.2%, up 2.2 points sequentially primarily due to higher ASPs and increased manufacturing efficiencies from higher production volumes. Systems and Services gross margin was down 0.7 points year-over-year due to lower ASPs, higher freight and other manufacturing costs partially offset by higher services revenue. Q4 operating expenses were $397.3 million, up sequentially 11.3% and up 23.8% year-over-year. The sequential increase in operating expenses is due to increased marketing and media spend and spending commensurate with business growth. Year-over-year, operating expenses increased by $76.5 million, reflecting our continued investment in sales and marketing, R&D activities, and manufacturing operations. On a non-GAAP basis, operating expenses were $372.3 million, up sequentially 12.1% and up 23.4% year-over-year due to the reasons as described earlier. Our fourth quarter operating income of $213.2 million resulted in an operating margin of 25.5%, up 1.4 points sequentially and up 2.3 points year-over-year. The sequential and year-over-year increases in operating income and the operating margin are primarily attributed to higher gross margin and operating leverage. On a non-GAAP basis, which excludes stock-based compensation, amortization of intangibles related to exocad, and acquisition-related costs, operating margin for the fourth quarter was 28.9%, up 0.9 points sequentially, and up 2.5 points year-over-year. Interest and other income and expense, net for the fourth quarter, was a benefit of $1.4 million, primarily driven by favorable foreign exchange. With regards to the fourth quarter tax provision, our GAAP tax rate was 25.9% which includes tax benefits of approximately $11 million related to adjustments in prior years' unrecognized tax positions. The fourth quarter tax rate on a non-GAAP basis was 14.5% compared to 16.6% in the prior quarter and 20.9% in the same quarter a year ago. The fourth quarter non-GAAP tax rate was lower than the third quarter's rate primarily due to the reason previously stated. Fourth quarter net income per diluted share was $2.00, up $0.24 sequentially and up $0.47 compared to the prior year. On a non-GAAP basis, net income per diluted share was $2.61 for the fourth quarter, up $0.37 sequentially and up $0.85 year-over-year. Moving on to the balance sheet. As of December 31, 2020, cash and cash equivalents were $960.8 million, an increase of approximately $345.3 million from the prior quarter, which is primarily due to higher cash flow from operations. Of our $960.8 million of cash and cash equivalents, $548.3 million was held in the U.S. and $412.5 million was held by our International entities. Q4 accounts receivable balance was $657.7 million, up approximately 5% sequentially. Our overall days sales outstanding was 71 days, down approximately 6 days sequentially and down approximately 5 days as compared to Q4 last year due to strong cash collections. Cash flow from operations for the fourth quarter was $381.4 million. Capital expenditures for the fourth quarter were $53.2 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 $328.3 million. Under our May 2018 Repurchase Program, we have $100 million still available for repurchase of our common stock. Before we move to the outlook, I would like to make a few comments on the full year 2020 results. In 2020, we shipped a record 1.6 million Invisalign cases, up 7.9% year-over-year. This reflects 13.3% volume growth from our International doctors and 3.6% volume growth from our Americas doctors. System and Services volumes were down 12% compared to 2019, reflecting the impact of the COVID-19 pandemic on equipment sales. Total revenue was a record $2.5 billion, up 2.7% year-over-year, with Clear Aligner revenues a record $2.1 billion, up 3.7% year-over-year. 2020 Systems and Services revenues were $370.5 million, including exocad revenues from April 1, 2020 forward compared to $381 million in 2019. Full year 2020 operating income of $387.2 million was down 28.6% versus 2019, and operating margin at 15.7% versus 22.5% in 2019. 2019 operating income included a litigation benefit of $51 million and Invisalign Store closures of $23 million for a net benefit on operating margin of 1.1%. With regards to a full year tax provision, our GAAP tax rate was negative 368.6%, which includes a one-time tax benefit of approximately $1.5 billion, net of current year amortization, associated with the recognition of a deferred tax asset related to an intra-entity sale of certain intellectual property rights resulting from our corporate structure reorganization completed in the first quarter of 2020. Excluding the tax benefit related to our corporate structure reorganization and the related tax effects of stock-based compensation and other non-GAAP adjustments, the full year tax rate on a non-GAAP basis was 17.6% compared to 22% for 2019. 2020 diluted EPS was $22.41. On a non-GAAP basis, 2020 diluted EPS was $5.25. Free cash flow was $507.3 million for 2020, down $90.3 million versus 2019. Now, let me turn to our outlook. Overall, we are very pleased with our Q4 performance and the strong momentum in our business, which has continued through January for both Clear Aligners and Systems and Services. As we discussed at our Investor day in November, we are committed to making significant investments to drive growth and we are seeing a good return on these investments across all regions and customer channels. These strong returns give us confidence to continue investing in sales, marketing, innovation, and manufacturing capacity to accelerate adoption in a huge, underpenetrated market. These investments coupled with typically higher seasonal operating expenses as a percentage of revenue are expected to result in a sequentially lower operating margin percentage in Q1 as we have historically seen. While the global environment surrounding the pandemic remains uncertain, we will continue to focus on what we can control and we are confident in our ability to continue to execute. Our responsibility is to continue driving innovation and delivering on the needs of our customer doctors and their patients. Over the past 24 years, Align has invested billions in technology, innovation, consumer marketing, and demand creation to connect millions of consumers with our doctor customers. We will continue to invest in this business to drive demand and to drive adoption of the Align Digital Platform, including manufacturing and operational expansion. We will always be responsible. Just like we've done in the past, we make investments to drive growth and maximize ROI. We remain committed to our long-term target model of 20% to 30% revenue growth for Clear Aligners and Systems and Services, and operating margin of 25% to 30%. With that, I'll turn it back over to Joe for final comments.

Thanks, John. The choices we made in 2020, to protect employees, support customers, and press forward on our strategy for growth, were possible because of the strength of our balance sheet and the confidence we have in our business model. Our actions reflect our conviction in the enormous opportunity we have to transform smiles and change lives. With 15 million orthodontic cases starts annually and more than 500 million consumers who can benefit from a better smile, the market for digital orthodontics and restorative dentistry is massive and has been unleashed by the need for digital. In a macro sense, COVID-19 has accentuated the benefits and pervasiveness of the digital economy. From an Align standpoint, practices across every region are embracing digital treatment in new ways and more purposefully than ever before. Invisalign providers are using our virtual tools to minimize in-office appointments and deliver doctor-directed, personalized treatment that meets the needs of the moment and that will reshape the future of treatment. Digital acceleration is not just around Invisalign treatment. It includes digital workflows around iTero scanners and general dentistry. Doctors tell us that the iTero scanner is central to their practice and their practice workflows, and it is key to driving digital treatment. We've always known this, iTero and now exocad are core components of the Align Digital Platform, our integrated suite of unique, proprietary technologies and services delivered as a seamless, end-to-end solution for patients and consumers, orthodontists and GP dentists, and lab partners. And particularly, we now have all the building blocks to create digital workflows, leveraging the combined power of Invisalign treatment, iTero scanners, and exocad software to become more relevant to the GP market, which is critical to accessing the 500 million consumer opportunity. Align is a growth business with huge opportunities, but the environment remains uncertain due to COVID-19. Our plan is still to counter uncertainty by staying focused on our long-term strategy, living our values, supporting our employees and customers, and keeping in mind the demand drivers we've identified over the past year, the re-direction of disposable income for many consumers, channel focus that allows us to reach and support a wider range of customers within each channel. And most importantly, the digital mindset that's taking hold with more and more of our customers and that we are supporting through innovative products and programs that can help support their digital transformation. We are not ignoring the reality of COVID-19 and how long it may be part of our lives, but we're also not going to stop driving the business forward for the good of customers and their patients, our employees, and our stakeholders. In closing, I want to leave you with a few thoughts as we begin the new year. While there is considerable amount of turmoil in the world, our focus is on what we can control as a company. We have strong momentum. We'll stay focused on our strategic priorities, international expansion, patient demand and conversion, orthodontist utilization, and GP dentist treatment. In summary, we are very pleased with the fourth quarter and full year results of 2020, during a remarkable year with events beyond our control as a result of COVID-19. It is during times such as this when having a solid strategy combined with focused execution can lead to outcomes that support growth, not only for Align's business but also practice growth for Align's customers which also leads to more and more Invisalign smiles. With that, turn it over to the operator and we'll take calls.

Hi. Thanks for the question. Hi. How are you?

Good.

Happy New Year. I wanted to begin by highlighting that you've achieved strong volume growth even in a stable to slightly declining pricing environment. When do you expect to return to the previous model that allowed for price increases? Is that still a possibility? Additionally, I believe the teen market is a significant area for future growth. You mentioned conversion and lead generation; could you clarify the conversion rates for the leads you generate? Also, how long does it typically take to see a return on investment from your advertisements?

Ravi, first of all, I guess, your first question is on average selling prices. We try to communicate this as strongly as we can is to keep your eyes on gross margin, because we have huge mix, whether it's international mix or it's product mix, you see a lot of progress in iGo and products like Moderate and Invisalign First in those products. The carry actually lower average selling prices, but higher margins, and so you can often mix up on those things. So I'd say as we keep emphasizing is don't be overly concerned about ASPs or focused on ASPs. Like John said, we didn't increase ASPs this year because we're interested in supporting our customers and making sure that this is a difficult transition for many practices right now and instituting a price increase just wouldn't have been responsible in that sense. But at the same time, we drove incredible productivity across the business, and we're able to show those kind of gross margins. So I hope you and the rest of the analysts community out there can actually see that. We've been talking about this for a few years, but actually taking place. On the teen side and the conversions from an advertising standpoint, I mean, we come out just from a lot of different ways and a lot of different areas. And if we are going to start teen season, you really have to start in February in the United States and you have to really work through a lot of different aspects of social media. You advertise differently for moms and you do teens and different things like that. So I can't give you a correlation coefficient in the sense of here we invest and how much we get back, but we understand as well as a business, we've been doing it for years. We understand the timing of it. And more and more we become more specific on the social advertising pieces and how to implement that properly. And John, do you have anything you want to add?

No. As you mentioned, there are other factors involved. You need to engage with teens, as Joe explained, and we discussed the role of social influencers. It's important to connect with parents, which we are attempting to do, while also ensuring we have the right approach with doctors. The key is getting those three groups to consider entering treatment.

Okay. Then maybe one last one if I can ask one more, just on the reopening and vaccination progress and kind of volumes. How are you guys kind of thinking about the consumer spending environment as the options that the patient is going to have start increasing? I mean, is that going to require more investment here in the near term or do you think kind of where we're at a baseline where you've kind of gotten the ramp where things are starting to really click here with the advertising that you're doing as is? Thank you.

Yes, Ravi, it's a good question. I mean, look, we're always looking to maximize our return on investment. We talk about that to grow in this vastly under-penetrated market. In some countries like in the U.S., it's just a matter of refining how we spend. We talked about the influencers, talked about NFL and other things. And in other countries, we've really started spending some of that consumer advertising and we see a great response and we see a strong return. And those are areas that, as we see that response, we see it turn into volume, those are areas that will continue. So we're always looking at return on investment and we'll find ways to be able to grow our volume that way.

Thanks, Ravi.

Hey, Joe. Good afternoon. Joe, you mentioned 2021 is off to a great start. From 2015 to 2019, so I'm sort of isolating pre-COVID management guidance for 1Q cases, the guidance for 1Q cases were up pretty consistently, just low single-digits off of what you did in the fourth quarter. And I guess where I'm going with this is at a high level, what's the expectation for case growth sequentially? And I'm just trying to level set as the back part of 2020 likely benefited from some pent-up demand. So just how we should think about the trend line, if you would, into the early part of 2021?

Jon, I'll let John have the specifics. I would just tell you that January was a really strong orders quarter, so that momentum really continues.

I think we're focused on what we can control and making investments to drive the business. As Joe mentioned, we felt very positive about our performance at the end of Q4, and we saw similar results in January. We prefer not to provide guidance because there are factors beyond our control. Our aim is to share the most current information without making forecasts.

Okay, fair enough. And I'll ask a quick two-part for the second one. EMEA was just gangbusters, I mean, it was up 48% of a 32% comp, shout out to Markus, but anything to call out there? I mean, the number was huge. And then the second part is teen up almost 40%, Joe. What do you think the underlying ortho market was growing? Where I'm going with this is just your conviction of sort of maybe a type of inflection point, if you would, with teen's share of share. Thanks, guys.

Jon, I appreciate you bringing up EMEA, I mean, that was just an amazing performance when you see that. I've been doing business in Europe since I was 30 years, and you see growth like that by countries, it's amazing. And I think that, to me, that was really a story on the fourth quarter too was the breadth of that growth. It wasn't just North America. It wasn't just Asia. It was deep across segments, across GPs, across orthos. So Jon, I'm not ready to talk about an inflection point. All I can say is when you think about, we had 77,000 doctors that ordered that I talked about in my script. And then 7,200 to 7,300 more doctors, that's 10% more doctors, that's a record for us too. So we see Invisalign, this digital treatment really catching on in a big way and it's meaningful. Look, we're gearing up for it. We're obviously advertising to drive that demand and will stay focused on just executing, Jon, right now.

Thanks, guys.

Thanks, Jon. Next question?

Hi. Thanks for the time here, guys. I wanted to try to understand a little bit better the relationship between some of the things that you flagged, John, in your prepared remarks as it relates to deferrals and ASP. I certainly agree with the view that gross margins are really the critical metric, but I'm sure we're going to get a lot of questions about ASP tonight and over the next couple of days. So I wonder if you could help us understand a little bit more deeply, one, why we'd be seeing more deferred revenue here both on aligners and scanners? And what's the relationship to ASP and do we see that reverse?

Yes, Steve, when considering our revenue, we account for the revenue generated from a new shipment. A portion of that is recognized at the time of shipment based on our revenue recognition principles, while the remainder pertains to future aligners or modifications, which are classified as deferred revenue. Additionally, revenue is generated from previous deferrals, where doctors may require additional lines. Given the mix of new cases and the strong demand for future volumes, our revenue composition heavily favors new cases, which influences our average selling prices. From a margin perspective, new cases tend to be more beneficial. However, when it comes to refinements that fall under deferred revenue, the margins are not as favorable. These factors create certain dynamics, particularly during significant volume increases like those we experienced in the third and fourth quarters.

Okay. Thank you, John. And then I wanted to follow-up about the GP channel. GP has been just gangbusters here lately. I wonder if I could try to understand that a little bit more deeply. One is do you think it continues to grow at the sort of clip relative to the ortho channel? Maybe two, do you think exocad has been a driver of incremental growth in that channel at this point? And then lastly, should we think about the shift to DSOs being a variable one way or another? And I apologize for my kids screaming in the background.

That's the life we live now, Steve. We understand. It happens on and off like every call. From a GP channel standpoint, I mean, three years ago when we first started segmenting in Europe, and now we are doing in the States and we do it all over the world. And then we introduced products like iGo that were specific to it. And just a salesforce that can communicate with GPs because it's a different conversation than with orthos. Yes, I can't tell you where it's going, but when we talk about that 500 million patients like I did in my script, that's where they are, and that's where you touch them. I mean, it's a different. It's not a big teen market. It's a lot of adults. But it has to have a workflow that's specific to a GP. And that's why we drive their products; that's why iTero is so important from a front-end standpoint. Your question on exocad is, we think that's going to be a big GP driver for us. It is a big legitimate piece for us, but I don't think it's adding to volume right now. We're just rolling out these new products. We're just starting to integrate that kind of software code into iTero and into our programs, and that certainly will drive increased penetration in the future.

Got it. Thank you so much for all the perspective here.

Yes. Thanks, Steve.

Next question?

Thank you. Good evening, everyone. Joe, I want to start by asking if there's any way to assess how much of the patient volume over the last two quarters can be attributed to backlog, the zoom effect, or actual increased adoption of clear aligners compared to traditional braces. Is there a way to categorize this or any metrics you are tracking that indicate whether this is the genuine upward trend we've been anticipating, instead of just backlog and the zoom influence?

I think as we get further and further from the second quarter, obviously the backlog question becomes less and less as part of the noise of the structure, right. I feel a lot of analysts, Jeff, they wonder, hey, we had a great third quarter obviously and it was, well, how much of that was really the second quarter that's rolled into the third. We really don't know what that was. We don't. And our doctors don't know it either as we talk to them. The fourth obviously had less of that. And we really felt good about our orders in January too. So I think we're really moving away from that question here soon. The number of docs like I just quoted with over 7,000 new docs ordering from us, 77,000 in total shows you the breadth of what's going on. And what's really struck me in this entire thing too, Jeff, is really this is not just United States, this is all over the world. It's Latin America, it's APAC. It's tremendous growth in Japan and ANZ and traditional markets, in China, in Europe. So there is breadth to this and then the segments we talked about, both GPs and orthos. So, look, there have been backlog in the third quarter. There has to be some backlog in the fourth quarter or whatever. But we don't think that's the overriding story here.

Yes, that's fair. I have a conceptual question regarding your Advantages program. Are you observing that high volume doctors, the Platinum tier, are advancing to Diamond and Double Diamond levels? Or are the lower Bronze and Gold tier doctors moving up to Platinum? Does it matter to you which group is advancing? More importantly, are you focused on encouraging the low volume doctors to fully commit or getting the high volume doctors to switch entirely to Invisalign? I'm quite sure your response will highlight that it's a mix of both, but any insights on your customer base would be helpful.

Yes. You helped me answer that question, Jeff, it is a mix. But it is really broad. I mean, we see in the Bronze accounts and Golds and all the way to Diamond and Diamond Plus. And we see growth in all those segments. And I think it's kind of logical, right. The people that know how to do digital are going to expand on it, because digital really allows them to function in this COVID environment in a way that allows them fewer customer touches and they can actually carry on their practices in a normal way. Other doctors actually see the advantages of that. They have patients asking for them. And they start to move toward a digital kind of a platform. Overall, again, it's a breadth discussion. It's not just one area, it's not just one country, it's not one segment of the Advantage program. We just weren't seeing adoption across the board. And John, anything to add on that?

I'd echo this, the breadth. I mean, you have new doctors, like Joe said, 7,000 new doctors that come in with and want to do cases that come into our ecosystem and start cases. You see doctors who have done just a few cases really start to accelerate and then at the top of the pyramid, you have people that are doing a lot of cases and they do even more cases. So that's part of when we talk about the breadth of this growth and what makes it exciting. And it's like Joe said, not just a U.S. phenomenon, it's pretty much everywhere.

And Jeff, I found your last point about whether we care to be interesting. The truth is, we really don’t have a preference. Our main goal is to support the doctors who choose to collaborate with us. We recognize how significant and underdeveloped this market is, and we are eager to tap into any growth opportunities, whether they are at the lower end or the higher end. Our company is structured to effectively serve both extremes.

Thank you. I appreciate the comments.

Thanks, Jeff.

Thanks, Jeff. Operator, we'll take one more question, please.

Hey, Joe. Good afternoon. Thanks for squeezing me in. Obviously, results over the past couple of quarters have been really strong. I guess, when we look out to 2021, it's tough to know what happens with COVID, but hopefully we'll start to get back to normal life later this year or 2022. I think as we look at where consensus is modeled, I think on a high-teens revenue growth, it seems like you still feel comfortable with the 20% to 30% target. So do you feel like we should be expecting that type of growth in line with the long-term range off of this new higher level of volumes that you're starting to see in the back half of this year?

Nathan, we try to emphasize as much as we can that we feel very confident about the 20% to 30% ranges of growth. We continue to target 25% to 30% operating profit to achieve that. You'll see us implementing investor initiatives that John mentioned to drive demand. We remain committed to that model of growth.

And it starts with the vastly under-penetrated market and the investment opportunities we talk about. We tried to give you a kind of the breadth of all the different levers that we have to pull to be able to drive that return. And we continue to make that. It changes over time in terms of how we invest and where and so on, but that, that belief is still there. And when we make those forward investments, we're invested into that under-penetrated market that we think we can grow 22% in and do it at a 25%-plus op margin rate.

Yes.

Great. Well, congratulations on the strong quarter.

Thanks a lot, Nathan. I appreciate it.

Thanks, Nate. Well, thank you everyone for joining us today. This concludes our earnings call. If you have any follow-up questions, please contact our Investor Relations department. And we look forward to following up with you at upcoming conferences and virtual events. Have a great day.