Align Technology Inc (ALGN) — Q4 2023 Earnings Call Transcript

Good afternoon, and thank you for joining us. I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO; and John Morici, CFO. We issued fourth quarter and full year 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 1 month. 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 have posted historical financial statements, including the corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our fourth quarter and full year 2023 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 President and CEO, Joe Hogan. Joe?

Thanks, Shirley. Good afternoon, and thanks for joining us. On our call today, I'll provide an overview of our fourth quarter and full year results and discuss a few highlights from our two operating segments, Systems, Services, and Clear Aligners. John will provide more detail on our Q4 financial performance and share our outlook for 2024. After that, I'll summarize some key points and open the call for questions. I'm pleased to report fourth quarter results with revenues and earnings better than expected. By the end of Q4, we reached several significant milestones, including 17 million Invisalign patients treated, which includes 4.7 million teens, along with 4 million Vivera Retainer cases and over 100,000 iTero scanners sold. For the full fiscal year 2023, total revenues exceeded our previous expectations, and we achieved a non-GAAP operating margin above 21%. In Q4, total revenues increased by 6.1% year-over-year, driven by higher Systems and Services revenues, along with strong Clear Aligner volumes for teens and international doctors, and continued growth from Invisalign touch-up cases under our Invisalign Doctor Subscription Program. Our Q4 Systems and Services revenues rose from the previous year, mainly due to increased services, CAD/CAM, and non-systems revenues, which include scanner leasing, rental programs, and certified preowned scanner sales. Although Q4 total Clear Aligner shipments were slightly down year-over-year, they did show some regional disparities: Clear Aligner volumes declined in the Americas and EMEA regions but increased in the APAC region. For Q4, Clear Aligner shipments comprised around 20,000 Invisalign DSP touch-up cases, primarily in North America, marking a more than 60% increase year-over-year from Q4 '22. DSP continues to be well received by our customers and is currently offered in the U.S., Canada, Iberia, Nordics, and most recently, the U.K. We’re pleased that DSP is benefiting both doctors and their patients as we continue to broaden the program. In fiscal 2023, total Invisalign DSP touch-up cases shipped reached 73,000, an 85% increase compared to last year. In terms of non-case revenues, Q4 saw an increase of 13.3% year-over-year, primarily due to continued growth from Vivera Retainers and Invisalign DSP retainer revenues. Sequentially, total revenues decreased slightly in Q4 by 0.4%, primarily due to expected seasonal declines in teen case starts, particularly in the U.S. ortho channel, and some adverse foreign exchange impacts, somewhat offset by increased revenues from Systems and Services and higher volumes from Clear Aligners for adults and non-comprehensive cases. Q4 total Aligner shipments showed a slight sequential decrease, with Clear Aligner volumes down in the Americas and APAC regions, while they saw an increase in the EMEA region. The December gauge practice analysis tool, which collects and consolidates data from about 1,000 orthodontic practices in the U.S. and Canada, reported a year-over-year decline in new patients, total exams, and total starts, especially among teens and kids. It also observed a decline in wires and brackets and total Clear Aligner starts, although Invisalign case starts fared better than those of Clear Aligner brands. In the teen segment for Q4, 197,000 teens and younger patients began treatment with Invisalign Clear Aligner Systems, up 6% year-over-year, representing a record for shipments in this category compared to previous fourth quarters. While Q4 teen starts were down sequentially, this aligns with typical historical trends, primarily due to fewer starts in China, as well as seasonal factors in North America compared to Q3. For fiscal 2023, total Clear Aligner shipments for teens and younger patients reached 809,000 cases, an 8% increase compared to the prior year, making up 34% of total Clear Aligner shipments. During Q4, we announced that the U.S. Food and Drug Administration cleared the Invisalign Palatal Expander System for commercial availability in the United States. This clearance applies to a broad range of patients, including growing children, teens, and adults. Early intervention treatments like Phase I or interceptive treatment account for about 20% of annual orthodontic case starts and are on the rise. Together with Invisalign First Aligners, IPEs enable doctors to better address common skeletal and dental malocclusions in growing children. The addition of mandibular advancement features to Invisalign aligners gives doctors more options for treating dental and skeletal conditions and bite correction for adolescents. Essentially, we now offer a comprehensive digital treatment solution for every phase of treatment. IPE is currently available on a limited basis in Canada and the U.S., and we've also received regulatory clearance in Australia and New Zealand, anticipating commercialization there in Q2. We expect to make IPE available in additional markets pending future regulatory approvals. Additionally, we are launching the ClinCheck smile video, the next generation of In-Face digitalization with AI-assisted video, aimed at enhancing patient understanding and confidence in Invisalign treatment, based on the iTero Intraoral Scanner and doctors' ClinCheck plans. This tool simulates the doctor’s treatment plan and presents it in a video format, helping patients visualize their potential new smile, which can lead to a higher acceptance of treatment. We plan to roll out ClinCheck smile video in Q1 '24 in North America and EMEA, followed by APAC later in the year. Before I hand the call over to John for our fourth quarter financial review, I want to share one more piece of exciting news. Today, we unveiled the latest innovation in the iTero family of intraoral scanners. The iTero Lumina intraoral scanner is tailored to meet the needs of doctors and their patients, featuring a smaller wand and exceptional data capture capabilities for effortless scanning by clinical staff. The iTero Lumina represents breakthrough technology, with a three times wider field of capture and a 50% smaller wand that allows for faster scanning, enhanced accuracy, and improved visualization, ultimately boosting practice efficiency. The iTero Lumina efficiently captures more data and provides exceptionally high-quality scans and photorealistic images, eliminating the need for intraoral photographs. Doctors can now scan at double the speed, taking advantage of its wide field of capture, multi-angled scanning, and large capture distance for detailed dentition views during the scanning procedure. To date, Align has submitted over 30 patent applications related to technology for the iTero Lumina. I believe iTero Lumina could establish a new standard of care in dental practices by simplifying scanning of complex oral regions while providing superior chairside visualization and a more comfortable experience for patients, particularly children. Initial feedback from doctors has been very positive, indicating that the iTero Lumina scanner is faster, clearer, and less invasive for patients, enhancing communication and the patient experience. The iTero Lumina intraoral scanner is now available for orthodontic workflows, with plans for restorative workflows in the second half of 2024, although GP practices can already take advantage of the new scanning technology. We’re planning a global broadcast to introduce iTero Lumina and share insights from our iTero team and early customer users on February 15. Registration will open on February 1, and the link has been included in our financial slides and today's press release. With that, I'll turn the call over to John.

Thanks, Joe. Now for our Q4 financial results. Total revenues for the fourth quarter were $956.7 million, down 0.4% from the prior quarter and up 6.1% from the corresponding quarter a year ago. On a constant currency basis, Q4 '23 revenues were impacted by unfavorable foreign exchange of approximately $12.8 million or approximately 1.3% sequentially and were favorably impacted by approximately $13.8 million year-over-year or approximately 1.5%. For Clear Aligners, Q4 revenues of $781.9 million were down 1.6% sequentially, primarily from lower volumes. On a year-over-year basis, Q4 Clear Aligner revenues were up 6.9% and primarily due to higher ASPs and non-case revenues slightly offset by lower volumes. For Q4, Invisalign ASPs for comprehensive treatment were up sequentially and up year-over-year. On a sequential basis, ASPs reflect higher additional aligners, partially offset by the unfavorable impact from foreign exchange, higher sales credits, and higher discounts. On a year-over-year basis, the increase in comprehensive ASPs reflect higher additional aligners, price increases, and favorable impact from foreign exchange, partially offset by higher discounts in product mix to lower ASP products. For Q4, ASPs for noncomprehensive treatment were down sequentially and up year-over-year. On a sequential basis, the decline in ASPs reflects the unfavorable impact from foreign exchange, a product mix shift to lower ASP products, and higher net revenue deferrals, partially offset by price increases and lower discounts. On a year-over-year basis, the increase in ASPs reflects price increases, the impact from favorable foreign exchange, and higher additional aligners, partially offset by a product mix shift to lower ASP products and higher discounts. Last quarter, we announced a 5% global price increase for some Invisalign products across most markets effective January 1, 2024. Invisalign Comprehensive Three and Three product is available in North America and certain markets in EMEA and APAC, most recently launching in China, Korea, Hong Kong, and Taiwan. We are pleased with the continued adoption of the Invisalign Comprehensive Three and Three product and anticipate it will continue to increase, providing doctors the flexibility they want and allowing us to recognize more revenue upfront with deferred revenue being recognized over a shorter period compared to our traditional Invisalign comprehensive product. Q4 '23 Clear Aligner revenues were impacted by unfavorable foreign exchange of approximately $10.7 million or approximately 1.4% sequentially. On a year-over-year basis, Clear Aligner revenues were favorably impacted by foreign exchange of approximately $12 million or approximately 1.6%. Clear Aligner deferred revenues on the balance sheet increased $14.9 million or 1.2% sequentially and $74.6 million or up 6.1% year-over-year and will be recognized as the additional aligners are shipped. Q4 '23 Systems and Services revenues of $174.8 million were up 5.8% sequentially primarily due to higher ASPs and an increase in CAD/CAM and services revenue, partially offset by lower volumes and were up 2.9% year-over-year, primarily due to higher services revenues from our larger base of scanners sold and increased nonsystem revenues related to our CPO and leasing rental programs, mostly offset by lower ASPs and scanner volume. CAD/CAM and services revenues for Q4 represent approximately 50% of our Systems and Services business. Q4 '23 Systems and Services revenues were unfavorably impacted by foreign exchange of approximately $2.1 million or approximately 1.2% sequentially. On a year-over-year basis, Systems and Services revenue were favorably impacted by foreign exchange of approximately $1.9 million or approximately 1.1%. Systems and Services deferred revenues on the balance sheet were down $4.3 million or 1.6% sequentially and down $13.1 million or 4.8% year-over-year, primarily due to the recognition of services revenue which is recognized ratably over the service period. As our scanner portfolio expands and we introduce new products, we increased the opportunities for customers to upgrade, make trade-ins, and purchase certified preowned scanners in certain markets. Developing new capital equipment opportunities to meet the digital transformation needs of our customers and DSO partners is a natural progression for our equipment business with a large and growing base of scanners sold. Moving on to gross margin. Fourth quarter overall gross margin was 70%, up 0.9 points sequentially and up 1.5 points year-over-year. Q4 non-GAAP gross margin was 70.5%, up 0.9 points sequentially and up 1.2 points year-over-year. Overall, gross margin was unfavorably impacted by foreign exchange by approximately 0.4 points sequentially and favorably impacted by approximately 0.4 points on a year-over-year basis. Clear Aligner gross margin for the fourth quarter was 71.1%, up 0.4 points sequentially primarily due to lower manufacturing spend, partially offset by higher freight costs. Clear Aligner gross margin for the fourth quarter was up 0.3 points year-over-year, primarily due to higher ASPs and favorable foreign exchange, partially offset by higher manufacturing spend and freight costs. Systems and Services gross margin for the fourth quarter was 64.8%, up 3.8 points sequentially due to higher ASPs, partially offset by higher service and freight costs. Systems and Services gross margin for the fourth quarter was up 6 points year-over-year due to improved manufacturing efficiencies and favorable foreign exchange, partially offset by lower ASPs. Before I go into the details, I want to note that during Q4 '23, we incurred a total of $14 million of restructuring and other charges, primarily related to post-employment benefits. Q4 operating expenses were $498 million, roughly flat sequentially and down 1.4 points year-over-year. On a sequential basis, operating expenses were up slightly due to restructuring and other charges, offset by lower employee compensation. Year-over-year operating expenses decreased by $7.1 million primarily due to controlled spending on advertising and marketing as part of our efforts to proactively manage costs, partially offset by employee-related costs and slightly higher restructuring charges. On a non-GAAP basis, excluding stock-based compensation, restructuring and other charges, and amortization of acquired intangibles related to certain acquisitions, operating expenses were $446.7 million, down 2.5% sequentially and down 2.8% year-over-year. Our fourth quarter operating income of $171.5 million resulted in an operating margin of 17.9%, up 0.6 points sequentially and up 5.4 points year-over-year. Operating margin was unfavorably impacted by approximately 0.6 points sequentially primarily due to foreign exchange. The year-over-year increase in operating margin is primarily attributed to operating leverage and proactively managing our costs as well as favorable impact from foreign exchange by approximately 0.6 points. On a non-GAAP basis, which excludes stock-based compensation, restructuring and other charges, the amortization of intangibles related to certain acquisitions, operating margin for the fourth quarter was 23.8%, up 2 points sequentially and up 5.5 points year-over-year. Interest and other income and expense net for the fourth quarter was an income of $1.3 million compared to a loss of $4.2 million in the third quarter and income of $2.7 million in Q4 2022, primarily driven by favorable foreign exchange. The GAAP effective tax rate for the fourth quarter was 28.3%, higher than the third quarter effective tax rate of 25.1% and lower than the fourth quarter effective tax rate of 63.8% in the prior year. The fourth quarter GAAP effective tax rate was higher than the third quarter effective tax rate primarily due to one-time benefit related to tax guidance issued in Q3, partially offset by lower U.S. taxes on foreign earnings in Q4. As a reminder, in Q4 2022, we changed our methodology for the computation of our non-GAAP effective tax rate to a long-term projected tax rate, and have given effect to the new methodology from January 1, 2022. Our non-GAAP effective tax rate for the fourth quarter was 20%, reflecting the change in our methodology. Fourth quarter net income per share was $1.64, up sequentially $0.06 and up $1.10 compared to the prior year. Our EPS was unfavorably impacted by $0.07 on a sequential basis and favorably impacted by $0.08 on a year-over-year basis due to foreign exchange. On a non-GAAP basis, net income per diluted share was $2.42 for the fourth quarter, up $0.28 sequentially and up $0.69 year-over-year. Moving on to the balance sheet. As of December 31, 2023, cash, cash equivalents, and short and long-term marketable securities were $980.8 million, down sequentially $321.2 million and down $60.8 million year-over-year. Of our $980.8 million balance, $196.1 million was held in the U.S. and $784.7 million was held by our international entities. In October 2023, we purchased approximately 1 million shares of our common stock at an average price of $190.56 per share through a $250 million Accelerated Share Repurchase. And in November and December 2023, we purchased approximately 466,000 shares of our common stock at an average price of $214.81 per share through a $100 million open market purchase, both under Align's current $1 billion stock repurchase program. We have $650 million remaining available for repurchase of our common stock under this stock repurchase program. Q4 accounts receivable balance was $903.4 million, slightly down sequentially. Our overall days sales outstanding was 85 days, flat sequentially and year-over-year. Cash flow from operations for the fourth quarter was $46.9 million. Capital expenditures for the fourth quarter were $33.4 million, primarily related to our continued investments to increase aligner manufacturing capacity in facilities. Free cash flow, defined as cash flow from operations less capital expenditures, amounted to $13.5 million. Now turning to our outlook. Assuming no circumstances occur beyond our control, we provide the following framework for Q1 and fiscal 2024. For Q1 2024, we expect our worldwide revenues to be in the range of $960 million to $980 million, up slightly from Q4 of 2023. We expect Clear Aligner volume and ASPs to be up slightly sequentially. We expect Systems and Services revenue to be down slightly sequentially, although less than the historical seasonal decline, given the launch of the iTero Lumina for ortho workflows in Q1 2024. We expect our Q1 2024 GAAP operating margin and non-GAAP operating margin to be slightly above Q1 2023 GAAP operating margin and non-GAAP operating margin, respectively. For full year, we expect fiscal 2024 total revenues to be up mid-single digits over 2023. We expect fiscal 2024 Clear Aligner and Systems and Services revenues to grow year-over-year in the same approximate range as our 2024 total revenues. We expect fiscal 2024 Clear Aligner ASPs to be up slightly year-over-year primarily due to price increases and favorable foreign exchange, partially offset by a higher mix of noncomprehensive products, which have lower ASPs. We expect fiscal 2024 GAAP operating margin and non-GAAP operating margin to be slightly above the 2023 GAAP operating margin and non-GAAP operating margin, respectively. We expect our investments in capital expenditures for fiscal 2024 to be approximately $100 million. Capital expenditures are expected to primarily relate to building construction and improvements as well as manufacturing capacity in support of our continued expansion. In summary, I am pleased with our fourth quarter and fiscal 2023 results, and I am especially proud of our continued focused execution of our product roadmap and innovation pipeline. We are committed to delivering on our strategic growth drivers of international expansion, patient demand, orthodontist utilization, and GP dentist treatment to extend our leadership in digital orthodontics and dentistry. I believe that the next wave of innovation that we are introducing into the market will further differentiate Align and allow us to continue to increase our share of the large untapped market opportunity of 22 million annual orthodontic case starts as well as an additional 600 million consumers who could benefit from a healthy, beautiful smile using Invisalign Clear Aligners. With that, I'll turn it back to Joe for final comments.

Thanks, John. In closing, while I'm pleased with our better-than-expected fourth quarter results and start to the year, I'm even more excited about Align innovation in 2024 and our next wave of growth drivers. When I spoke to you about a year ago, I discussed the innovations that we are planning to bring to market that we continue to revolutionize the orthodontic and dental industry and scanning software and direct 3D printing. We are delivering on that promise. With the introduction of iTero Lumina powered by Multi-Direct Capture technology, we are pushing the boundaries of what intraoral scanners can do. iTero Lumina is a combination of years of research and development to offer visualization capabilities that support doctors' clinical decisions while also enhancing their patients' comfort and overall treatment experiences. Building on more than 20 years of expertise in revolutionizing imaging technologies, the iTero Lumina scanner elevates the standard in digital scanning to achieve exceptional clinical outcomes and increased practice efficiency. The iTero scanner is at the forefront of digital dentistry. With the closing of our acquisition of Cubicure, a pioneer of direct 3D printing solutions for polymer additive manufacturing, we will enable the next generation of 3D printed products, helping to create more unique configurations for aligners that are more sustainable and also efficient solutions. We also expect it to extend and scale our printing materials and manufacturing capabilities for our 3D printed product portfolio, which now includes the Invisalign Palate Expander System. And with the introduction of IPE, we have expanded the clinical applicability of the Invisalign system to nearly 100% of the orthodontic case starts. The ability to direct 3D print, IPE will eventually lead to other direct printed products with the goal of direct 3D printed Invisalign Clear Aligners, which we hope to achieve in the next couple of years. As a company, Align has multifaceted competitive advantage, technology innovation, where we invest up to $300 million in R&D per year to bring in some of the most disruptive products in digital dentistry and orthodontics to the market in a highly regulated industry. A direct sales force that consists of 5,000 highly trained specialists, a doctor-centered model because we understand the importance of doctor-directed care, a $1 billion brand trusted by over 17 million patients worldwide, and global scale and manufacturing to deliver millions of customized Clear Aligner parts every day. We are extremely pleased with our latest innovations and commercialization of products to better serve our doctors, customers, and their patients. Our belief in the future business overall is unwavering. Before we turn the call over to the operator, I want to address an important matter regarding DTC, or direct to consumer Clear Aligners, in our industry. Align has always believed that a doctor-centered model for orthodontic treatment is the safest for patients, and we're always looking for new and better ways to support doctors as they work to create better smiles for their patients. Recent news regarding the bankruptcy of a DTC clear aligner company has led many consumers to reach out to Invisalign providers to address their unmet needs, including helping those DTC patients with incomplete treatments. To support these former DTC patients who are seeking help from Invisalign providers and practices, in Q4 we introduced a program in the U.S. and select other markets, offering up to a 50% discount on Invisalign case submission in Vivera Retention to help offset any additional costs to finish their treatment. We want to help everyone achieve a healthy, beautiful smile and strongly recommend that individuals who are impacted by this matter seek the advice of a licensed orthodontist or dentist. Our concierge team is always available to answer questions and help connect consumers with Invisalign practices. With that, I'll thank you for your time today. We look forward to updating you on our next earnings call. Now I'll turn the call over to the operator for questions.

Congrats on the quarter. I was wondering if you could explain the components of the mid-single-digit guidance for 2024. I understand that Systems and Services and Clear Aligners are expected to be in the same range. I'm trying to explore how to think about that. It seems like it could be low single-digit ASP improvement along with low to mid-single-digit case growth. Is that the right perspective? Is there anything else you can clarify on this? Additionally, how do you anticipate the pacing of the year to progress?

Yes. Elizabeth, this is John. You framed it the right way. We're looking at the segments up mid-single digits, and then ASPs because of the price increase. We have some offset due to some of the lower-stage products that we have, including the DSP touch-ups and so on, that you would expect, then a little bit lower of ASP impact year-over-year.

Got it. That makes sense. And then separately, how has the volume in sort of market in China been progressing across the fourth quarter and maybe into the first quarter so far as you can comment.

Elizabeth, it's Joe. We felt good about China last year. But remember, we had year-over-year comparisons that were really favorable because of the COVID shutdowns over there last year. But overall, as we exited the year, we felt good about our performance there, and we feel good about, as we move into 2024, about our competitive position in a China market that I think is a little more predictable because it's not the overhead that we've seen with COVID over the last several years.

Got it. And sorry, maybe one last one for me. Can you just remind us the sort of Q1 dip in the operating margins and then how it sort of steps up across the year. I understand the guidance you gave for the first quarter of the year, but just why that first quarter has a sort of different perspective than the rest of the year?

Yes. So we wanted to give to prior year because, in that prior year, when you start the year, you have certain expenses that you incur right at the beginning, payroll, taxes, and other things that you incur initially some of the investments that you make that you then get leverage on as you go through the year. So it's similar to how we position things from last year in 2023.

Can you hear me out there?

Yes. We hear you fine.

John, I would like to follow up on Elizabeth's question about margins beyond just the first quarter. If you meet your guidance this year and your operating margin increases slightly from 2023 levels, that would mark three consecutive years in the low to mid-21% range. Pre-COVID, you were around 25%. What steps would be necessary to move those margins back toward pre-COVID levels? You've implemented price increases for the past two years, and it seems that your research and development expenses should decrease somewhat. I understand that you're making significant investments with Cubicure and other initiatives, but with IPE and Lumina now out, could you help us understand when we might begin to see a pathway toward improving those margins by a few points from their recent levels?

Yes, Jeff, this is John. Really, when you start to get some of that volume leverage, we're positioned as having our manufacturing and the organization that we have that's really set to drive more growth. And once we get some of that volume leverage, we should see that benefit showing up in our numbers. And it's really what we saw as we went through the quarters last year where you see some of that volume benefit. You get that benefit as well when you go through the year, but really looking to try to drive as much volume as we can, and you'll start to see some of that leverage that shows up in our numbers.

All right. Fair enough. And then, Joe, I think we've talked for many years now how iTero has carved out such a commanding, strong competitive position. You've sold a ton of iTeros over the last 5, 6 years or so. They're all probably getting, I don't know, close to their end of their useful life or so. Lumina for the first time feels like that kind of product with a better form factor, especially things like that, that could really cause some of these docs to say, I got to get rid of this big iTero and go back down to this much smaller one, and things like that, just things that would actually matter to the docs, and I'm sure the technology does this, too, I don't want to just put it on the size. But just thinking there, is this the kind of product that can finally kick off that multiyear upgrade strategy or path in iTero that we've kind of been waiting to see?

Yes, the quick answer is yes. It's a brand-new platform, and we've sold 100,000 units so far, with about one-third being 5D pluses, which can be upgraded easily with just a wand switch. This is how we've designed Lumina. We are also actively upgrading our installed base between E1 and E2 to better prepare for this transition. As we develop Lumina, we had your question in mind, and we believe we are well positioned to make this happen.

And if you switch out that wand from the 5 to the Lumina, there is a fee there, right? It's not like, hey, you bought this knowing that you could always upgrade at no charge to Lumina?

There's no charity here at Align. There will be a charge.

So Joe, maybe this one's for you. Video 1Q '24 IPE some markets today, but more in the common IPE should have longer term with team, docs might take a little bit of a wait-and-see approach. You talked about the new scanner. In your opinion, like is innovation are we seeing that in the '24 guide? Or is that more of like a ramp in the '25? And maybe even to take that a step further, John, for you, is there a way to sort of quantify out of that mid-single-digit revenue growth, what can you attribute to these new products coming on board in '24? I'm just trying to think about the impact of '24, is this more the ramp or the slope in the '25 for the innovation hitting?

Jon, I like the way you set that up. It's a ramp, it really is. But we feel good that we can play offense with these product lines. Now we still have to scale IPE. We have a great team that knows how to scale, and we'll get through that. Obviously, Lumina is a completely different set of outside of the computer itself. The wand itself is, we feel good about the scale part of that as we sell through the marketplace. But overall, I think the way you described it is a ramp of this new technology really beginning in 2024 is a good foundation for that kind of thought process.

And any way to quantify what's in there from the current guide or no? Is that just too difficult to tease out?

It really is just too difficult to tease out.

I'll start with that, Jon, in terms of the current guidance. Look, we're looking at the environment that we're all in. It's not a great economy, most places, but it is more stable, and we're building off of that. And then, as Joe said, we're doing things to play offense. New products that we have with Lumina and IPE and so on, which we think can help us grow in this environment.

Jon, your question about the ramp up, the margin piece or part of that, what's that mean in 2025 or whatever. Look, we feel confident, and as you know from our discussions and our analyst presentation last year is that 3D printing is foundationally, it can be less expensive as we scale. And so I mean, we'll start to see that come through as we scale that, but we need time to scale this. No one's ever had this polymer before that has a scale. No one's ever used the Cubicure system to the degree that we need to use it. Now we did this with 3D systems years ago because we basically scaled those systems through our team, and the team knows how to do that. I just can't tell you specifically within those in the next 1 to 3 years, with this being the first year, exactly when that really hits that hyperbolic side.

To conclude on the CapEx, much of the spending in previous years was focused on equipment. We are continuously increasing our capacity, but a significant portion was dedicated to constructing new buildings for our locations and manufacturing processes. Most of the additional capacity for our manufacturing will be accommodated within our existing buildings, so we generally do not need to construct new ones. That explains the current level of CapEx.

Regarding the guidance, I would like to ask a question to gain a better understanding of the underlying assumptions. Looking back at some previous trends on the teen side, which seems less impacted by macroeconomic factors, it's reasonable to expect low single-digit volume growth for the entire Clear Aligner business, likely not including some of the DSP. Am I correct in understanding that for adults, on a year-over-year basis for the full year 2024, you're anticipating fairly flat performance, or potentially even a decrease, depending on how teenagers and some of the DSP cases perform?

I would say that both teens and adults are showing positive growth on a year-over-year basis, with adults likely growing faster than teens, which is a change from past trends where teens outpaced adults. I expect both categories to increase and reflect that in our numbers.

Okay. And then can you just reiterate maybe both for IPE and for Lumina exciting? It seems like they're going to ramp over the coming quarters. Are there any like key quarters and catalysts that we should think about that might take that up. You're talking about a ramp, but we get to the next level on the ramp on any of those when they go from maybe a limited launch to full market relief, anything like that?

On the Lumina side, our restorative scanner for general practitioners is set to be released in the third quarter. However, as John mentioned, we believe we can start selling it now with its current capabilities, although its adoption will largely depend on the regulatory approvals we need to secure globally. At the moment, we have approval only in the United States, Canada, and Australia-New Zealand. Additionally, for IPE, we are facing similar regulatory constraints, as we still need to navigate the approval process in Europe. IPE is expected to launch in the second quarter in Australia as well, and we will be scaling it accordingly while we assess the market dynamics. Therefore, as I noted in previous calls, we anticipate a gradual ramp-up rather than immediate widespread adoption.

I'm going to pile on here on the guidance, just to focus there first. You mentioned noncomprehensive mix as being an offsetting factor to ASPs. I know you've got that DSP factor. I had thought maybe originally you were signaling adults growing better than teens, but doesn't seem like that's the case just given your comments there to Brandon. But I guess, regardless on adults, are you seeing this market getting its footing back, it sounds like it, but if you are, what's giving you the confidence? Or what are you seeing that kind of the day-to-day or month-to-month that's showing adults are coming back into the office for treatment? And then sorry to load a few in here, but should we expect this faster noncomprehensive mix also to have gross margin benefits for the year as well? I think it typically does, but I don't think we've gotten kind of a gross margin cadence outlook for '24.

Jason, I'll take the first part of your question and hand the rest off to John, is we feel we're on a more stable, I'd call it, economic platform than last year. And so the adult and teen question that you had is we expect that to carry through in 2024, as we indicated with our guidance, too. So when I look back, everybody has a clear vision backward than forward, we look back to last year, a pretty unstable platform that we experienced for the year and the third quarter was a tough one in that sense. But I think we all see it right now; we have more confidence that at least we're dealing with stability from an economic standpoint in most parts of the world from what we see.

And on the noncomprehensive and gross margin questions and related to that: Look, as we have the mix that shifts through and you might have an ASP lower on some of the non-comp DSP and others that fall into that. Those are our highest gross margin products from a rate standpoint. So they're helpful for us as a business. It's really what that customer wants for him or her to run their practice, and that's how we balance things out. But overall, we expect that we would see benefits in gross margin just like we're talking about op margin year-over-year benefits, we should see a benefit as well in gross margin.

All right. That's helpful. And then for the follow-up here, I'll ask on teens. It does look like you're back to gaining share against brackets and wires. It looks like the kind of the second consecutive quarter of that. I'm curious if you could talk maybe bigger picture, what's changed to what you think has changed over the last 3 to 6 months versus maybe the 12-plus months that preceded that. But do you think the share gains you're seeing versus brackets and wires, does that have to do with changes you made to that Teen Guarantee program middle part of last year? Or are there other items at the practice level or associated with your go-to-market activities that are driving that shift?

You can always say that at Align, there's no single variable equation. And this is another one. The Teen Guarantee, we think is some of it, obviously, our portfolio and how we put that together, our DSP programs, the uniqueness of Invisalign First. All those things really help. And from an adult standpoint, with the firmer economic platform I talked about, I just think there's more confidence out there that we're starting to see lead through.

I want to start with DSP, which has seen great success and impressive year-over-year growth. However, the growth pattern seems to be more like a step function. Looking at the numbers, we see growth from 6,000 to 7,000 to 9,000, and then into the 11,000 to 12,000 range. Now, we’re seeing figures in the 18,000 to 20,000 range. Do you anticipate another step function next year? Could you elaborate on what’s driving this growth and where you see it heading in the next couple of years?

Michael, this is John. I would say as we look to expand this out, it's been successful; every place that we've done, we've seen, as you said, North America starts with this. So you see some doctors start, and then we have more and more doctors that sign up for the program. And then as the doctors sign up for the program, then they end up doing more and more volume with us. We've taken that same approach to other countries, and now we've introduced this in EMEA and other places. And the same thing happens. More and more doctors sign up for it, they start to see the benefits of it, and then they utilize it more. So it's really just a matter of now scaling this to other parts of the world because we find that this is really a nice way to supplement how a doctor wants to run their practice.

Could you provide more details about the roadmap for Cubicure and Direct 3D printing, including the key milestones we should be watching for in the next six months, one year, and two years, to help us track progress?

Michael, it's Joe again. I think the best way to describe it is that it's a 1- to 3-year journey. We know how to make these aligners and understand the process. The challenge lies in scaling the resin in the Cubicure process, which takes time. We'll provide updates each quarter so you can fully grasp our progress, including the challenges we face and the opportunities ahead.

Okay. Let me adjust that slightly. Can you clarify if there are specific aspects of the scalability of the resin and polymer that will enable some products to be ready sooner than others, or will it be an all-or-nothing situation?

I mean, obviously, the scale, you look at retainers first because units of one. And that's why you'd end up with comprehensive full cases in some way. And that's basically how we'll ramp.

I wanted to ask about the revenue guidance for Systems and Services in 2024. It seems low to me, especially considering that growth in 2023 was nearly flat, just slightly up. We anticipated that the Lumina launch would drive more growth than what we saw in 2023. Could you elaborate on your expectations for that segment?

Nate, this is John. We're looking at, like we said, this year, you're kind of in that mid-single digits. We do have Lumina, which helps, but there's also unknowns about the macro economy. We were very pleased with what we saw in the fourth quarter with doctors buying and actually doing better than what we had really guided to. So we're pleased with the performance of Q4, but we just want to make sure that as we ramp up Lumina that we're properly positioned there, and we'll update as we go along.

Okay. Great. And then just going back to the margin cadence, I guess are there any either upfront or one-time costs associated with either the launches of Lumina or IPE that impact the margin in the early part of the year just as we think about cadence and sort of what the right baseline is?

There is some ramp up in Q1, but it's not significant enough to create a large impact in expenses all at once. This ramp up is included in our guidance. When we mention that we anticipate a slight year-over-year increase in the first quarter, those expenses are accounted for.

You mentioned at the end of the call, some of the DTC customers that you are tailoring some of the offerings to. I guess, was this material at all in the quarter? Maybe it's not large enough at this point, but any sort of contributions in 2024 as we think about picking up some of that business? And then also, DSO relationships, has there been any changes there in terms of the relationships on that front? How would you characterize those at this point? Are you seeing any greater traction there? Do some of these new products really move the needle on some of those relationships or conversations you're having?

Ann, regarding the direct-to-consumer customers, we have long maintained that this isn't our primary market due to the pricing. However, these patients are likely to seek treatment, especially from doctors rather than direct-to-consumer options. We are doing our best to support these customers moving forward. As I mentioned earlier, we are primarily focused on serving doctors, and we intend to continue in that direction. Nevertheless, we recognize this as a potential opportunity, although it's currently difficult for us to measure. Concerning our relationships with dental service organizations, I would say these have strengthened globally. Notably, Heartland and another new orthodontic partner are significant, with Heartland focusing more on general practice. We have developed solid relationships and effectively leverage our portfolio to aid their growth, allowing us to grow alongside them. Overall, I am optimistic about our position with dental service organizations and the robust relationships we have established.

Joe, given the positive macro shift we've seen in the last few months with consumer confidence coming back, any chance you can comment on what you've seen in case starts in January and inflection? And then with respect to the '24 growth outlook. Any chance you could break that out between Americas and International?

Yes, I wouldn't differentiate between the Americas and International because we feel positive about the geographies overall, especially in the latter half of the fourth quarter of last year. As we move into this year, I believe we have a stable economic foundation, and some of the data you mentioned would support that. We are optimistic about our new products and are focused on being proactive.

Okay. And then one housekeeping one for you, John. The fourth quarter operating cash flow was pretty weak. Can you just unpack any of the moving parts that might have been one-time in the quarter? It looks like there was a spike in prepaid expenses on the balance sheet. But anything you would call out?

Things that related to like tax payments and things. It's just some timing as things go through the year. But we feel great. I mean, it's a great model. It generates a lot of cash. It gives us a lot of flexibility, and we were able to use that cash, that $350 million buyback that we did last quarter.

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