Align Technology, Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Greetings. Welcome to the Align First Quarter 2024 Earnings Call. [Operator Instructions] Please note, this conference is being recorded.
Good afternoon, and thank you for joining us.
Thanks, Shirley. Good afternoon, and thanks for joining us on our call today.
Thanks, Joe.
Thanks, John.
[Operator Instructions] Our first question comes from Elizabeth Anderson with Evercore ISI.
I was wondering if you could talk about how you're seeing the overall demand environment? I guess, I'm particularly curious about the U.S. sort of how you're seeing it from like a consumer demand perspective, especially and any comments you could make on the SmileDirect impact on volumes in the quarter? And then secondarily, if you could comment a little bit more on the broader demand environment in China, that would be super helpful.
Elizabeth, I'll start off and have John jump in on anything. First of all, we describe the business right now as stable. The same things that we talked about as we came out of the fourth quarter, and we see that stability broadly around the globe. And you saw in our script that we just read to, that it's good from an adult standpoint and also a teen standpoint, too, which, again, led to that kind of stability that we talk about.
No, I agree. And that's -- we're driving the growth strategies. As we've said, we've seen that stability in the environment and we're executing against that.
And Elizabeth, last thing on your SmileDirectClub comment, them not being advertising like they were before or whatever, we can't attribute any part of the demand equation up or down as part of that. And obviously, that was more pronounced in the United States than it was anywhere else in the world, but I can't attribute any change in the marketplace because of them not advertising at this point in time.
Our next question comes from Brandon Vazquez with William Blair.
I wanted to focus for a second on the -- on the teen side, you have the Palatal Expander out there now getting great reviews, and it seems like it closes, if I'm understanding the numbers correctly, maybe 20% of that market that you haven't been able to hit before. This is such a big opportunity. I'm curious if you can just reflect on like how does commercialization within teens look in the next couple of years now that you have kind of a broader and more fuller portfolio here compared to the prior couple of years? And what does that mean for growth rates within that teen section and adoption within teen that's underpenetrated relative to teens as we look forward the next couple of years?
That's a good question, Ben. I think we -- as we mentioned, it's 20%. And there's -- we don't -- we call them tweens, really. They're young students before they really hit the teen years and have a mature dentition. With Invisalign First and now with IPE, we can handle the 20% that's out there on the Phase I. And some teens just need -- tweens just need dental expansion and some of you really have to split the suture and widen the pallet overall. We feel in both those cases, with IPE and Invisalign First, these are very unique products specific to that area. And we think it will actually make doctors that aren't comfortable with the Phase I, may be even more comfortable now because of the impact on patients is not what it was before when you tried to work these kinds of cases with wires and brackets or higher risk expanders and those kinds of things.
Next question comes from Jon Block with Stifel.
Hoping to ask 2, maybe just the first one, throughout the quarter, there was sort of like an obsession or a big focus from investors on month-to-month trends. There was talk about February strength, March weakness. I don't think if anyone really knew if it was the consumer or the calendar or both. So maybe you guys can talk a little bit about how it played out for you guys, elaborate on February and March? And as much as you can, just touch on April here for the first 2 to 3 weeks. And then I'll ask my follow-up.
Yes, Jon, this is John. Look, from -- as we talk about the quarter and think about -- we're very pleased with our results in Q1, we saw stability, as Joe mentioned, and that really continued from the end of the year into the quarter, less about month-to-month. I mean it was the stability and then the execution that we had throughout the quarter with our products.
Okay. And then I'll just shift gears. John, I might stick with you. I believe the wording is slightly above the 2023 OM, which I think is 21.4% unchanged. Despite the higher revenues, the midpoint going from roughly 5% to 7%. So can you talk about where that extra spend is going? Do we see the returns on that this year? Or will that aid and give you some more tailwinds into 2025?
I think that latter point is how I would look at it, Jon. We're making investments. We make investments throughout the year. We get the shorter longer-term investments that we make different returns on whether they're short or long term. But what we see is a stable environment, continued investments in go-to-market activities, we have new products coming. So that helps us accelerate with things that we'll have on the iTero side, as well as IPE and others that Joe talked about, where we really get the approval later in the year. So it's about a stable environment, making investments into that environment and then executing on our growth strategies, and that should give us the benefits that you described in the second half.
Our next question comes from Jeff Johnson with Baird.
John, maybe following up on Jon's question there and just a little finer point on the guidance itself. You've taken that guidance from mid-single digits to 6 to 8 scanner and CAD/CAM services came in obviously strongly in the double digits, upper teens. Should we think about kind of that double digits, maybe not in the upper teens, but double digits is kind of where the scanner and services continues this year? And your Clear Aligner revenue guidance kind of still in the mid-single digits. I think last quarter, we were talking about both those segments being mid-single-digit growers. It seems like to me now, maybe the raise here is being driven more by the scanner and CAD/CAM services. And as Joe calls the market stable, then maybe the Clear Aligner revenue still kind of expected to be in that mid-ish single digits. Is that a fair kind of way to look at guidance?
That's a fair way to look at it, Jeff. I mean, you would see, given the new products that we have with Lumina and iTero, we'll see a little bit faster growth. We're very pleased with what we saw in the first quarter. Typically in the first quarter, you don't have a sequential gain in revenue from the fourth quarter being an equipment business. So we're very pleased with what we saw there. But then we also look at the Clear Aligner business, and we expect to be able to grow and continue to grow there, both in terms of the investments that we're making in a relatively stable environment and some of the new products that should help supplement that growth.
Yes, that's helpful. And then one other follow-up. I think it's been asked in the past maybe at an Analyst Day or something. I don't remember if you've given a clear answer. But it's something I keep getting asked here more recently, and that's a percentage of your patient base of maybe orthodontic cases that get financed through some sort of third-party patient financing company. We have seen in areas like full arch implants, some of the aesthetic procedures outside of dental, where lending standards have gone up, FICO scores have gone from the 500 to 700, something like that to qualify for patient financing in this cost of capital and tougher capital environment. So what percentage -- do you know a percentage or round about of what cases get financed? And if those lending standards have changed at all and put an incremental pressure on patients here more recently?
Yes. What we see, Jeff, is it varies country by control say U.S. is maybe the most -- and I'll combine ortho and GP together, roughly 1/3 of the cases that we see get some type of external financing. Remember, many patients or parents will pay in advance. That's great for doctors. Many doctors, especially orthos will do some type of kind of internal financing where you kind of pay as you go and so on. And many doctors are continuing to do that, especially in the tougher environment. And we're doing things to help doctors to try to give them a little bit more extension in payments so that they can provide and pass that on to their patients as well. And we'll work with DSO partners to really try to help them work with these external companies to try to give better financing rates to try to get these patients to go into treatment.
John, any change to note over just the past few months even in those lending standards getting tougher? Or do you feel like that's stable as well as just kind of the overall environment as you've described that way?
I look at that as more stable. I think there was a lot of things. If you go back to last year, people are really getting a bit of sticker shock in terms of the higher interest rates, when they came to try to go into treatment. I think people are past that.
Our next question comes from Michael Cherny with Leerink Partners.
Can you hear me okay?
Yes, we can hear you fine.
Okay. So just relative to the spend, I want to dive in a little bit more, if possible. You talked about the investment growth. Can you delineate relative to that investment, how you're thinking about the growth into, call it, your core markets or some of the new product launches? And especially with regards to the ramp on the printing side, how much incremental printing spend, so to speak, is coming now versus where you think it's going to grow, what the run rate should be on ramping that over time?
Yes. I think we have a core business that we're running. And obviously, there's a certain amount of investment that you have to be able to grow around sales, sales and marketing and the go-to-market activities that we have.
Our next question comes from Jason Bednar with Piper Sandler.
First I want to build on some of the macro questions that have been asked. I don't want to belabor the point, but other consumer discretionary companies called out a downtick in March. It doesn't sound like you saw any of that, but just wanted to confirm that's the case with respect to Invisalign demand. And maybe speak to your confidence to drive Clear Aligner volumes going forward, now that comps turn a little bit tougher. How much do you think you might need to fund that growth with investments to drive more traffic into the office?
Jason, on the first part is, we talk about the stable environment that we've seen that stability of it. We read and I read, what's going on there with the consumer investment, some concerns, particularly in the luxury goods or what's going on out there.
And in terms of investments, we make the investments that we need go to market and manufacture and other expansion as we continue to grow. We'll continue those investments. But as we've talked about, not only for the -- now the second quarter when we're talking about that sequential improvement in op margin and what we've talked about in total year where we expect the year-over-year improvement in margin. We're making sure that we're investing with that right amount of profitability. To still be able to grow into our market and expand the opportunity -- expand on the opportunities that we have, but then being respectful in terms of what margin we need to be able to deliver for the company.
All right. Very helpful, Joe and John. And maybe one follow-up here to maybe a multi-partner on teen. So bear with me. But this might be a nuanced look. It seems like a lot of emphasis here just recently in product development and marketing that's really trying to tap into that much younger market, that Phase I opportunity. IPE fits in there, your new marketing branding plans and emphasis there. There seems to be some benefits for younger patients with Lumina. So it's really -- it seems intentional, but wondering if you could bifurcate for us, how your Invisalign business is performing in this younger patient population relative to the teen as a whole? Where does your penetration sit in those younger patients versus the broader teen channel? And maybe what kind of outsized growth you're expecting from this part of the channel as we look out over the near to intermediate term?
Jason, just I'll back up on your question, just to give you a kind of a conceptual view. When you think of Phase I, it's actually been controversial in the orthodontic market for years, some orthodontists don't want to do Phase I because as I mentioned before, the kind of devices that have been used, have been kind of difficult from a consumer standpoint. And so those wait for all permanent dentition and move on to there.
Any sense penetration-wise or maybe where you're at relative to the broader teen market?
I'd say we're just in that story. I mean even Invisalign First is used sometimes on more permanent dentition too. So it's hard -- we'd have to split our cases out of Invisalign First is what the age of patients are or whatever. But as we get more data and we really get through with IPE and some more specificity around this, we'll share it with you and the rest of the....
The only thing that -- I mean if you've tracked us for a while, you know that our average age of teen patients gets younger and younger, I think we're 14 now versus 15 plus before. So I mean that's a reflection of just being able to go after those younger patients with First.
Our next question comes from Nathan Rich with Goldman Sachs.
Great. I wanted to go back to the guidance. I know it's kind of been touched on a few different times. But I wanted to ask on the Clear Aligner revenue outlook. It looks like you're raising the outlook for the full year by about 1%. I guess could you maybe just touch on what changed specifically with respect to that outlook? It sounds like maybe it's expectations around IPE and DSP versus market improvement. But I'd be curious, any color you could share there? And maybe anything on teen versus adult within the updated guidance would be great.
Yes, I'll start, Nate. So overall, we went from -- we had talked about mid-single digits, so call it 5% to raising it to the midpoint of 7% on a year-over-year, so up 2 points. And really, that's a reflection of a few things. One is the continued stability that we're seeing. We're operating in an environment that's more stable. We saw that coming into the fourth quarter and now into this quarter as well. So that's good if we want that stability there.
Okay. That's helpful. And then, John, maybe just sticking with you. The 2Q operating margin, I know up slightly sequentially, but down year-over-year. And I think historically, it's been a little bit variable, but you've seen more of a step-up in the second quarter than I think what the guidance implies. Anything to call out with respect to FX? Or I think you mentioned some manufacturing cost spend, but just anything there that we should keep in mind as it regards the margin cadence?
Well, and certainly, we are seeing a stronger dollar. So that's something that we talked about when we think about our guide too, we see a stronger dollar coming out of -- out of the first quarter into the second quarter. Our guide reflects that as well.
Our next question comes from Erin Wright with Morgan Stanley.
Great. I'll ask me 2 upfront here, but follow up on the guidance, and I don't want to belabor this too much, but do you think you have better visibility now just on the underlying demand trends globally? Or would you say that there's still an element or a healthy element of macro uncertainty that's still embedded in your guidance and some conservatism there?
Erin, this is John. I'll talk a little bit about visibility and guidance. I think what we -- what we enjoy now and what we want to be able to have in an operating environment is more stability, and that stability is there. Markets are open. There's a higher overall higher inflation and interest rates, but people are operating in that environment.
And Erin, on the Lumina piece, it's Joe, obviously, is -- as I mentioned in the closing of my script, we're really excited about that technology. We've been working on it for 6 years. It is a true new platform. It's not a derivative of the old confocal imaging platform. And there's really no other scanner in the world that's like that and how we've built it.
[Operator Instructions] Our next question comes from Michael Ryskin with Bank of America.
Congrats on the quarter. I want to follow up on something, I think, Joe, you touched on in the prepared remarks. If I caught it correctly, you kind of pointed to a little bit of strength in U.S. ortho or Americas ortho in the quarter stood out for us.
Michael, I understand your question. I'd say it's -- we feel it's -- we've seen more stability in that market this year than we have last year. We've always known that the teen segment of that much more solid than the adult segment, but the adult segment held up for us in the quarter 2. And so that aspect of the adults was good for us also.
Okay. And if I could squeeze in a follow-up if there's time. Again, also impressed by the DSP touch-up progress. You called it out in the deck. You got some additional launches later this year. You got the 14-stage touch-up aligner offering you're talking about. Any way you can start framing in terms of would you incorporate that into guidance at some point in terms of where you think that can go in terms of volumes and revenues or any update longer term, how you see DSP and touch up evolving over time?
Yes, Mike, I'll take that one. Look, DSP is very popular because it really serves the needs that doctors have. They want to be able to buy things kind of the way they want to buy. They want to be able to instead of making things or doing things themselves, they can use our aligners as part of that DSP and be able to treat those touch-up cases.
Operator, we can take one more question.
And our last question comes from Kevin Caliendo with UBS.
I have 2 questions. So the first one is on Heartland. Can you talk a little bit about the benefits of the Heartland investment operationally? And also Heartland is -- my understanding is a pretty profitable business and now with 2 separate investments there, how does their profits or how does the accounting work for that from your perspective at this point? .
I can start with the guidance part of that, Kevin. Look, we use a lot of factors to look at where our guidance is. So we're using data from Q1 and the most recent information. But it goes back to the stability that we've seen. You can see it in a lot of the surveys and other things that a lot of people do, but what we see is that stability, coupled with what we're trying to do to go to market to drive the initiatives we have and the new products that we have. So that's a key part of what we factor in into our guidance. No change from what we normally do. This is how we've come together in terms of a guidance standpoint.
That actually concludes -- sorry, go ahead, operator.
And we have reached the end of our question-and-answer session. I will now turn the call back over to Shirley Stacy for closing remarks.
Thank you so much, and thank you, everyone, for joining us today. We look forward to speaking to you at upcoming financial conferences and industry meetings, including the American Association of Orthodontics meeting in New Orleans, May 4 and 5. If you have any questions, please give us a call. Thank you.
Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.