Align Technology Inc (ALGN) — Q4 2021 Earnings Call Transcript

Thank you. 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 2021 financial results today via Globe Newswire, 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 1 month. The telephone replay will be available today by approximately 5:30 p.m. Eastern Time through 5:30 p.m. Eastern Time on February 16. To access the telephone replay, domestic callers should dial (877) 660-6853 with conference number 13725950 followed by #. 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 statements. We've posted historical financial statements, including the corresponding reconciliations including our GAAP to non-GAAP reconciliation, if applicable, and our fourth quarter and full year 2021 conference call slides 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 thank you for joining us. Today, I will highlight some key points from the fourth quarter, followed by a discussion on the performance of our two operating segments, Services Systems and Clear Aligners. John will then provide more details on our financial results and future outlook. After that, I will summarize a few important points and open the call for questions. I am very pleased to report our fourth quarter results and another record year for Align. Our net revenues reached $4 billion, with an operating margin of 24.7%, both at the high end of our guidance for fiscal 2021. For Systems and Services, full-year revenues increased by 90.4% from the previous year to a record $705.5 million. For Clear Aligners, full-year revenues rose 54.5% to a record $3.2 billion. In 2021, we achieved several major milestones, including reaching our 12 millionth Invisalign patient, selling 68,000 iTero scanners, and installing 47,000 Exocad software licenses. These achievements form the backbone of the Align Digital platform, which is our proprietary combination of software, systems, and services aimed at creating a seamless workflow for doctors, labs, patients, and consumers. In Q4, our revenues indicate continued strong growth, particularly in iTero scanner services in North America, despite lower-than-expected sales for Invisalign Clear Aligners. Throughout most of the fourth quarter, our Clear Aligner volumes followed Q4 seasonal trends. However, the situation shifted in December due to the emergence of the COVID-19 Omicron variant. We believe that our Q4 Clear Aligner volumes were adversely affected by an uptick in Omicron cases that caused staffing shortages in customer labs, practice closures or reduced hours, and diminished patient traffic in December, a trend that continued into Q1. We estimate that these factors negatively impacted our Q4 year-over-year revenue growth by about 3 percentage points. While there are some similarities to our experiences during the initial COVID-19 outbreak two years ago, particularly in China—where a strict COVID policy is currently in place—the current situation is quite different. There are no widespread government-mandated lockdowns or stay-at-home orders, but there are increased consumer precautions, self-imposed quarantines, higher inflation, decreased economic stimulus, and supply chain challenges that make predicting recovery more difficult. Despite this, we are seeing improved submissions from Invisalign doctors and case submissions. We are collaborating closely with our customers to support their needs while ensuring the health and safety of our employees. In Q4, Systems and Services revenues increased by 61.3% year-over-year and 21% sequentially, reflecting strong revenue growth across regions. These results highlight the continued adoption of the iTero Element 5D Plus imaging system, launched last year with innovative Near Infrared technology for detecting and monitoring cavities without harmful radiation. This system comprised 75% of iTero volumes in Q4, with more than 50% of sales made to first-time scanner buyers beginning their journey with the Align Digital Platform. We also saw growth in our installed base of iTero scanners, accompanied by increasing service revenues that historically indicate rising digital adoption among doctors. For Q4, Clear Aligners revenues increased by 16.3% year-over-year, showing strong growth across all regions and product categories, including comprehensive and non-comprehensive offerings, as well as specific products like Invisalign First, Invisalign Moderate, and Invisalign Go. Our fourth-quarter revenues also included non-case revenue streams such as clinical training and education, doctor-prescribed retainer products, and other dental consumables. We experienced solid performance from our retainer business, which saw strong revenue growth, alongside rising enthusiasm for our pilot doctor subscription program in North America. Our market share in the retention sector is significantly underdeveloped, even more so than in the orthodontic case starts. Therefore, we are building a comprehensive retainer strategy, including a dedicated marketing team focused on increasing adoption and market share in the U.S. Our goal is to enhance brand awareness for Vivera retainers and foster engagement with doctors through clinical education and sales initiatives, while connecting consumers to doctors through demand creation programs and our concierge service. Additionally, we have launched social media campaigns highlighting the benefits of Vivera retainers. We are confident that these incremental investments will enhance value for Invisalign practices and drive growth consistent with our long-term financial model. Q4 non-case revenues also included accessories and consumables available through our e-commerce channels and will reinforce patient and doctor engagement with the Invisalign brand. Our full-year results demonstrate the ongoing adoption and demand for the Invisalign system, iTero systems and services, and Exocad CAD/CAM software, as more doctors transition their practices to digital technology and consumers increasingly seek to improve their smiles with doctor-directed Invisalign treatments. Now, let's look at our fourth-quarter results in detail, starting with the Americas. Full-year 2021 Invisalign case volumes in the Americas increased by 57.6%. In Q4, case volumes were up 11.5% year-over-year, with notable growth in Latin America. Sequentially, shipments in the Americas dropped by 7.9%, mainly due to the previously mentioned Omicron impact and a seasonally slower period for teens transitioning from Q3 to Q4. We also observed higher general practitioner and adult case volumes and ongoing momentum from our doctor subscription plan pilot. In Q4, we made a $1 million donation to the American Association of Orthodontists Foundation to support orthodontic science. We are also investing in educational grants to provide universities with better access to Align products for educational and training purposes. Through these initiatives, we are committed to advancing the orthodontic profession by supporting those who treat patients directly. In Q4, our Systems and Services business in the Americas had a strong quarter, driven by continued adoption of the iTero 5D Plus imaging system across our distribution channels, including DSO partners. Services revenues showed robust growth, reflecting the increasing installed base of iTero scanners in North America. For our international business, full-year Invisalign case volumes rose by 51.6%. In Q4, cases increased by 10.7% year-over-year amid challenging comparisons to 2020, with sequential shipments growing by 1.7%. Despite the Omicron impact in December, we witnessed strong growth in the EMEA region, although growth was somewhat tempered by a seasonally slower period in China. Full-year EMEA Invisalign volume was up 69.5%, and in Q4, case volumes grew 14.9% year-over-year, with broad-based growth in all markets, particularly in Italy and Iberia, and continued expansion in Turkey, Russia, CIS, and Benelux. During Q4, we commenced commercial operations in Africa, focusing initially on North Africa, with plans to expand into Sub-Saharan Africa and South Africa this year, broadening our international market base. We are making significant progress on our Europe manufacturing facility in Wroclaw, Poland, which will serve as our third global aligner manufacturing operation and is on track to open in the first half of 2022, further enhancing our capability to efficiently provide the Invisalign system in Europe. In Q4, we experienced strong scanner shipments as more EMEA doctors digitize their practices. Throughout the full year, APAC Invisalign case volumes grew by 27.1%. For Q4, case volumes in APAC, particularly from Japan, Korea, and India, increased by 3.4% year-over-year, aligning with tough comparisons given ongoing COVID-related lockdowns impacting various countries, including China. We noted strength in the GP dentist channel, with more Invisalign submitters, as well as growth in the teen market. Sequentially, APAC case volumes decreased by 15.4%, reflecting the impact of Omicron and seasonal trends in China, while we experienced substantial growth in Thailand, Southeast Asia, and Taiwan. Overall, it was encouraging to see record shipments in APAC markets less severely affected by lockdowns. In Q4, the Systems and Services segment in APAC saw the highest percentage of iTero scanners sold to new doctors. Today, we announced new innovations for the Invisalign Systems within the Align Digital platform, which integrates software, systems, and services for a seamless experience connecting all users: doctors, labs, patients, and consumers. New innovations include the ClinCheck live update for 3D controls, the Invisalign Practice App, the Invisalign Personalized Plan (IPP), and the Invisalign Smile Architect. We believe these advancements will revolutionize digital treatment planning for both orthodontics and restorative dentistry by enhancing flexibility, treatment consistency, and real-time access to planning modifications. The ClinCheck live update enables real-time modifications, significantly improving practice productivity and treatment quality. The Invisalign practice app provides mobile connectivity with the Invisalign Doctor Site, empowering doctors to manage their practices conveniently. The IPP automatically incorporates doctors' treatment preferences for comprehensive cases, enhancing efficiency and consistency. The Invisalign Smile Architect allows GP dentists to create and visualize orthodontic restorative treatment plans using iTero scans and wide smile photos on the Invisalign Go platform. The technical design assessment is set for Q4 '22. Recognizing that each Invisalign-trained doctor has unique preferences and each patient presents distinct needs, the IPP and ClinCheck live update for 3D controls offer game-changing capabilities for personalized treatment planning. Through 3D controls, doctors experience real-time efficiency improvements with updates reflecting immediately. The Smile Architect merges orthodontic and restorative treatment planning with ClinCheck software, providing doctors with flexibility to address diverse patient needs. By combining advancements in digital technology and Align's unique expertise, we are launching these innovations to our customers this year. The development journey for the ClinCheck live update and IPP involved extensive testing and learning, made possible by the insights gained from over 12 million Invisalign cases. Our innovations leverage AI and automation to redefine the treatment planning experience for our doctors, allowing for personalized modifications more efficiently than ever. Tasks that once required several days can now be completed in just a few minutes, improving productivity for doctors and benefiting patients. Our consumer marketing initiatives focus on raising awareness about the Invisalign system and driving demand towards our associated doctors' offices, tackling the substantial market opportunity to transform 500 million smiles. Interest in the Invisalign brand remains strong, and we are actively investing in key markets and consumer segments. We are enhancing our social media presence to better reach consumers, working with media partners to optimize our campaigns, and implementing new strategies. In Q4, we continued our successful 'Invis is' multi-channel campaign, raising awareness among various consumer segments. Globally, we achieved record impression volumes with over 8 billion impressions, an 84% year-over-year increase, and attracted 21.7 million unique visitors to our website, a 127% growth. In the U.S., we amplified our campaigns on major social media platforms such as TikTok, Snapchat, Instagram, and YouTube to increase awareness among teens about Invisalign. Our campaigns featured prominent teen influencers from our Invisalign Smile Squad, who shared their experiences and reasons for choosing Invisalign for their smile transformations. Furthermore, we connected with gaming audiences through Twitch with a customized integration that won a gold medal at the Annual Internationalist Awards for innovation in digital marketing. To promote our offerings to young adults across the Americas, EMEA, and APAC, we expanded our 'Invis Is a Powerful Thing' campaign, emphasizing its impact on self-confidence. Integrated media plans across YouTube, Snapchat, Instagram, Facebook, and TikTok reached young adults in the platforms they frequent. In Brazil, we have notably increased our campaign's reach through mega-influencer Taís Araujo, achieving a 400% year-over-year increase in web traffic. In EMEA, we made strides in markets like Italy and the Netherlands, complementing our media plans with Google and YouTube while utilizing newer channels like TikTok to boost engagement, resulting in a 170% increase in unique visitors. We continue to invest in consumer advertising across APAC, resulting in significant increases in visitors and impressions. In Japan, we observed strong consumer responses with a 117% year-over-year rise in unique visitors. Additionally, we expanded our advertising reach in India and Taiwan, generating remarkable increases in impressions and unique visitors. Our My Invisalign app has seen adoption rise, with 1.4 million downloads to date. Usage of our digital tools continues to grow, including the My Invisalign app, which was utilized over 14,000 times, and the insurance verification feature, which was accessed 20,000 times in Q4. We also received over 45,000 patient photos through our virtual care feature, contributing valuable data to enhance our services for both doctors and patients. Our Systems and Services revenue for Q4 increased by 61.3% year-over-year, supported by robust scanner shipments and a 21% sequential growth. This marks the sixth consecutive quarter of revenue growth for our Systems and Services division. As previously mentioned, over 50% of scanner sales in Q4 were made to first-time iTero scanner buyers. It's encouraging to see that more doctors are digitizing their practices and investing in the Align digital platform. The iTero Element 5D Plus imaging system continues to gain traction across all regions, with its recent launch in China during Q4. This series broadens our portfolio of iTero Element scanners to better meet the needs of both doctors and patients. An important indicator of digital acceleration in dental practices is the number of intraoral digital scans used for Invisalign case submissions. In Q4, worldwide intraoral digital scans submitted for Invisalign cases increased to 85.4%, up from 79.3% in the same quarter last year. International intraoral scans grew by 80.8%, compared to 73.7% in the previous year. In the Americas, 89.1% of Invisalign cases were submitted using intraoral digital scans, an increase from 84% a year earlier. We have conducted over 50 million orthodontic scans and 10.3 million restorative scans with our iTero scanners. Sales of the iTero scanners continue to grow, with 68,000 units sold globally as of Q4, constituting approximately 30% of our services revenue, including recurring subscriptions, CAT scan software, and ancillary products aimed at enhancing orthodontic and GP dentist workflows. For example, we have simplified the Invisalign case submission process through the iTero Element 5D imaging system’s Auto Upload functionality. Turning to Exocad, Q4 revenues for Systems and Services also included contributions from Exocad CAD/CAM products and services, which enhance Align's digital solutions in restorative dentistry, implantology, guided surgery, and smile design. Exocad now has over 47,000 software licenses distributed globally. During the quarter, Exocad launched ChairsideCAD 3.0 Galway, an advanced CAD software for single-visit dentistry, featuring design tools adaptable for various indications and a choice of integrated devices. This software is now accessible in North America, Europe, and other selective markets, and has been recognized for innovation with the Cellerant best-of-class technology award for the third consecutive year. With that, I will now hand the call over to John.

Thanks, Joe. Now for our fourth quarter financial results. Total revenues for the fourth quarter were $1.31 billion, reflecting a 1.5% increase from the prior quarter and a 23.6% increase from the same quarter of the previous year. In Clear Aligners, Q4 revenues reached $815.3 million, a 2.7% decline sequentially due to reduced Invisalign volumes, although this was partially offset by slightly higher average selling prices and a 16.3% increase year-over-year, indicating growth in Invisalign volume across all regions along with higher prices. We shipped 631,100 Invisalign cases in Q4, which is a 3.7% decrease sequentially but an increase of 11.1% compared to the previous year. Furthermore, we shipped to 83,500 Invisalign doctors globally, with over 6,400 being first-time customers. Q4 comprehensive volume experienced a 13.1% increase year-over-year while decreasing 4.5% sequentially. Additionally, noncomprehensive volume rose 6.6% year-over-year and fell 1.7% sequentially. The number of adult patients in Q4 grew by 10.4% year-over-year and increased marginally by 0.1% sequentially. Meanwhile, the number of teens or younger patients increased by 13% year-over-year but decreased by 11.8% sequentially. Clear Aligner revenues faced an adverse impact from foreign exchange amounting to roughly $11.4 million, which translates to about 1.4 percentage points sequentially. Year-over-year, Clear Aligner revenues were negatively affected by foreign exchange by about $1.5 million or approximately 0.2 percentage points. For Q4, Invisalign comprehensive average selling prices increased both sequentially and year-over-year. The sequential increase in comprehensive ASPs reflects higher additional liners but was somewhat offset by unfavorable foreign exchange and higher discounts. On a year-over-year basis, comprehensive ASPs show higher additional aligners with partial offsets from increased discounts. Conversely, Q4 noncomprehensive ASPs decreased sequentially but increased year-over-year. The sequential decline in noncomprehensive ASPs was negatively influenced by foreign exchange, although this was partially mitigated by higher additional aligners. Year-over-year, these ASPs reflect higher additional liners and product mix, offset by increases in discounts. Clear Aligner deferred revenues on the balance sheet rose by $68.5 million or 6.9% sequentially and by $332.9 million or 45.8% year-over-year, which will be recognized as additional aligners are shipped. Our Systems and Services revenues for the fourth quarter set a record at $215.8 million, indicating a 21% sequential increase and a 61.3% year-over-year increase. This marks the sixth consecutive quarter of sequential revenue growth, driven by increased scanner shipments and service revenues from our larger installed base. The year-over-year rise can be attributed to greater scanner shipments, increased service revenues as well as higher average selling prices from the more favorable mix towards the premium iTero 5D scanners and imaging systems. The deferred revenue for Systems and Services on the balance sheet saw an increase of $42.6 million or 22.8% sequentially and an increase of $116.2 million or 102.6% year-over-year, primarily due to enhanced scanner sales and deferral of service revenues, which will be recognized over time. Regarding gross margin, the overall gross margin for the fourth quarter was 72.2%, a decrease of 2.1 points sequentially and down 0.9 points year-over-year. On a non-GAAP basis, excluding stock-based compensation and amortization of intangibles linked to acquisitions, the overall gross margin was 72.6% for the fourth quarter, reflecting similar declines. The overall gross margin was adversely influenced by roughly 0.1 points year-over-year and about 0.4% sequentially due to foreign exchange effects. The fourth quarter gross margin for Clear Aligners was 74.2%, down 2 points sequentially due to higher freight and additional aligner costs, along with fewer primary shipments, though this was partially offset by higher average selling prices. The year-over-year gross margin decrease of 0.6 points can be attributed to higher additional aligners and freight costs, offset by increased average selling prices and better manufacturing absorption due to increased volumes. The gross margin for Systems and Services for Q4 was 64.7%, a decrease of 0.9 points sequentially, largely due to higher freight and component costs, even while being counterbalanced by improved average selling prices from the 5D Plus mix and higher service revenues. Year-over-year, Systems and Services gross margin rose by 0.4 points due to increased average selling prices linked to the higher mix of iTero 5D Plus and more service revenues, although this was offset by increased freight and component costs. We are working to address supply disruptions through expanded communication with suppliers, alterations to our purchase order strategies, and increased inventory for essential components. Operating expenses for Q4 reached $523.7 million, a 6% sequential increase and up 31.8% year-over-year, with a sequential rise of $29.7 million. The year-over-year increase of $126.4 million reflects hiring growth and ongoing investments in marketing, sales, R&D, and other areas to support business growth. On a non-GAAP basis, operating expenses were $494.4 million, representing a 6.1% sequential increase and a 32.8% increase year-over-year for similar reasons. For the fourth quarter, our operating income was $220.9 million, resulting in an operating margin of 21.4%, down 4.3 points sequentially and down 4.1 points year-over-year. The declines in operating margin are largely related to lower gross margins, increased investments in go-to-market teams and technology, and adverse foreign exchange impacts. From a non-GAAP perspective, excluding stock-based compensation and amortization of intangibles related to specific acquisitions, the operating margin for Q4 stood at 24.7%, down 4.1 points sequentially and 4.3 points year-over-year. In terms of interest and other net income and expenses for Q4, we recorded a loss of $0.9 million, reflecting a decline of $1.7 million sequentially and a $2.2 million decrease year-over-year. The GAAP tax rate for Q4 was 13.2%, compared to 30.9% in Q3 and 25.9% in the same quarter of the prior year. Our non-GAAP effective tax rate was 11.5% for Q4, down from 22.2% in Q3 and 14.5% in Q4 of the previous year. The effective tax rates for both GAAP and non-GAAP in Q4 included an out-of-period adjustment, reducing our tax rate by 7.3% and 6.3%, respectively. The diluted net income per share for Q4 was $2.40, an increase of $0.12 sequentially and an increase of $0.40 year-over-year. On a non-GAAP basis, diluted net income per share was $2.83 for the fourth quarter, down $0.04 sequentially but up $0.22 year-over-year. For the full year, diluted net income per share was $9.69, a decrease from $12.72 year-over-year due to a one-time tax benefit in 2020 of around $1.5 billion resulting from our corporate structure reorganization completed in Q1 2020. On a non-GAAP basis, the diluted net income per share for the full year was $11.22, which is an increase of $5.97 year-over-year. Turning to the balance sheet, as of December 31, 2021, our cash, cash equivalents, and short-term and long-term marketable securities totaled $1.3 billion, marking a sequential increase of $58.8 million and an increase of $335.8 million year-over-year. Of this total, $582.9 million was held in the U.S. and $713.8 million was with our international entities. The Q4 accounts receivable balance stood at $897.2 million, representing an approximate 4.9% sequential increase. Our overall days sales outstanding was 78 days, seeing a sequential rise of approximately 3 days and an increase of around 7 days compared to Q4 of last year. Cash flow from operations in the fourth quarter amounted to $272.8 million. Capital expenditures for this quarter were $109.1 million, mainly linked to our ongoing investment in expanding aligner manufacturing capabilities and facilities. Free cash flow, defined as operational cash flow minus capital expenditures, was $163.8 million. In November 2021, we repurchased $100 million of common stock through an accelerated share repurchase, translating to around 0.2 million shares at an average price of $666.53 per share. We currently have approximately $725 million remaining for repurchase under our $1 billion repurchase program initiated on May 13, 2021. Before outlining our outlook, I want to highlight our full-year results for 2021. In that year, we shipped a record 2.5 million Invisalign cases, reflecting a 54.8% year-over-year increase. This includes volume growth of 51.6% from our international doctors and 57.6% from our Americas doctors. Total revenues reached a record $4 billion, up 59.9% year-over-year, with Clear Aligner revenues also hitting a record at $3.2 billion, a 54.5% increase year-over-year. The Systems and Services revenue also set a record at $705.5 million compared to $370.5 million in 2020, marking a 90.4% year-over-year rise. The GAAP operating income for the full year 2021 reached $976.4 million, a 152.2% increase over 2020, yielding an operating margin of 24.7% compared to 15.7% in 2020. From a non-GAAP perspective, the operating margin for 2021 stood at 27.9%, up from 20.3% in 2020. The net figure for 2021 interest income and other items totaled $36 million, which included a gain of $43.4 million from the SmileDirectClub arbitration award. Excluding this gain, interest and other income and expense net was an expense of $7.4 million on a non-GAAP basis. Regarding our tax provision for the full year, the GAAP tax rate was 23.7%. On a non-GAAP basis, the full year tax rate was 18.5%, compared to 17.6% in 2020. For 2021, diluted EPS was $9.69, while on a non-GAAP basis, it was $11.22. Free cash flow amounted to $771.4 million for 2021, representing an increase of $264.2 million compared to 2020. Overall, we are pleased with our Q4 results and celebrate another record year for Align. We achieved strong growth and profitability in alignment with our guidance, despite facing disruptions towards the end of the quarter from Omicron and other factors. Our year-over-year revenue growth for Q4 aligned with our long-term projections, even with disruptions affecting roughly 3 percentage points. The momentum and demand for our Systems and Services remained robust in Q4, particularly among first-time scanner buyers, which we view as a positive leading indicator for future Invisalign growth as our customers continue embracing digital technology, even amidst the challenges of COVID. Now, turning to our outlook. We typically expect sequentially higher revenues from Invisalign and lower revenues from Systems and Services in line with the usual Q1 seasonality. However, due to the ongoing effects of Omicron, we now anticipate a slight sequential decline in our total Q1 revenues. We maintain confidence in our strategy, our substantial untapped market opportunity, our leadership in the industry, and our execution capabilities. These elements have been central to our approach throughout the pandemic, allowing us to persistently invest in new technologies, commercial expansion, and manufacturing capacities to foster growth. We intend to continue these investments in Q1, therefore, we anticipate our Q1 operating margin to be below 20%. Additionally, in Q1 2022, we plan to repurchase up to $75 million of our common stock, possibly through a combination of open market activities or an accelerated buyback agreement. Looking at 2022 as a whole, despite challenges posed by Omicron, we project revenue growth for 2022 to align with our long-term target range of 20% to 30%. This guidance takes into account no significant surges of COVID following the current wave, no major disruptions to practices, or severe issues in the supply chain throughout the year. On a GAAP basis, we expect our operating margin for 2022 to be around 24%. Non-GAAP, we foresee an operating margin about 3 percentage points higher than our GAAP estimate after excluding stock-based compensation and amortization related to certain acquisitions. For 2022, we anticipate capital expenditures will exceed $350 million, primarily directed towards building improvements and expanded manufacturing capacity to advance our international growth. This includes our planned investment in a Clear Aligner manufacturing facility in Wroclaw, Poland, set to commence servicing doctors in 2022 as part of our strategy to bring operational facilities closer to our customers. With that, I'll hand it back to Joe for final comments.

Thanks, John. Overall, despite the disruption from the Omicron in December, we delivered a record year with strong revenue growth and operating margin, in line with our guidance for the full year on top of a record Q4 and 2020 a year ago. As you look back, I wanted to take a moment to recognize our accomplishments and thank our employees and our customers for another remarkable year. In the face of ongoing challenges related to COVID-19 and economic uncertainty, we remain steadfast in our commitment to our employees, customers and the focused execution of our strategic initiatives, and our customers remain confident in our ability to support them. Operating in this environment has not been easy, but after two years of navigating uncharted waters, the Align team is more agile and resilient than ever. In 2021, we met our goals and achieved numerous milestones. Globally, we delivered across each of our strategic priorities, which are highlighted in our Q4 '21 webcast slides. Our performance over the last year reaffirms the incredible size of our target market and demonstrates that our strategy and investment in recent years are validated by the trust and faith our customers place in us. In 2022, we must continue to extend our leadership in digital orthodontics and restorative dentistry through relentless execution of our strategic initiatives, focusing on expanding our commercial, manufacturing, R&D, clinical, treatment planning and manufacturing operations, and building our quality and regulatory muscle globally in existing and emerging markets, reaching millions of consumers who want to transform their smiles using the most advanced Clear Aligner system in the world. This includes the right investments in advertising, PR, digital, social media and influencer marketing to drive demand and conversion through Invisalign trained doctors. Invisalign ortho adoption and teen utilization of Invisalign treatment and training and educating GP dentists on how the iTero Element family of intraoral scanners and imaging systems can propel today's dental practice into the future by enhancing patient experience and elevating clinical precision, and on the benefits of digital dentistry with the Invisalign system trusted by more than 12 million people worldwide to transform smiles. We remain mindful of the ongoing uncertainty surrounding COVID-19 and the challenges that go with it. While there is still uncertainty, it has become increasingly clear over the last year with the first spread of the Delta variant, now Omicron, that COVID-19 may never fully go away and may be a virus that persists in one variant form or another for the foreseeable future. And like other viruses, new or different vaccines will be needed and new therapies will be developed to minimize the impact and effectively treat COVID-19 in our most vulnerable populations. The reality of living with COVID is one that governments, businesses and communities all over the world are beginning to acknowledge and move towards, and at Align, we will do the same. In closing, I'm going to share some thoughts that I expressed to our employees recently. What we learn in life, both in business and our personal lives, is that we're not fully in control of our environment and destiny. This is a fact of life that we face every day, but not being in control does not mean that we can't make good choices regardless of the situation or challenges we all face. We must look forward focused on the opportunities. Align has numerous growth drivers in a vastly underpenetrated market. And while we continue to see some lasting impact and continued uncertainty due to COVID-19, we remain confident in both the enormous opportunity to lead the evolution of digital orthodontics and comprehensive dentistry. We never forget that digital orthodontics presents the fastest growing and largest market in the world of medical devices. We have the greatest Clear Aligner system, scanners, GP lab software in the world and the broadest and deepest digital dental platform. We have the most recognized consumer brand in the largest direct sales force in the dental space with over 4,000 salespeople supporting over 212,000 doctors and labs and their staff, who have incredible skills and dedication to their patients. We have an amazing team of employees committed to our purpose. It's a unique opportunity unlike anything I've ever seen in my career. They both continue to grow Align and be part of positively changing millions of lives by transforming their smiles. Thank you for your time today. We look forward to speaking to you again as the year progresses. Now I'll turn the call over to the operator.

Joe, thanks for all the details on the outlook. You called out the 300 basis point headwind from COVID in the quarter, with the impact, I think, concentrated in December. So maybe a bit higher as we think about what the headwind was exiting the year. Could you maybe talk about how the impact in January as compared to what you experienced in December? And can you maybe elaborate on what you've seen in recent weeks? I'm just looking for a sense of maybe where January is trending and kind of what you're assuming for the balance of the quarter to get you to the guidance that you gave for 1Q?

Nathan, look, we saw what we talked about in December, we had a rapid decrease through COVID. But what we've seen as we've gone into January is just a progressive improvement. And we feel good about that. We feel it's moving in the right way. It's in direct correlation. We track it around the country with what's going on with Omicron in certain states and certain regions. And remember, this is in just the United States. We've seen this all over the world. We see it in APAC, and we see it in Europe too when we track it.

Okay. And maybe just building on that at a high level, Joe, do you feel like the slowdown, I guess, is primarily a supply issue, just given the practice closures and lockdowns and staffing issues that you cited versus a demand issue? Because I think in your prepared remarks, you also mentioned some impacts from inflation and less stimulus. So I was just curious to kind of get your thoughts there.

No, we don't see this as a demand issue. I mean, we look at the market as we always have. That's why we reasserted our 20%, 30% growth rate for this year. So this is not a demand equation issue or you call it a supply, but I'd call it demand from a patient standpoint. We just see it's patients and doctors in the sense of cancellations, availability and all those things that COVID has impacted around. So we remain very confident. That's why you see us continue to make investments, the things we announced today. We feel really good about the business. We just have to get through this first quarter and what we talked about, and we'll move on. We feel really good about it.

Could you provide some insights on your Q1 planning assumptions and guidance for 2022? Joe, you mentioned improvements in early January. Do you think this sluggish recovery will be resolved by the end of the quarter? Will Q2 mark a turning point that helps you achieve the 20% to 30% growth you've discussed? Additionally, there seems to be a notion that some of the growth during the pandemic was unusually high, and now we are adjusting to that. How confident are you that once staffing issues are addressed, the demand and growth drivers you are implementing in your core markets will lead to a sustainable growth trajectory in 2022, rather than just adjusting for pandemic-related growth? I apologize for the lengthy two-part question, but I would appreciate your thoughts on it.

We understand the basis of your question, Matt. That's not a problem in that sense. Look, as I mentioned before, we're really confident in demand equation in the sense of Clear Aligners and Invisalign. What we're experiencing right now is obviously somewhat of a slowdown in our order demand pattern based on what we see through the virus that's going on around the world. As soon as that clears and we see it clearing around the world, and as I mentioned, we see January improving over December, we're very confident in demand models that we've expressed for this business over the last several years.

I believe you mentioned the increased investments you're making in marketing and sales capacity. How should we evaluate the effectiveness of these initiatives compared to previous efforts, and where do you anticipate these efforts will impact our progress as we consider the year ahead?

Yes. I mean the pacing of the year, I mean we continue to invest, as we mentioned, John mentioned, I mentioned too in marketing. Where we invest? We understand the returns that we get, no matter what the country is or what kind of media we use in order to go after consumers. So we've been very consistent in the sense of that investment. And we move money around based on where we see the most opportunity. John, anything to add?

As we mentioned, we added some sales resources in Q4 to get ahead of sales territories and changes. We saw that impact in Q4, and it positions us well for growth as we enter this year. We are making ongoing investments to drive the greatest returns, and that remains our focus.

Okay. So it sounds like maybe no change in sort of the pacing that we've been seeing before. Maybe as a follow-up, I know you obviously highlighted that the total growth of the company would be in your 20% to 30% range. Do you also see that the case growth on a year-over-year basis would be above 20% as you look out at this point?

We'd expect them to be similar. When we talk about 20% to 30%, we're talking about revenue for the entire company, but they would be similar from an outlook standpoint.

Maybe just the first one. The outmargin compression year-over-year, the 24.7-ish gap that is to the 24%. Maybe you could talk to that, John, I was just going to say it's a gross margin thing with scanners likely to grow much faster than case vol. But to Elizabeth's question, it seems like you expect both to be within the guardrails of 20% to 30%. So is it more a function of you guys just sort of, call it, running a little bit harder on the OpEx line to drive that case volume and why we would see that year-over-year OM compression. Again, I'm just sort of referring gap-to-gap for apples-to-apples?

I believe that our ongoing investments will enable us to grow in this market. Overall, we anticipate the GAAP rate to be around 24% for 2022, and we will reassess and provide updates as needed. We are set to launch our Poland facility in 2022, which will slightly impact our gross margin, and this will also reflect in our operating margin. These are the initiatives we are pursuing, but they align with our usual practices.

Okay. Heads up this next one is going to be long, probably two parts. But maybe can you just get people comfortable with the fact that if you look at your 2Q, 3Q, 4Q '21 case files and the implied guidance for 1Q, to get to 20% to 30% case volumes for the year, you're going to have to rip sequentially in 2Q, 3Q, 4Q of '22. Maybe if you could talk to that? And then the other sort of third question, if you would admittedly is I'm confused on the 3 points. So if 4Q was impacted by 3 points of growth, why don't you we capture, I don't know, 2 or 3 points of that in 1Q '22? Where are those cases going if they're not showing up in the next possible quarter?

I'll begin with the last part of your question, Jon. Considering the global situation with Omicron, its effects are being felt at varying rates in different regions. For instance, the Northeast U.S. seems to be affected first but also takes longer to recover. Other areas of the country experience impacts subsequently. The recovery isn't instantaneous; it relies on when people can return to work, specifically in medical settings, as well as when patients feel confident enough to visit. Therefore, we don't expect immediate effects. Reflecting on what we learned from the earlier stages of COVID, we understand that there is an initial decline followed by a recovery phase, which is how we view the recovery moving forward.

John, on your other part about you have the rest of the year, we understand that. I mean we've modeled it out. Remember, our comparisons are a little better in the second half than they were first half when you look at what we did in 2021 in the first half of the year. So look, we wouldn't make that prediction if we didn't think it was feasible based on what we've seen and what we've modeled.

Just a couple of questions here for me. I guess one, John, in 2021, you guys were talking about being within your LRP, but at the upper end of that, do you want to put any qualifiers on kind of the LRP for 2022. It feels like kind of low end, given where 1Q is starting. But one, do you want to put any qualifiers around where within that LRP you'd expect to be? And two, just to go back to the last 2 questions again. I feel like I'm talking to my 10-year-old kid here, so apologies, but I'm going to give you one more chance. Do you feel like case shipments can still grow within that LRP this year too, not just revenue because you've got some of the new products you're selling, plus you've got faster iTero growth than that, but case shipments also can be within that 20% to 30% LRP. I just want to make sure I'm hearing that correctly.

I can address both of those, Jeff, regarding the 20% to 30%. We are not going to specify a high or low on that. We are reaffirming our 20% to 30%, consistent with what was discussed at Investor Day, despite the challenges we've mentioned regarding Omicron and other factors. When we review Invisalign case volume, we expect it to be at or above that range. Everything appears to be normal based on our expectations. Our average selling prices were quite similar to those in the previous quarter, assuming there are no significant changes due to foreign exchange or other unforeseen factors, and if that remains consistent, we anticipate being within that range as well.

Jeff, from a competitive perspective, there hasn’t been any significant change. Looking at the technology we announced this week, we believe we are advancing our capabilities. I’ve always maintained that competition does not impact us in terms of pricing, and our actions reflect that. However, competition helps to expand the market and raise awareness. In this competitive landscape, we feel we are performing well and maintaining our leadership. As we approach 2022, I don’t see any changes in competition compared to the past three years.

John, I have two quick questions for you. I believe you mentioned that the receivable days sales outstanding were up about 7 days year-over-year. Can you provide more details on that? Were there any additional incentives offered to practices or is there anything we should be concerned about in that regard?

Nothing to be concerned. We're in a fortunate cash position as a company to be able to generate a lot of CFOA and free cash flow. And in working with doctors to be able to give them more flexibility, sometimes we'll extend payments. But we've actually seen historically low amount of past dues as we've gone through this time period in 2021. So we feel very comfortable with that. It's just working with doctors to kind of meet their cash flow needs, but nothing out of the ordinary.

Okay. Great. And then one other one to clarify. I think you said that you expect the EBIT margin to be under 20% in the first quarter. Was that GAAP or non-GAAP?

That's GAAP.

Joe, just real quick, and I asked whether you can confirm you said January improved over December. I thought I heard you say that earlier in the call? Or is it just that the January trend line showed improvement as the month unfolded? Sorry for just clarifying that something nuanced like that here.

Yes, to clarify, Jason, the end of the month showed improvement compared to December. It's about how COVID spreads in different regions and how it impacts both staff and patients. As we progressed through the month, we observed a more positive trend than we had at the beginning.

Okay, I understand. As a follow-up to an earlier question, I would like to direct this to Joe or John. You frequently discuss the internal investments you're making in the business, and you've mentioned running a similar growth algorithm in 2022 as in previous years. We also have two case examples from the market: before COVID, many resources were allocated to accelerate growth in your team business, while in the past 18 months during the pandemic, adult demand has surged, growing faster than teen demand. My question is, as you went through your year-end planning and are clearly investing significantly in this business for 2022, how are you approaching it this year? Are you focusing on expanding the sales force, marketing plans, and so on? How are you considering the balance between adult and teen segments for this year?

It's Joe and Jason here. There hasn't been a significant change regarding the critical factors we believe we need to invest in to foster growth. The way we invest is crucial. When considering technology and aspects related to consumers, it's important to focus on specific areas of demand. However, we always maintain certain ratios in our business related to our investments, and we hold ourselves accountable to those ratios and performance from a profitability perspective. I want to emphasize the importance of having a strong sales force. We've mentioned hiring additional salespeople. Our consumer brand is vital for our growth, and we're becoming increasingly strategic about how and where we allocate our resources. Leadership in technology is essential in this field, which is why we're excited to share our recent advancements. We've been developing these programs for over three years, and they significantly enhance how doctors interact with patients.

And I would just add to that, Jason. We're investing with that return on investment in mind. That's how we look at our long-term growth model. And when we make investments, we have that in mind. In some countries, you're going deeper, you're adding more salespeople to get closer to doctors and really drive that utilization. In other areas where you don't have a direct sales force, you're just adding and just trying to get the breadth in there. And then we've been talking about a lot of the marketing activities and other things that we do to drive that awareness in some of those markets and coupled with the research and development investments. Some of it operations, again, to get closer to our customers like in Poland. So it's a multitude of investments, but we look at it with how do we generate the best return and there's multiple different ways that we do it across these functions.

Thanks, Jason. Operator, we'll take one more call, please?

John, you've talked about freight costs for a few quarters now. Any chance you're planning a price increase this year to help offset some of that? It's been a few years since you've taken a price increase?

Yes, that's a good question. We are noticing freight issues, similar to many other companies. We have several plans in place to enhance productivity. The operating team is well aware of our cost inputs and knows where we can improve productivity by getting closer to our customers, as we've discussed in Poland. Once we establish operations there, it will lead to freight savings. However, we haven't finalized any plans for a price increase yet. We'll assess the situation as we move forward, and our first discussions would be with our customers. We understand that pricing is crucial, and we are also very mindful of our customers' experiences throughout the COVID journey. So, currently, there are no plans in motion.

Over the years, Brandon, we've obviously seen that correlation, and we've communicated it to you in a sense if you sell more iTero scanners, you sell more Invisalign. And that's obviously, the front end of our digital system and it works for us really well. We just had to side the 50% because, one, you saw we had a very strong fourth quarter for iTero. And we always have strong fourth quarters. So this was exceptional in that sense. It was a good signal from the practices that we're dealing with that had to do with the day-to-day flow that you see from an Invisalign patient standpoint, it had nothing to do with their enthusiasm in the sense of embracing the digital environment that we're talking about. And so to see the number of sales that we had really in the last couple of weeks of the quarter, it was just a good signal for us. And we wanted to share that with you is that this market is embracing digital even when it's under pressure, and we're performing really well in that area.

Thank you. Thanks, everyone, for joining us today. We look forward to speaking to you at upcoming financial conferences and industry meetings. If you have any questions or follow-up, please contact our Investor Relations team. Have a great day.