Greetings. Welcome to the Align Q4 '21 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Shirley Stacy, with Align Technology. You may begin.

Thank you. Good afternoon, and thank you for joining us. I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO; and John Morici, CFO. We issued fourth quarter and full year 2021 financial results today via Globe Newswire, which is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately 1 month. The telephone replay will be available today by approximately 5:30 p.m. Eastern Time through 5:30 p.m. Eastern Time on February 16. To access the telephone replay, domestic callers should dial (877) 660-6853 with conference number 13725950 followed by #. International callers should dial (201) 612-7415 with the same conference number. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events and product outlook. These forward-looking statements are only predictions and involve risks and uncertainties that are described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission available on our website and at sec.gov. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statements. We've posted historical financial statements, including the corresponding reconciliations including our GAAP to non-GAAP reconciliation, if applicable, and our fourth quarter and full year 2021 conference call slides on our website under quarterly results. Please refer to these files for more detailed information. With that, I'll turn the call over to Align Technology's President and CEO, Joe Hogan. Joe?

Thanks, Shirley. Good afternoon, and thanks for joining us. On our call today, I'll provide some highlights from the fourth quarter, then briefly discuss the performance of our 2 operating segments, Services Systems and Clear Aligners. John will provide more detail on our financial results and discuss our outlook. Following that, I'll come back and summarize a few key points and open the call to questions. Overall, I'm very pleased to report fourth quarter results and another record year -- full year for Align. Net revenues of $4 billion and operating margin of 24.7% were both at the high end of our guidance for fiscal 2021. For Systems and Services, full year revenues increased 90.4% over the prior year to a record $705.5 million. For Clear Aligners, full year revenues increased 54.5% over the prior year to a record $3.2 billion. During 2021, we achieved several major installed base milestones, including our 12 millionth Invisalign patient, 68,000 iTero scanners sold and 47,000 Exocad software license install. Together, these elements are the foundation of the Align Digital platform. Proprietary combination of software, systems and services designed to provide a seamless experience and workflow that integrates and connects all users, doctors, labs, patients and consumers. For Q4, revenues reflect continued strong growth and momentum from iTero scanner services revenues, particularly in North America, offset by lower-than-expected Invisalign Clear Aligner revenues. Through most of the fourth quarter, our Clear Aligner volumes were trending in line with our Q4 seasonality. However, the environment quickly changed in December with the rise of COVID-19 Omicron variant. We believe our Q4 Clear Aligners volumes were impacted by an increase in COVID-19 Omicron cases that cause customer lab shortages from a staff standpoint, practice closures or reduced hours and less patient traffic in December and that continued into…

Thanks, Joe. Now for our Q4 financial results. Total revenues for the fourth quarter were $1.31 billion, up 1.5% from the prior quarter and up 23.6% from the corresponding quarter a year ago. For Clear Aligners, Q4 revenues of $815.3 million were down 2.7% sequentially due to lower Invisalign volumes, partially offset by slightly higher ASPs and up 16.3% year-over-year, reflecting Invisalign volume growth across all geographies and higher ASPs. In Q4, we shipped 631,100 Invisalign cases, a decrease of 3.7% sequentially, an increase of 11.1% year-over-year. In addition, we shipped to 83,500 Invisalign doctors worldwide, of which over 6,400 were to first-time customers. Q4 comprehensive volume increased 13.1% year-over-year and decreased 4.5% sequentially. And Q4 noncomprehensive volume increased 6.6% year-over-year and decreased 1.7% sequentially. Q4 adult patients increased 10.4% year-over-year and increased 0.1% sequentially. In Q4, teens or younger patients increased 13% year-over-year and decreased 11.8% sequentially. Clear Aligner revenues were unfavorably impacted by foreign exchange of approximately $11.4 million or approximately 1.4 points sequentially. On a year-over-year basis, Clear Aligner revenues were unfavorably impacted by foreign exchange of approximately $1.5 million or approximately 0.2 points. For Q4, Invisalign comprehensive ASPs increased sequentially and year-over-year. On a sequential basis, Invisalign comprehensive ASPs reflect higher additional liners, partially offset by unfavorable foreign exchange and higher discounts. On a year-over-year basis, comprehensive ASPs reflect higher additional aligners, partially offset by higher discounts. Q4 Invisalign noncomprehensive ASPs decreased sequentially and increased year-over-year. On a sequential basis, Invisalign noncomprehensive ASPs were unfavorably impacted by foreign exchange, partially offset by higher additional aligners. On a year-over-year basis, Invisalign noncomprehensive ASPs reflect higher additional liners and product mix, partially offset by higher discounts. Clear Aligner deferred revenues on the balance sheet increased $68.5 million or 6.9% sequentially and $332.9 million or 45.8% year-over-year and will…

Thanks, John. Overall, despite the disruption from the Omicron in December, we delivered a record year with strong revenue growth and operating margin, in line with our guidance for the full year on top of a record Q4 and 2020 a year ago. As you look back, I wanted to take a moment to recognize our accomplishments and thank our employees and our customers for another remarkable year. In the face of ongoing challenges related to COVID-19 and economic uncertainty, we remain steadfast in our commitment to our employees, customers and the focused execution of our strategic initiatives, and our customers remain confident in our ability to support them. Operating in this environment has not been easy, but after 2 years of navigating uncharted waters, the Align team is more agile and resilient than ever. In 2021, we met our goals and achieved numerous milestones. Globally, we delivered across each of our strategic priorities, which are highlighted in our Q4 '21 webcast slides. Our performance over the last year reaffirms the incredible size of our target market, and demonstrates that our strategy and investment in recent years are validated by the trust and faith our customers place in us. In 2022, we must continue to extend our leadership in digital orthodontics and restorative dentistry through relentless execution of our strategic initiatives, focusing on expanding our commercial, manufacturing, R&D, clinical, treatment planning and manufacturing operations, and building our quality and regulatory muscle globally in existing and emerging markets, reaching millions of consumers who want to transform their smiles using the most advanced Clear Aligner system in the world through the right investments in advertising, PR, digital, social media and influencer marketing to drive demand and conversion through Invisalign trained doctors. Invisalign ortho adoption and teen utilization of Invisalign treatment and training…

[Operator Instructions] Our first question comes from the line of Nathan Rich with Goldman Sachs.

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

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

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

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

And our next question comes from the line of Matt Miksic with Credit Suisse.

Just maybe a follow-up on that -- the question on planning assumptions around your Q1 comments and 2022 guidance. Maybe, Joe, if you could just give a sense as to how -- you mentioned improvements in early January. Is this kind of sluggish recovery wrapping up by the end of the quarter? Is Q2 the inflection to help you get to that 20%, 30% growth that you mentioned? And then just if I could also on a similar topic. Just the idea that somehow there is -- you've -- I think many of the folks on the call heard this idea that somehow there was outsized growth due to the pandemic, and we're sort of digesting that somehow now, which I know it's sort of one of the ways that folks look at Align and aligners and so on. If you could maybe just talk about your confidence that, once we get through the staffing that the demand that's in front of you of the growth drivers that you're laying in on top of your core markets, that we're not looking to digest some sort of outsized growth during the pandemic here in '22, but we're getting back to a growth market that's still highly underpenetrated? Sorry for the lengthy 2-part question, but I would appreciate it.

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

And our next question comes from the line of Elizabeth Anderson with Evercore ISI.

I guess on the first side, I think you obviously talked about some of the increased investments that you're making on marketing and also in sales capacity, et cetera. How do we think about the conversion efforts of those initiatives versus sort of prior -- and sort of where do you sort of see that hitting in terms of as we're thinking about the pacing of the year?

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

And we -- as we mentioned, we added some sales resources in Q4 to get ahead of sales territories and changes and so on. We saw that show up in Q4, but it really gives us the opportunity then to be able to grow as we get into this year. So it's continued investments to drive the biggest return and that's what we're continuing to do.

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

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

And our next question comes from the line of Jon Block with Stifel.

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

I think, Jon, it's continued investments like we have with the story to continue to invest that we have and being able to be able to grow into this market. So I think when we look at it overall, we're kind of pegging the GAAP rate to be at 24% for 2022, and we'll evaluate and update as we go forward. But it's continuing to invest. We've got, as you know, our Poland facility going live in 2022. And we have some of those moving parts that will impact our gross margin slightly as a result of that, but -- and that translates to op margin. But those are the initiatives that we have, but nothing out of the ordinary that we've done in the past.

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

I think I'll maybe start with the last part of your question, Jon. When you think of what's happened in the world with Omicron and the effects of that, it's affecting parts of the world at different paces. You see it even within the U.S. Northeast maybe gets hit with it first. It starts to open up later. After that, maybe other parts of the country get impacted. So it's not like it just happens and you immediately get it back. It comes down to when people are able to go to work, in this case, at doctors' offices to be able to provide care and then it comes down to when patients feel comfortable to be able to go back in. And so it's not an immediate effect in how we look at it. So think of -- and what we've learned from kind of COVID 1.0, the first time we saw this, we know that there's an impact, and then there's a recovery period -- and that's our best view of that recovery period.

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

Our next question comes from the line of Jeff Johnson with Robert W. Baird.

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

I can answer both of those, Jeff, in terms of the 20% to 30%. We're not going to call kind of high low on that. We're kind of reaffirming our 20% to 30%, similar to what we talked about at Investor Day despite some of the things that we've talked about here with Omicron in some of those cases and so on. But when we look at Invisalign case volume, we would expect to be in and above that range. So nothing out of the ordinary from what we expect. We don't see -- our ASPs were very similar to what they were in the prior quarter, provided that there's not FX or other things that we're not projecting now. And if there's no change there, we would expect to be in that range as well.

Fair enough. And then, Joe, maybe kind of just update us on kind of the competitive landscape. We've seen a couple of DSO contracts get announced here from others in the last few months and maybe some talk over in China about some growing competition or slowing end markets in that. But where do you see your end markets across the globe from a competitive standpoint? Would just love to hear your update there?

Jeff, I think from a competitive standpoint, nothing's really changed. As we look out there, you can see the tech we just announced this week, we move on in the sense of our capabilities, what we can do. My position has always been that competition isn't really affecting us from a price standpoint. I think you see that in what we're doing. But they do serve to help to broaden the market and increase the market and make -- increase the awareness. So we feel we are -- in this kind of competitive environment, we're doing well, and we lead in this sense and there's nothing as we go into 2022 that I won't reflect on it's changed competitively than what I've seen over the last 3 years.

And our next question comes from the line of John Kreger with William Blair.

John, two quick ones for you. I think you said that the receivable DSOs were up about 7 days year-over-year. Can you just expand on that? Was that -- were you providing some extra inducements to practices or anything to be concerned about there?

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

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

That's GAAP.

Our next question comes from the line of Jason Bednar with Piper Sandler.

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

Yes. I think to clarify, Jason, the month end showed improvement versus December. It was -- it's how COVID spreads across, whether it's one country or parts of countries and so on and how it affects the staff and how it affects the patients in. But as we exited, we're in a better trend line than we started the month with.

Okay. Understood. And then maybe as a follow-up to an earlier question, really for Joe or John. I know you often talk about the internal investments you keep making in the business, you talked about running a similar growth algorithm here in '22 as you have in the past. But we also have 2 different case examples here of the market with pre-COVID, a lot of those resources were helping funding faster growth in your team business. And then the last 18 months during the pandemic, adult demand has really taken off and growing faster than teens. So I guess my question here is, as you went through your year-end planning and you're obviously resourcing this business in another significant way here in '22, how do you approach it for this year? Is it from a sales force add marketing plan and whatnot? Is it -- are you really with respect to how you're thinking about the adult and teen mix that you're expecting for this year?

I mean we're -- it's Joe, Jason. I mean there's no big change in the sense of what we think the critical drivers are that we have to invest in to drive growth. Where we invest and how we invest is really important. When you look at technology, when you look at consumer pieces, however, parts of those demand inflations you want to go to. But remember, there are certain ratios that we always hold to in this business, its that what we invest in. And we hold ourselves accountable for those ratios and that performance from a profitability standpoint. But I can't overstate the importance of having a strong sales force. We talked about additional sales people that we are putting in place. Our consumer brand means a lot in the sense of our growth. And that's becoming more and more sophisticated in the sense of where we spend those dollars and how we spend those dollars. But leading in technology, you have to have technology in this business, and that's why we're excited to really announce what we did today. We've been working on these programs for 3 years or more. And these are game breakers in the sense of how you interface with a doctor and how a doctor interface with patients.

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

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

Sure. The last question we have is from the line of Brandon Couillard with Jefferies.

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

Yes, it's a good question. We are seeing freight -- it looks like many companies have. We have a lot of plans in place to drive productivity. The operating team is very aware of our cost inputs and where we can drive productivity, getting closer to our customers, like we talk in Poland. Once we get there, that will be a freight savings. And once we're operational there, and that will help. But we haven't really finalized any plans on a price increase. We'll evaluate as we go through. And the first people that we talked to would be our customers. But you're right, we understand the price is important, but we're also very sensitive to our customers and what they've had to go through as we've been on this COVID journey. So nothing in the works now.

Okay. And then Joe, on Ontario, I appreciate the detail as far as more than 50% of placements being new buyers. I would actually expect that to be normally the case. So what's the relevancy of that metric? Is that up a lot compared to historical levels? And what percent of those placements are being used for Invisalign case submissions?

Over the years, Brandon, we've obviously seen that correlation, and we've communicated it to you in a sense if you sell more iTero scanners, you sell more Invisalign. And that's obviously, the front end of our digital system and it works for us really well. We just had to side the 50% because, one, you saw we had a very strong fourth quarter for iTero. And we always have strong fourth quarters. So this was exceptional in that sense. And it was a good signal from the practices that we're dealing with that this had to do with the day-to-day flow that you see from an Invisalign patient standpoint, it had nothing to do with their enthusiasm in the sense of embracing the digital environment that we're talking about. And so to see the number of sales that we had really in the last couple of weeks of the quarter, it was just a good signal for us. And we wanted to share that with you is that this market is embracing digital even when it's under pressure, and we're performing really well in that area. As far as 50%, whatever and how, I don't know exactly what the historical percentages are in that way. But we're -- obviously, what we're excited about is once those scanners are in place, it gives us a good foundation to sell Invisalign.

And we have reached the end of our question and session. I now turn the call back over to Shirley Stacy for closing remarks.

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

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.