Align Technology Inc (ALGN) — Q2 2023 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 second quarter 2023 financial results today via Business Wire, 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 August 9th. To access the telephone replay, domestic callers should dial (929)-458-6194 with access code 342791. International callers should dial 44-204-525-0658 using the same access code. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events, products, and 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 second quarter 2023 conference call slides on our website under quarterly results. Please refer to these files for more detailed information. With that, I'd like to turn the call over to Align Technology's President and CEO, Joe Hogan. Joe?

Thanks for joining us today. I’ll start with an overview of our second quarter results and highlight key points from our systems services and clear aligners segments. John will delve into our Q2 financial performance and share our outlook for the third quarter and the year overall. Afterward, I’ll summarize the main takeaways, and then we’ll open the floor for questions. I'm pleased to share that we had another strong quarter with revenues and operating margins that surpassed our expectations. The second quarter results show positive trends across regions, particularly in teen and younger patient volumes, boosted by increasing submission rates and utilization, along with ongoing growth from Invisalign First. In the Teen segment, which accounts for a significant portion of the 21 million annual orthodontic case starts, 195,000 teens and kids began treatment with Invisalign clear aligners in the second quarter. This marks a 7% increase from the previous quarter and a 10% increase year-over-year, representing the highest growth rate in the teen segment since 2021. In Systems & Services, second quarter revenues reached $169.5 million, showing a sequential increase of 10.5% but a slight decline of 1% year-over-year. The sequential rise in revenues reflects increased scanner volumes and higher service revenues, driven by sales of certified pre-owned scanners and subscription revenue growth. Year-over-year, services revenue grew mainly due to higher subscription income from a significant number of iTero scanners in circulation. Additionally, we observed growth in non-system scanner revenues associated with our certified pre-owned offerings and our scanner leasing and rental programs. In Q2, total clear aligner revenues were $832.7 million, up 5.4% sequentially and 4.3% year-over-year. This sequential growth rate aligns with our historical average and shows growth across all regions. Non-case revenues in Q2 totaled $80 million, marking a 6.2% sequential increase and an 18% year-over-year increase, supported by ongoing demand for Vivera retainers and our Invisalign Doctor Subscription Program, a monthly subscription-based aligner service. The DSP program effectively meets a vital need for experienced Invisalign doctors, allowing them to attract new patients and enhance the overall treatment experience. Launched in the U.S. and Canada in 2021, we expanded DSP to Spain and the Nordic countries in Q2 2023, with plans to introduce it in France and the United Kingdom later this year. We also extended DSP to DSO partners, acknowledging the value that our subscription model provides in terms of pricing and flexibility for their patients. Over the last two years, the DSP program has gained significant momentum, and during Q2, we shipped over 18,000 DSP touch-up cases in North America, a notable increase from 15,500 in Q1 and more than double the volume from Q2 last year. Despite its importance to our growth, it should be noted that DSP touch-up cases are not included in the overall metrics and case volumes unless specified. In Q2, total clear aligner volumes rose by 5% sequentially and 1% year-over-year, while including DSP touch-up cases, volumes increased by 5.4% sequentially and 2.4% year-over-year. For the Americas, clear aligner volumes showed sequential growth across ortho and GP dentist channels, with increased teen case starts fueled by Invisalign First and a rise in adult patients from the GP channel. North America also saw increased adoption of our Invisalign Comprehensive three and three product, contributing to sequential volume growth. While North American ortho utilization saw a slight year-over-year decline, it was up sequentially as per our Q2 earnings slides. EMEA clear aligner volumes grew both sequentially and year-over-year, driven by adoption of Invisalign Moderate and Comprehensive products, along with rising teen case starts propelled by Invisalign First and our new Teen case packs. Sequential growth in clear aligners was strongest in Iberia, Italy, DACH, and Turkey. In APAC, clear aligner volumes rose both sequentially and year-over-year, reflecting positive trends in key markets like China, Japan, Taiwan, Korea, and India, with increased submissions and utilization particularly for teen patients. During Q2, we progressed with the rollout of the Invisalign Comprehensive three and three product in APAC, now available in Hong Kong, Korea, Taiwan, and India, with a launch planned for China in Q3. We are satisfied with the growing adoption of the three and three products in the region. Recently, we held the 2023 Invisalign APAC Summit in Singapore, gathering nearly 1,000 orthodontists, dentists, and clinic staff from across 18 countries to showcase our products and highlight digital transformation in improving patient experiences. Teen orthodontic treatment remains the largest market segment worldwide, and we aim to increase market share from traditional braces with focused marketing initiatives. Teen clear aligner cases rose by 7% sequentially and 9.7% year-over-year, with notable growth driven by increased submissions in APAC and EMEA regions. Our Teen Case Packs, launched last year in North America and expanded in France and Scandinavia this year, showed strong sequential and year-over-year growth, particularly in EMEA. Invisalign First also saw an increase across all regions, enhancing adoption of Invisalign treatment for younger patients. Among DSO customers, clear aligner volumes grew primarily in the Americas, with the growth rate outpacing that of non-DSO doctors, showcasing the benefits of our subscription program. Invisalign remains a trusted brand globally, and our marketing efforts generated over 10.3 billion impressions and attracted nearly 31 million visits to our website in Q2. We are deeply committed to raising awareness about the Invisalign brand through investments in top media platforms and collaborations with social media influencers. Our campaigns in the Americas targeted reaching young adults and teens, resulting in substantial brand interest and visitors to our websites. In EMEA, we collaborated with new influencers, particularly highlighting testimonials from young adults. Our consumer advertising investments in APAC also yielded impressive results, leading to significant increases in website visitors and impressions across various markets. The adoption of the My Invisalign consumer app continued to rise, with 3.1 million downloads and over 350,000 monthly active users. We also saw increased use of other digital tools like ClinCheck live update, helping doctors manage treatment modifications more efficiently. The Invisalign practice app is being adopted by 88,000 doctors, who uploaded over 5 million photos in Q2. I’ll now turn the call over to John.

Thank you, Joe. Now, let's discuss our Q2 financial results. Total revenues for the second quarter reached $1.002 billion, marking a 6.3% increase from the previous quarter and a 3.4% rise compared to the same quarter last year. On a constant currency basis, Q2 '23 revenues were positively influenced by foreign exchange, adding approximately $1.3 million or about 0.1% sequentially, while year-over-year, it faced a negative impact of roughly $19.4 million or around 1.9%. Clear aligners generated Q2 revenues of $832.7 million, reflecting a 5.4% sequential increase, driven mainly by higher volumes, increased non-case revenues, and elevated average selling prices. Year-over-year, clear aligner revenues were up 4.3%, attributed mainly to higher average selling prices, additional non-case revenues, and increased volumes. In Q2, the average selling prices for comprehensive Invisalign treatment saw a sequential decline but a year-over-year increase. Sequentially, these prices were influenced by larger discounts and a shift in product mix towards lower-priced items, partially countered by price hikes. Annually, the uptick in comprehensive average selling prices is due to price increases and more additional aligners, although it was partially offset by product mix shifts, larger discounts, and adverse foreign exchange impacts. For non-comprehensive treatments, average selling prices rose sequentially and year-over-year. The sequential growth in these prices resulted from reduced discounts, more additional aligners, price hikes, and favorable foreign exchange. Year-over-year, the increase is attributed to higher average prices and additional aligners, partially offset by shifts in product mix, larger discounts, and negative foreign exchange effects. In Q1 '23, we announced the launch of our Invisalign Comprehensive three-and-three products in most markets and continued to expand into additional markets. This new configuration provides doctors with comprehensive treatment, including three additional aligners within three years post-treatment, as opposed to the previous offering of unlimited additional aligners over five years at the 2022 price. Our data indicates that, on average, Invisalign doctors complete comprehensive treatments with two or fewer additional aligners. We are encouraged by the ongoing adoption of the Invisalign Comprehensive three-and-three product, expecting it to grow, giving doctors the flexibility they need while allowing us to recognize more revenue upfront, with deferred revenue being acknowledged over a shorter timeline compared to our traditional product offerings. As revenues from subscriptions, retainers, and ancillary products expand globally, traditional metrics focusing solely on case shipments will represent a smaller percentage of our overall growth. In our earnings release and financial slides, we have included our total clear aligner revenue per case shipment, which we believe is a more indicative measure of our overall growth strategy. Q2 '23 clear aligner revenues benefited from favorable foreign exchange of approximately $1.2 million or about 0.1% sequentially. Year-over-year, clear aligner revenues faced a negative impact of approximately $16.3 million or around 1.9%. The clear aligner deferred revenues on our balance sheet increased by $13 million, or 1% sequentially, and rose by $138.6 million, or 12.2% year-over-year, to be recognized when additional aligners are shipped. Q2 '23 systems and services revenue totaled $169.5 million, up 10.5% sequentially, primarily from higher scanner volumes, increased revenues from our certified pre-owned program, and more service revenue due to a larger base of scanners sold, though this was partially offset by decreased average selling prices. Year-over-year, systems and services revenue decreased by 1%, mainly due to lower scanner volumes and unfavorable average selling prices, though higher service revenues from sold scanners and increased revenues from our certified pre-owned and leasing programs partially offset this decline. Q2 '23 systems and services revenue were positively influenced by foreign exchange by approximately $0.1 million or about 0.1% sequentially. Comparatively, year-over-year, systems and services revenue faced a negative impact of around $3.1 million or about 1.8% from foreign exchange. Systems and Services deferred revenues on our balance sheet decreased by $2.3 million or 0.8% sequentially, primarily due to a reduction in the deferral of service revenues from scanner purchases but rose by $8.6 million or 3.3% year-over-year, mainly from increased scanner sales and service revenue deferrals tied to scanner purchases that will be recognized evenly over the service period. As we expand our scanner portfolio and introduce new products, we are creating more opportunities for customers to upgrade, trade-in, or acquire refurbished scanners in certain markets. Consequently, our business model is evolving. We anticipate continuing to grow our programs, offering certified pre-owned units for purchase, and adapting to customer preferences. Our capital equipment strategies are evolving to meet the digital transformation needs of our customers and DSO partners, reflecting an ongoing progression in our equipment business alongside the growing scanner base. Now, let's discuss gross margin. In the second quarter, our overall gross margin reached 71.2%, which is a 1.2-point increase sequentially and a 0.3-point rise year-over-year. This overall gross margin was adversely affected by approximately 0.5 points due to foreign exchange on a year-over-year basis. The gross margin for clear aligners in the second quarter was 72.4%, up 0.7 points sequentially, driven primarily by a lower mix of additional aligners, favorable manufacturing variances, and improved average selling prices. However, year-over-year, clear aligner gross margin saw a decline of 0.9 points, mainly due to increased manufacturing costs as we ramp up operations at our new facility in Poland and a greater mix of additional aligners, partially offset by higher average selling prices and lower freight costs. The gross margin for systems and services in Q2 was 65.1%, up 3.5 points sequentially, due to decreased service and freight costs, though this was partially countered by lower average selling prices. Year-over-year, systems and services gross margin increased by 5.3 points, primarily due to lower service and freight costs alongside higher service revenues, despite reduced average selling prices. Q2 operating expenses were $541.7 million, which is a sequential increase of 2.8% and an 8.5% rise year-over-year. Sequentially, operating expenses increased by $14.5 million, mainly due to higher consumer marketing and incentive compensation expenditures. Year-over-year, operating expenses rose by $42.3 million, driven primarily by higher incentive compensation and ongoing investments in sales and R&D, partially offset by controlled marketing and advertising spending as part of our cost management strategy. On a non-GAAP basis, excluding stock-based compensation and amortization of acquired intangibles related to specific acquisitions, offset by restructuring and other charges, operating expenses were $505 million, reflecting a 2.9% increase sequentially and an 8.4% rise year-over-year. Our second-quarter operating income amounted to $171.9 million, yielding an operating margin of 17.2%, which represents a 3-point sequential increase and a 2.2-point decline year-over-year. This sequential uplift in operating margin is mainly due to higher gross margins and a favorable foreign exchange impact of 0.1 points. The year-over-year drop in operating margin is predominantly due to investments in our go-to-market teams and technology, along with a negative foreign exchange effect of approximately 1.1 points. On a non-GAAP basis, which excludes stock-based compensation and amortization of intangibles tied to certain acquisitions, offset by restructuring and other charges, operating margin for the second quarter stood at 21.3%, with a 2.8-point sequential rise and a 2-point year-over-year decrease. The net result of interest and other income and expenses for Q2 was a loss of $0.3 million, compared to a $1.1 million income in the first quarter and a loss of $14.6 million in the same quarter last year, primarily due to foreign exchange. For Q2, the GAAP effective tax rate was 34.8%, consistent with the first quarter and slightly lower than 35% in the previous year's second quarter. As a reminder, we modified our methodology for calculating our non-GAAP effective tax rate in Q4 2022, basing it on a long-term projected tax rate and implementing this change retrospectively from January 1, 2022. Our non-GAAP effective tax rate for Q2 was 20%, reflecting this new methodology. Net income per diluted share for the second quarter was $1.46, representing a $0.32 sequential increase and a $0.02 rise compared to the previous year. Our EPS was negatively influenced by $0.02 sequentially and $0.15 year-over-year due to foreign exchange. On a non-GAAP basis, net income per diluted share was $2.22 for the second quarter, reflecting a $0.40 sequential rise and a $0.07 annual increase. Note that the preceding year’s 2022 non-GAAP net income per diluted share reflects the Q4 2022 adjustment in our non-GAAP effective tax rate methodology. Turning to the balance sheet, as of June 30, 2023, cash, cash equivalents, and both short-term and long-term marketable securities totaled $133.8 billion, which is a sequential increase of $112.4 million and a $56.6 million rise year-over-year. Of this $133.8 billion, $314.3 million was held domestically, while $719.5 million was held internationally. In Q2, we executed a $75 million equity investment in Heartland Dental, a multi-disciplinary DSO operating GP and ortho practices throughout the U.S. During Q1 2023, we communicated that our Board approved a new $1 billion stock repurchase program to follow up on the previous $1 billion initiative. Currently, there is $1 billion still available for repurchase under the 2023 program. The Q2 accounts receivable balance was $908.4 million, indicating an increase sequentially. Our overall days sales outstanding was 81 days, reducing by about two days sequentially and four days year-over-year. Cash flow from operations for Q2 registered at $251.9 million. Capital expenditures for this quarter amounted to $58.5 million, mainly tied to ongoing investments aimed at enhancing aligner manufacturing capacity. The free cash flow, calculated as cash flow from operations minus capital expenditures, was $193.3 million. Now, regarding our outlook. As Joe highlighted earlier, we are satisfied with our Q2 outcomes. Although the macroeconomic environment remains uncertain, we have observed improvements in the operating landscape and consumer demand signals affecting our outlook. For Q3 2023, we project our global revenue to be between $990 million and $1.01 billion, which signifies about a 12% year-over-year increase at the midpoint. We expect our GAAP and non-GAAP operating margin for Q3 2023 to tick slightly upward from Q2 2023 as we strategically focus our investments on R&D and market activities to drive growth. For the full year of 2023, assuming no unforeseen circumstances arise, we estimate our worldwide revenue to be between $3.97 billion and $3.99 billion, indicating about a 7% year-over-year increase at the midpoint. We also expect our GAAP operating margin for the full year of 2023 to be slightly above 17%, and our non-GAAP operating margin to exceed 21%, reflecting a 1-point improvement from our earlier guidance in April 2023. For the year, we anticipate our capital expenditures to be around $200 million, primarily related to construction improvements and manufacturing capacity to support ongoing international growth. With that, I will pass it back to Joe for final remarks.

At our continued growth despite the economic slowdown in uncertain environment. Q2 results demonstrate our resilience and adaptability. While we cannot predict future economic conditions, we're confident in our ability to focus and execute on our strategic growth initiatives. As a leader in digital transformation, we offer a powerful suite of innovative digital tools that make up the aligned digital platform, which provides a seamless end-to-end digital experience for doctors and their patients. Innovations launched over the last year include ClinCheck live update for 3D controls. This enables doctors to generate modified Invisalign patient treatment plans in real time, reducing modifications that used to take weeks to as little as two minutes. Improving practice productivity while also improving the quality of treatment plans. Invisalign Personal Plan, or IPP streamlines the treatment planning process and helps doctors achieve their desired treatment plans more consistently and efficiently. Invisalign Smile Architect allows general dentists to integrate clear aligner therapy into their comprehensive treatment plans by combining tooth alignment and restorative planning in a single platform. Invisalign Virtual Care equips doctors with a next-generation remote monitoring solution that has new artificial intelligence-assisted capabilities to streamline their workflows. Cowen being computed tomography or CVCT enables doctors to visualize the patient's roots as part of the digital treatment planning process. Invisalign Outcome Simulator Pro expands Align's existing Invisalign outcome simulator technology and adds the benefit of the company's ClinCheck in-face visualization tool that combines a photo of a patient's face, with their 3D treatment simulation, creating a truly personalized view of how their new smile will look. Itero-exocad Connector integrates iTero intraoral camera and NIRI images with exocad DentalCAD 3.1 software, and allows dental professionals to visualize the internal and external structure of teeth. In addition to these and other incredible innovations in the coming years, we'll continue to build a digital platform and add new capabilities to improve clinical outcomes and elevate the patient experience to drive continued practice growth and positive patient experiences. Thank you for your time today. We look forward to speaking to you at our upcoming Investor Day on September 6, where we'll share with you our views about the incredible market opportunity we have and how Align is uniquely positioned to continue to lead the transformation of the digital orthodontic industry. Now I'll turn the call over to the operator for questions.

Thank you. Good afternoon, guys. Hey Joe, congrats on a nice bounce back quarter here. I wanted to start really on the teen market. Obviously, that's where we all focus long-term on the business. But that 9.7% year-over-year growth, when I look back last year, it was your first quarter in a long time of negative year-over-year growth in teens. So you had a bit of an easy comp there, although, obviously, '21 was a fantastic year. So I guess I'm trying to figure out in this economy, when I think about comps from '21 that were so tough, when I think about competition that's out there, where do you think that 9%, 10% teen growth is relative to where you expect to be normalized? Are we still expecting a nice improvement of this over the next few years back to kind of mid, upper teens, something like that? I just would like to get your views on that.

Jeff, the teen market is crucial for us, as I mentioned with the 21 million case starts, where around 75% to 80% are teens. I see the sequential growth in this segment as very promising. We had a solid figure to compare, as you've noted. Our Invisalign First product line is performing exceptionally well and continues to experience remarkable growth globally in all three regions we operate in. Our various teen pack business models contribute positively to this growth as well. Looking ahead at our upcoming technology enhancements and products, they are also well-aligned with the needs of the teen market. The potential growth and market penetration figures you brought up align with our investments and our outlook in this space. However, we must acknowledge that it's been challenging to persuade orthodontists to fully engage with the teen segment. That said, our leading doctors primarily use Invisalign. Our aim is to introduce this new technology while ensuring doctors feel comfortable with the procedures and clinical outcomes. I believe we've made significant strides in this regard.

That's helpful. Thank you. And then just would like an update maybe on China. Obviously, third quarter tends to be a big teen season there, but we're also seeing some mixed macro feedback on China as a whole kind of from an overall economic standpoint. So just what's kind of current tenor of business in China? And just remind us how bad were things in third quarter last year in China? We just kind of lose track of the COVID shutdowns and all that, but should the third quarter be an easy comp in China? Or were things opening back up there before we got to the beginning of this year where they shut back down again? Thanks.

Yes. China, obviously, from an economic standpoint, Jeff, we watch that closely as everybody does, too, but we have to take it as it is right now. And we had a good quarter. We had a good start in the first quarter, too. And so we're seeing good sequential momentum, an improvement in that sense in the business overall. Obviously, when you look at the third quarter, I mean, we all know you watch our stock closely. We know the third quarter is a huge teen market in China, as I mentioned in the script, too. And we're really good on that, but we feel very confident in the sense of our positioning there and where China stands right now. I can't comment on future economic activity there with any more accuracy than you can. But what we've experienced in the second quarter and what we see going into the third, we feel good about it.

Thank you.

Good afternoon. Hi, Joe. I'll start on innovation. And Joe, going into '23, you called out this year is one of the biggest for Align in terms of innovation when we think about the company's history. At the end of the prepared remarks, that was really helpful. You laid out a handful of innovations. Where are you with the next wave? And when I say the next wave, any details that you can give with paddle expansion in terms of timing in the U.S., maybe if you can elaborate a little bit on the limited rollout in Canada to date. And is there anything else that we should expect more near term, i.e., maybe the next three to 12 months before some of those longer-term aspirations come into play on direct printing? And then I'll ask my follow-up.

Jon, the Invisalign Palate Expander has made significant progress. We've recently made some advances in Canada and received positive feedback on our product line. When the investor conference arrives, we will provide a more comprehensive discussion about the status of that product and our commercialization strategy. Overall, I want you to know that we are capable of producing it. We have an effective manufacturing process in place. However, in our business, simply making the product is not enough; we need to scale our operations to reach millions. That is our current focus: figuring out how to scale and roll this out. There are many regulatory requirements we must fulfill in each region since it is a new device, but I am optimistic about that. Jon, you are aware that our development can be connected to both product production and the software we’ve previously discussed. IPE encompasses both of these areas; it includes new software and treatment planning, alongside a 3D-printed device that we have not launched before. So, as we concentrate on scaling up, we will have many more details for you when we meet on September 6.

Okay. That's helpful. And then maybe as my second question, sort of one of those famous two partners. John, to start with you, can you elaborate on the average selling price for comprehensive Q-over-Q? I believe you said it was down Q-over-Q, a little confused because I think you would have had the full quarter of the price increase on the 3x3 and the comprehensive. So if I've got that right, maybe if you can tease out why it would have been down Q-over-Q. And then, Joe, the upside for the cases, I'm packing it around 10,000 relative to the implied guide that you gave back for Q2. I've got the U.S. cases essentially in line with our estimate. International seems to have really been the driver of the upside. And maybe to build on Jeff's question, can you just give some more details on where the outperformance was? Was it China? Was it EMEA? Where do you see maybe the better-than-expected results specific to those international regions? Thanks, guys.

Yes. Just first on the average selling price, Jon. Yes, the comprehensive was down slightly, just a reflection of some of the product mix that we had as well as some of the discounts that we have, partially offset by price decreases. So nothing out of the ordinary there, we actually saw an increase on a sequential basis for non-comprehensive. But the comprehensive was just more mix.

Yes, you're right. When looking at the regional performance, EMEA and APAC stood out. In EMEA, as I mentioned earlier, Iberia performed well, the U.K. did well, and in the Nordic region, we just introduced DSP among other things, which we are excited about. The growth among teenagers in these areas was solid overall. It reflects a strong performance. Regarding the EMEA economy, despite the ongoing uncertainty related to the situation in Ukraine, European countries have managed to stabilize their economies. We're also noticing some improvement in consumer sentiment, which is evident in our numbers. In APAC, China showed good year-on-year growth, and Japan performed very strongly for us, along with Korea and various parts of Asia. Overall, there are significant improvements in both of these regions, particularly in the teen segment I mentioned. We're seeing good sequential progress as well.

Next question please.

Great, good afternoon. Thanks for the questions. Hey Joe, hey John. I guess, could you maybe just talk about how adult cases performed relative to your expectations, improved slightly, but I think still down a little bit year-over-year. And how are you thinking about the biggest swing factors that could impact revenue in the back half? Does the guidance kind of just reflect a continuation of the environment that you saw in 2Q? And is there any kind of part of the business that you're watching specifically, either teen versus adult or certain markets that you feel are especially big swing factors in the back half?

Yes, I'll take that one, Nate. This is John. When you look at the commentary that we gave, we saw improving trends as we went into the second quarter. We see that in the results. And our guidance reflects that. It shows up in Q3, and it also gives us the confidence to talk to guide for the total year. So that's how we've kind of factored things in and looking at the normal metrics in indices that help us with that. As far as adult versus teen, as we said, teen season now. We saw good results in Q2, and we expect that to continue in Q3. As we've said, China is a big market, U.S. a big market in Q3, and we expect that to continue. And adults are important for us too. We have a lot of capabilities to be able to go to those general dentists and try to work where those adults might be wanting to come into treatment and be able to help provide for them as well as our orthodontists. So we feel good about the efforts that we have to try to improve both teen and adult as we go through this year.

Okay, great. And just to clarify on the touch-up cases, it seems that this is impacting the North America ortho utilization metric. However, if we exclude that or include the touch-up, it would have shown an increase year-over-year. I'm interested in understanding what portion of those 18,000 touch-up cases you believe would have been cases in the past before the DSP, just to get a sense of what that change might look like.

Yes. The 18,000 touch-up cases we discussed are predominantly lower-stage products, likely in the range of 5 to 10 stages, leaning more towards the lower end. We are witnessing significant growth in the DSP program, which has doubled since last year. We wanted to highlight the increasing importance of this trend and share insights on year-over-year and sequential comparisons. At Investor Day in September, I will provide detailed information about the origins and significance of this program moving forward, as we will include these cases in our future considerations. Overall, we observe that the DSP program generates additional volume for us. The physicians continue to perform comprehensive cases while also engaging in these lower-stage touch-up cases and retention, which we believe is beneficial for our doctors.

Great, thank you.

Thanks, Nate.

Hello, thanks for taking the question. I just wanted to follow up first on the DSP program. If we're doing our math correctly, it seems like most, if not all of the year-over-year increase in case volumes is actually coming from the DSP program. So one, is that correct? And two, maybe if it is, can you talk about where do you think the mix goes eventually to DSP? And is DSP at this point accretive to your case volumes? Or are you seeing accounts kind of switch what they would have been doing as kind of normal base volumes into DSP?

We are actually seeing the DSP program as beneficial. We are noticing that doctors who previously made aligners themselves or relied on labs are now switching to our comprehensive cases while also providing us with DSP cases. It's important to note that most of the DSP cases, particularly in the retention segment, come from the retention we are providing. Additionally, there are touch-up cases, which number around 18,000. This aspect has positively influenced our overall performance by approximately 1.5 percentage points. We reported a volume increase of about 0.9%, which would have risen to 2.4% had it not been for this factor. Therefore, from any perspective, it is beneficial, especially considering the margins it generates. The margin from this program is among the highest in our product portfolio due to the straightforward cost of service. We recognize all the revenue immediately upon shipment without needing additional aligners.

Okay. And then one other second on......

Other clarification on your question was whether you put DSP or not, we were up year-over-year in our numbers.

Got it.

So I'm not sure, go ahead.

Got it. That's helpful. The next question is about teens. Joe, you mentioned earlier that there are challenges in the teen market and the difficulty in increasing our share within existing accounts. Could you explain what the main challenges are right now? What makes it tougher to gain additional share in the teen market? Also, what strategies are you focusing on in the next six to 12 months to enhance that share? Thanks.

Hey Brandon, in general, when you look at orthodontic workflows, if they're not completely digitized in the sense of what they do and you're kind of in a down cycle right now with orthodontists and their challenge. They feel like on a wire bracket side, they can just make more money with wires and brackets versus Invisalign because the raw material costs are 3.5 times. Now if you're fully digitized your workflows and everything else, obviously, you make more money with Invisalign. But I think in these kind of challenging economic times, it's just more difficult to move the orthodontic community over to the clear aligner piece because they're just used to the workflow of what we have with versus wires and brackets. I can say Invisalign First seems to be an exception to that. In the sense of how Phase I kind of patients are treated. That's not a constant when you look at what's going on in the orthodontic industry. But we see a lot more interest in Phase I with Invisalign First than we thought before. I think that's going to help to be a span breaker for us in this whole thing. In the future, there's no doubt to us in the sense that clear aligners of the future, no white spot lesions, obviously six months faster than a normal kind of a treatment, much easier for patients. We know all those things. When you ask what the biggest issues are, they're not basically clinical anymore. It's about workflow, workflow, and confidence in orthodontic practice.

Hi everyone. Congratulations on the quarter and thank you for the question. I want to clarify that I'm very pleased we have a full-year guidance. What I wanted to ask was what you observed in the end markets or in your results that gave you the confidence to transition from the recent quarterly guidance to this longer-term outlook.

Yes, I'll give you the high-level view, and I'll turn it over to John, Elizabeth for the ground thing. But I mean, obviously, we had a good second quarter, and we feel we can see through to the third quarter whatever. At that point, too, like we said, with the qualifiers, is continued economic situation that we see now, we feel confident just based on what we understand from a cyclical standpoint to be able to call the fourth quarter. And so look, we're still in very difficult economic times and uncertain times. But with the second quarter out of the way and with what we talked about improvement, particularly in a sequential sense, we just felt like I mean we're going to give it to you, you're going to make it up. So we might give the best guess we have. But John can give you more.

Yes look, I can't add much more to that. We've got now a couple good quarters behind us. We've seen stability kind of turning to improving trends. It's a good position to be in. We continue to see that into the third quarter. As Joe said, it's not great, but it's better than it has been from an overall economic standpoint. And so based on the order trends and kind of how things are looking, we felt comfortable about Q3 and translate that to total year as well.

Got it. And just as a follow-up, are you guys taking any different approach to sort of like, sales either so from like a personnel perspective or a focus versus earlier in the year? I know sometimes you guys have sort of been ramping reps. And then that had sort of flatlined. So I just wanted to understand sort of like how you're thinking about that as we go into the balance of the year and sort of set up for 2024?

Elizabeth, I'd say our sales practices are consistent and dynamic in the same way, consistent in the sense of the number of salespeople we have, how we train those salespeople, how they go to market. We obviously offer different products in different areas. We split up orthodontics salespeople and general dentistry salespeople specifically because it's just a different kind of a call. So there's no I'd say, big change in the sense of how we go to market. And obviously, our iTero sales force works really closely with the Invisalign sales force and overlaps in some areas. But I might be missing your question, but there's no, I'd say, material changes going on from a sales as salespeople, a number of salespeople standpoint and specifically the way we approach the market.

Okay, thank you guys.

Thanks for taking my questions. I have a couple of quick ones. One is related to the results from the first quarter to the second quarter and your outlook for the third quarter. Is it safe to say that you are returning to the usual seasonality seen historically? It has been a bit volatile the last couple of years, but it seems like we are getting back to that routine. Should we consider this our base case approach moving forward?

In terms of our guidance from Q2 to Q3, we are seeing typical seasonality with performance being flat to slightly up compared to Q2. However, given the overall macro uncertainty, we are not fully ready to state that we have returned to normal seasonality. The short-term guidance we provided reflects our current observations.

Okay. And then the second one would be on the Analyst Day. I mean, a couple of pieces there. One is, could you just what goes into the thought process that now is the right time to have the Analyst Day? As you say markets are still pretty uncertain. There's still some volatility, visibility is not fully back. So kind of what goes into that decision? And then related to that, the long-term guide, is that something you're going to be addressing just as we start thinking about modeling 2024 and going forward from there?

We usually do this about every two years, Michael. It is a really sophisticated algorithm we use to figure that out, but it's about every two years. And we think it's just about time for that too, from the standpoint of just to reinitiate the investor base in the sense of where we're investing, how we see the marketplace and just a good summary of a lot of the questions that have been asked.

Yes, sorry. Is there one more question?

Thank you. Good afternoon, and I appreciate you taking my questions. I wanted to highlight a few key points from the quarter. Firstly, it's encouraging to see a sequential increase in the number of doctors we ship to, along with higher utilization across all channels we serve. While I understand you don't provide detailed figures on the number of doctors shipped in the U.S. or international markets anymore, can you share if the increase in doctors is primarily due to China reopening and expansion in the Asia-Pacific region, or have you also seen an uptick in users in your North American and EMEA channels?

Yes, Jason, you're right. We don't give that level of detail, but we saw more doctors that we ship to in APAC related to China, as you said, and we saw it in other regions as well. So we are pleased with the number of doctors that we're shipping to. It's a reflection of our products and what they want to do and then as well, being able to be up on a utilization basis is a good metric as well.

Okay. I guess maybe just to follow-up there, John, real quick. Can you confirm whether or not you saw that increase in North America in Orthos or GPs or both?

Yes, we saw improvement for North America as well.

Okay, all right. Great. And then I know we got some good details on some of your APAC markets, including China. But I guess wondering if you can talk about just monthly cadence of U.S. trends throughout the quarter and maybe even here in July. Some of the work we've done shows that there's maybe a bit more mix trends in April and June, May was pretty strong. I guess just wondering how that drives what you were seeing in your case shipment trends throughout the quarter? And then same question for EMEA, if you could elaborate just on how the quarter unfolded in that region? Thank you.

Yes, we're not providing specific month-by-month details. The results indicate where we stand, and they align with our guidance. Without diving into specifics by country or region, it's challenging to provide that level of detail. However, I believe the results from Q2 and our discussion of the sequential improvement and its implications for guidance convey the necessary information.

Okay, fair enough. Thanks.

Thanks, Jason.

Hey thanks guys.

Hi, Brandon.

You mentioned scanner average selling prices as a bad guy in terms of segment gross margin sequentially and year-over-year. Joe, could you just talk about the competitive environment and whether you're seeing pricing pressure intensifying, just your macro view there would be helpful. Thanks.

Yes, I wouldn't categorize it as a negative aspect. What we aimed to convey is that we have a varied product mix from a pricing perspective. We are confident in our high-end product line and the prices we can command for our 5D Plus and 5D Flex, both of which are leading scanners in the market. As you've noted, there is a certain sensitivity in the market regarding capital expenditures in dental offices, especially when many are facing economic challenges in orthodontics and dentistry. However, we have been able to deliver strong performance. Our certified pre-owned products enable us to compete in the lower market segment if necessary. When you look at the market, particularly with confocal imaging scanners, we are at the forefront. Competitors may attempt to target the lower end, but I remain confident in our capabilities and value proposition, which is reflected in our numbers both this quarter and previously. While I acknowledge the competitive landscape, I believe we offer a superior product line and a strong value stream, particularly through our integration with Invisalign via iTero.

Great. And John, you mentioned freight costs coming down year-over-year as a positive tailwind to gross margins. I think first time in a while. I think that's been the case. Do you expect that to be sustainable over the next several quarters? And any color on how we should think about gross margins in the second half of the year relative to the 2Q base? I think it's a reflection of just it's freight, but maybe some of the material costs and others that as we manage things, manage our business and we see less inflationary pressure from kind of the raw material/freight and other inputs. And we're always driving productivity. We're always trying to improve our productivity. We saw that in some of our gross margin improvements, both for clear aligner and the scanner and services. And we'll work to continue to manage it. But seeing some of those pricing pressures, the input pricing pressure come down that continues.

Thank you, everyone, and thank you again for joining us. We look forward to speaking to you at any financial conferences and industry meetings. And as Joe mentioned, Align is hosting its 2023 Investor Day, September 6 in Las Vegas. For more information, please visit our Investor Relations page on aligntech.com. Or if you have any questions, please contact Investor Relations. Thanks, and have a great day.