Welcome to Align Technology, Third Quarter 2023 Earnings Call. [Operator Instructions] Please note that this conference call is being recorded. I would now like to turn the conference over to your host, Shirley Stacy, with Align Technologies. 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 third quarter 2023 financial results today via Businesswire, which is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately one month. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events, products and outlook. These forward-looking statements are only predictions and involve risks and uncertainties that are described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission, available on our website and at sec.gov. Actual results may vary significantly and Align expressly assumes no obligation to update any forward-looking statement. We have posted historical financial statements, including the corresponding reconciliations, including our gap to non-GAAP reconciliation if applicable, and our third quarter 2023 conference call slides on our website under Quarterly Results. Please refer to these files for more detail. Note as of Q3, DSP touch-up cases and associated revenues have been reclassified to the non-comprehensive clear Aligner segment and are now reflected in our reported clear Aligner case volumes, revenues and business metrics. Prior to this quarter, they were not reported in the non-case category. Unless otherwise stated all metrics include DSP touch up cases in reported clear Aligner volumes. With that, I'll turn the call over to Align technologies 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 third quarter results and discuss a few highlights from our two operating segments, Systems and Services and Clear Liners. Jon will provide more detail on our Q3 financial performance and comment on our views for the remainder of the year. Following that, we'll come back and summarize a few key points and we'll take questions. Our third quarter results reflect lower than expected demand in a more difficult macro environment than we experienced in the first half of 2023. Dental practices and industry research firms have reported deteriorating trends, including decreased patient visits and increased patient cancellations, along with fewer orthodontic case starts overall, especially among adult patients. The September Gauge report, which reflect more than 1200 North American Orthopactices shows deceleration for orthodontic treatment, and new orthodontic patient appointments were down 8.7% year over year, and ortho case starts were down 6.9% year over year, the biggest decrease in over a year. Despite these headwinds, total Q3 worldwide revenues of 960 million were up 7.8% year over year, with growth across all regions. For Q3, we had record clear liner shipments to teenage and younger patients, which increased 10% sequentially, and 8.4% year over year, driven by continued strength from iInvisalign First. Q3 year over year revenue growth also reflects improvement in APAC, offset by more pronounced summer seasonality in EMEA and North America. Our Q3 systems and services revenues were up 4.9% year over year despite continued challenges for capital equipment, primarily due to higher iTero scanner volumes in the Americas and APAC regions, reflecting certified preowned or what we call CPO sales, scanner, leasing and rental programs, as well as increased services revenue. Q3 systems and services revenues…

Thanks Joe. Now for our Q3 '23 financial results. Total revenues for the third quarter were $960.2 million, down 4.2% from the prior quarter and up 7.8% from the corresponding quarter a year ago. On a constant currency basis, Q3 revenues were impacted by unfavorable foreign exchange of approximately $2.7 million, or approximately 0.3% sequentially and favorably impacted by approximately $4.2 million year over year, or approximately 0.4%. For clear aligners, Q3 revenues of $794.9 million were down 4.5% sequentially, primarily from lower volumes and lower ASPs. On a year over year basis, Q3 clear aligner revenues were up 8.5%, primarily due to higher ASPs, higher volumes and higher non case revenues. For Q3 invisalign ASPs for comprehensive treatment were down sequentially and up year over year. On a sequential basis, ASPs reflect larger discounts, product shift, mix shift to lower priced products and unfavorable foreign exchange, partially offset by higher additional aligners. On a year over year basis, the increase in comprehensive ASPs reflect higher additional aligners and price increases, partially offset by larger discounts and unfavorable product mix shift. For Q3 invisalign ASPs for non-comprehensive treatment were down sequentially and up year over year. On a sequential basis the decrease in ASPs reflects larger discounts, higher sales credits, and unfavorable product mix, partially offset by higher additional liners and favorable foreign exchange. On a year over year basis, the increase in non-comprehensive ASPs reflects price increases, higher additional aligners and favorable foreign exchange, partially offset by product mix shift. In Q1 '23 we launched the invisalign comprehensive Three and Three product. The Three and Three configuration offers our doctor customers invisalign comprehensive treatment with three additional liners included within three years of the treatment end date, instead of unlimited additional liners within five years of the treatment end…

Thanks, John. While our third quarter results and fourth quarter outlook reflect weaker consumer sentiment and increased headwinds including foreign exchange, Align is in a unique position to continue driving the digital revolution in the dental industry to help doctors transform and grow their practices with invisalign clear aligners, Itero Scanners and Align digital platform. We are very excited about the recent innovations developed to further revolutionize digital treatment planning for Orthodontics and also restore to dentistry by providing doctors with greater flexibility, real time treatment plan modification capabilities, and digital solutions to help improve practice productivity and patient experience, which are even more important to our customers in the current environment. This includes clincheck live update for 3D controls invisalign practice App, invisalign personal plan or IPP, Invisalign Smile Architect, Itero exocad [ph] connector Invisalign Outcome Simulator pro and invisalign virtual Care AI software. These digital tools are continuing to gain adoption and help doctors gain efficiencies. In Q3 Clincheck Live Update was used by 41,000 doctors on more than 560,000 cases, reducing time spent and modifying treatment by 21%. Invisalign Practice app is now actively used by about 87,000 doctors, with over 5.2 million photos uploaded during the quarter via the Practice app. In addition, we will launch Invisalign Pallet expander or IPE system in Canada this quarter. IP is our first direct printed orthodontic device that provides a safe, comfortable, and clinically effective alternative to metal paddled, expanders and boosts our market opportunity in the teen market by addressing a portion of cases we couldn't otherwise treat without IPE. In summary, we're committed to balancing our investments in near and long term growth drivers while delivering improved operating margin as we navigate one of the most challenging operating environments in recent history with increasing macroeconomic pressure on doctors and their patients, we have an enormous opportunity to continue driving adoption of digital orthodontics and restorative dentistry and a responsibility to optimize our investments for the current environment. Before turning the call over for questions, I'd like to address the war in the Middle East and our Itero scanner business. The situation continues to evolve and is very fluid. We are monitoring developments closely. Our singular focus at this stage is on the safety and security of our employees and their families and our doctors and their staff and patients. Align offices and scanner manufacturing facility in Israel are currently open and operating. While we hope the situation will improve, we're preparing mitigation plans to ensure business continuity and we'll update our customers and other stakeholders as needed. Now I'll turn the call back over to the operator for questions.

Certainly. [Operator Instructions] And our first question comes from the line of Jason Bednar from Piper Sandler. Your question, please.

Hi, Jason.

Jason, you might have your phone on mute.

Operator, you want to go to the next question?

Certainly.

And we'll come back.

Certainly. One moment. And our next question comes in line Brandon Vazquez from William Blair. Your question, please.

Hey, everyone, thanks for taking the question. On the first one, maybe can we just start a little bit? It sounds like macro, and given the data that you guys were talking about is probably getting a little worse into the end of the year. Maybe just talk about how that kind of trended through the quarter, how we're trending now. I think what a lot of us are trying to get our head around is what's the direction of macro in the dental space going into the end of the year and into 2024, especially as you look at kind of the consumer and then CapEx on scanners. So how are you guys seeing that from your end right now?

When you look at the fourth quarter and the way we have done our forecast overall, we felt great about teens in the third quarter and what we reported to, but adults were really highly affected. And when you run through the fourth quarter, it's primarily an adult season for us. And China is a big teen season in the third quarter, too. When you look at the gauge data for September and what we see in October so far, and even some of the consumer profiles around how they're feeling about their finances and all, we've basically just projected what we've seen in September forward to the fourth quarter.

Okay. And then maybe as a follow up on the teen side, it sounds like the Ortho channel, based off the market data you have, is that teens are declining year over year. But you guys, or at least sequentially, you guys are up both, it looks like. So are you guys taking share within the teen market? It's a little bit of a funny dynamic because I think earlier this year, as the Ortho channel got a little weaker, they were going to wires and brackets. But it seems like now you're taking share. How durable is that and what are you guys kind of seeing that's driving that in the underlying market? Thanks.

We were happy to see that change and the gauge data that showed wires and brackets going down and competitive aligners going down and us going up. But you can't draw a line through one dot. We feel good again about the technology and all that. We're presenting the Efficiencies and all we're offering to Orthodontists, and we think that's a good stimulant in that sense. But right now, we're going to have to take this thing quarter to quarter.

Thank you. One moment for our next question. And Jason Bednar from Piper Sandler. Your line is open.

Hi, Jason.

Jason, we're still not hearing you. Shall I move on? Yes, please. Certainly. One moment for our next question. And our next question comes from the line of Jeff Johnson from Baird. Your question, please.

Mr. Johnson, your line is open. One moment - certainly as we go to our next question. Our next question comes from the line of Jon Block from Stifel. Your question, please.

Hey, guys, can you hear me okay?

Hey, John. Just fine.

All right, so far so good. Maybe a couple of questions. I'll start right now, you just seem highly tethered to the consumer. But in '24, you've got some incrementals, right? You just launched IP in Canada. You've got remote monitoring. We think maybe you have a new scanner. So just like your thoughts on the ability for the company to manufacture more of your own growth in 2024, and any commitment to grow revenues year over year in '24. And where I'm going with that is even the revised guidance you'll grow year over year in 2H '23. But if I annualize your 4Q number and just sort of run rate that you arguably land down year over year with call it a more dynamic set of innovation. So not asking for a number, but clearly things are moving around. And how do we think about what that means again, to manufacture your own growth in '24 and any commitment to have positive revenue growth in '24?

Hey, John, it's a good question that's one of the things we talk about obviously here is with what we presented at the Investors conference and the new technology that we're offering, those are areas that we can really expand what we call our penetration in the marketplace and control a certain amount of our destiny. I think you know as well as know we can't fight a market from a down standpoint in the sense of that that won't affect us in some way. I would throw DSP into that whole question also because you see the continued growth in DSP and I'd say a business model change. And so those kinds of things, I feel like we can drive more demand in the marketplace as we get into 2024. I just can't preclude what that consumer sentiment is going to look like at that point in time, but it certainly gives us also the efficiency gains that we show through the software that I just talked about in my script, too, with different orthodontists that seem to be taking hold and you pick up in your surveys also, John. So we do feel good about that. It's just the uncertainty of this marketplace and it obviously surprised us coming out of the third quarter. We're going to have to get through this quarter, and as we go into 2024, we can be more specific about what we think, what that opportunity is.

Okay, that was very helpful. And then maybe just this might build on Brandon's question earlier, but when you guys guide, you've got almost half the quarter in the bag. So clearly things changed, notably in the last seven weeks of the third quarter. I know you guys called out Gage's September data. Joe, you referenced the October what was the 3Q deviation? I mean seems like it was largely North America. And EMEA, did APAC perform as expected, if you could answer that. And then I guess where I'm struggling is I think we all know it's not a robust consumer out there and that narrative around soft landing or not, if that holds true, but it doesn't seem like things changed all that dramatically in the last seven weeks. And so anything you can give Joe to elaborate, because clearly the exit rate in the quarter was very different than the way things started. Thank you.

Yeah. John, you know, third quarter is I call, our most non linear quarter, and it's the most difficult to predict. And it's because it know three major components to it. One is obviously the seasonality of our European business because of the vacation base or whatever, and the way that comes back is not always consistent. And in this case, it did not come back in the way that we had hoped it would. Secondly is you count on a big China teen market. And we did well in China, I feel, from a growth standpoint, but it wasn't to a point that it could offset a slower rebound overall from a European standpoint. And the last thing is, in the United States, that lack of adult cases I mean, we did well on teen that lack of adult cases when we went into September was really felt. And so it's those three key variables that I think, is how we came out of this differently than what we anticipated as we went in.

Thanks, guys.

Thanks, John.

Thank you. One moment for our next question. And our next question comes from the line of Elizabeth Anderson from Evercore ISI your question, please.

Hi, guys. Thanks so much for the question. My question is so if we think about obviously we're talking about consumer weakness and sort of the cyclicalness of the business. If we think about sort of the headcount reduction and the SG&A spend can you help us parse out a little bit more about the cuts and how to think about how to sort of preserve margin as sort of we're seeing weaker demand and then how you need to invest again on the upcycle in order to continue to push penetration in what's obviously a very largely underpenetrated market over a longer period.

Hey, Elizabeth, this is John. So as we go through our planning process, like we do every year, we're prioritizing investments that we can continue to invest to be able to help grow the business. So we look at some R&D and some of the investments we make. We have a lot of new products coming to market, as we've talked about at Investor Day. We want to preserve that flow of products. We want to make sure we're properly reaching our customers so we prioritize some of the sales and go to market activities that we have around that. But we're looking at all parts of the business to say, okay, what can we adjust? What can we make adjustments to still deliver on our priorities that we have as a business to help try to grow with the means that we've seen, but then also deliver the profitability and being able to see this margin accretion. We've seen that all year as we've gone through. And essentially what we're calling for in the fourth quarter is the continuation of that margin accretion. And that's just through a combination of just looking at those investments and making sure that we properly invest for the future.

Got it. And maybe as a follow up, obviously I have hope for the safety of all of your employees in Israel. Can you talk about sort of the capacity of that organization if sort of things stay as they are? Is that something where you're sort of drawing down inventory elsewhere, not able to produce, if any, more details you could provide on that obviously unfortunate situation.

Back to know we're producing over there right now. I don't give you this. It's a reasonable amount of capacity. I've had other businesses in Israel at times like this, too. Not this bad. But in those situations, I feel like where it is now, we can manage it. As we talked about in the script, if the things get worse, the war over there. We can't guarantee what we have. But we have a terrific team there, very dedicated team. They're working both sides of the angle right now. We're bringing in materials. We're converting those materials, we're shipping those out. So the business is operating fine right now, but we have to just wait in the upcoming weeks and see what develops on their homeland.

Got it. Thank you very much.

Yeah, thank you. One moment for our next question. And our next question comes from the line of Aaron Wright from Morgan Stanley. Your question, please.

Great, thanks. I'm curious if you could break down a little bit the key components of the teen case volume trend you saw in the quarter by geography, specifically in the Americas region, and what's driving that. And I think you mentioned, like, invisalign first and how we should be thinking about visibility across that patient cohort just given you have some more inherent control over maybe that segment in this sort of environment. And then second part of my question is just more of a clarification, I guess, in terms of the fourth quarter guidance. Does it specifically assume that there's a further deterioration in the macro or just a continuation of what you saw in this September experience? And I just want to understand the buffers I guess you have in that expectation at this point. Thanks.

As far as the teenage patients, again, we're really pleased with the growth that we saw in teens, and it's a very important teen season. I think the teens perform extremely well. We saw strength across every geography. We saw in Europe. We saw in North America. We also saw it in China. I think our portfolio helps us a lot invisalign first. We led with that. Remember, those are patients that are anywhere between six and ten years old. We really have terrific results in those areas, but also with permanent dentition. We saw some good growth, too. So overall, I feel like it's a strong indication in the sense that we're hitting the dot, in the sense of where we want to with those specific consumers, and through the advertising programs that I talked about and also through our digital platform and then the specific products, like invisalign first and then IPE that rolls into Canada. And then more broadly as we move into 2024.

And just on the fourth quarter, Aaron really taking what we see in September continues into October, and we assume that things don't get better than what we saw in September. So it's a tough macro environment. There's less orthodontic case starts, lower patient traffic. And so we factor in all those based on what we saw, and that's what our projection is for. Q four.

Okay. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Jeff Johnson from Baird. Your question, please. Jeff, I don't know if you're on a speaker phone, but if you could lift the handset if that were the case. Still not hearing anything from Mr. Johnson. One moment for our next question .And our next question comes from Jason Bednar from Piper Sandler. Your question, please. Still not hearing Jason?

That's strange. We certainly will follow up with both Jeff and Jason. Operator, do you mind just going to the next question, please?

Certainly. One moment for our next question. Our next question comes from the line of Nathan Rich from Goldman Sachs. Your question please.

Great, thank you. Can you hear me okay?

Yes.

Okay, great. Joe, you mentioned the focus on delivering improved operating margins and you guided to non GAAP margins being up sequentially in the fourth quarter despite the reduction in the revenue guidance. I guess as we think about the business going forward, should we think about that four Q margin as a good base level for the business even in an uncertain demand environment? And are there additional actions you can take on the cost side to give yourself some additional cushion for margins going forward?

You've been watching us long enough to know that each of our quarters have a certain personality in the sense of the kind of operating profit we deliver. You can see in the fourth quarter that we feel good about where we stand right now and the levers that we can pull in order to deliver the operating margin that John talked about. So – I think you know, more than anything, I want the investors to understand that while we have this uncertain environment, from a demand standpoint, we're going to be responsible on cost. We'll invest in technology and we'll focus in those areas, but we're always looking closely in the sense of where we can rationalize, also where we can prioritize in different areas that will help in that operating profit area. John, anything you want to add on that's?

So we'll see the benefit that we've seen all year to be able to see that operating margin improvement. But as Joe said, we're prioritizing our investments. We look at this time as we finalize our plan for next year. But we have got a lot of technology coming and we want to make sure that we're properly invested there as well as being able to deliver like we can on an margin basis.

Okay, great. And if I could just ask a follow up on the 4Q guidance for clear liner volumes. I think you had said that you don't expect improvement in adult and had talked about, I guess, modeling what you saw in September through the fourth quarter. I guess how should we think about adult cases relative to the 381,000? I guess when we take that together, given how it sounds like September shaped up, should we expect a decline off of that 381 level in the fourth quarter for the adult cases specifically?

I think when you look at things, Nathan, like we said, teen showed up well in the third quarter. We're pleased with that. Seasonally comes down in the fourth quarter. And based on what we saw in September and so far in October, I think you would expect to see adults down as well.

Great. Thank you for the color.

Thank you. One moment for our next question. And our next question comes from the line of Brandon Couillard from Jeffries. Your question, please.

Hey, thanks. Good afternoon. Just a clarification, Joe or John on the adult trends and the weakness, is that predominantly in the US or is it about to extend outside the US as well? If you have any chance, you're willing to take a stab at some of the factors behind that and whether or not student loan repayments may be contributing to some of the [indiscernible] and sentiment in that customer base.

Remember, third quarter is a big teen quarter, but adults are obviously a large component of that. We saw that adult phenomenon in North America, but we saw it across each geography.

Okay, then just to follow up, John, on the fourth quarter, margins operating margins up with revs down sequentially, is that all coming from OpEx, or would you expect gross margins to bounce up sequentially as well?

When we talked about down sequentially on Op margin, that was on a GAAP basis. We have some of the restructuring and other things that include we expect sequential improvement on a non-GAAP basis from Q3 to Q4. And we didn't give specific gross margin guidance, but we're working to try to make sure that we work on our gross margin as well. But right now we've kind of given the guidance down to our margin.

Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Mike Ryskin from Bank of America. Your question, please.

Great. Thanks for taking the question, guys. I got a couple real quick here. First, hopefully you can hear me. First I want to ask on the right, sizing or some of the layoffs you discussed. I'm thinking back to 2020, sort of like peak COVID when everyone was panicking and some of your competitors or other players in the dental space announced some layoffs and you held fast and powered through it. And then the argument was that you saw it as being transient and you wanted to invest in growth and sort of be ready for the rebound. Just contrasting that with a decision to implement some cuts here. Does that mean anything in terms of your thoughts on the duration of the macro slowdown? Why, if this is just macro related and as you said, September slowed pretty suddenly, if there is a rebound, why not continue to invest given the balance sheet is strong, the free cash flows are strong, just sort of compare and contrast and lay out your thinking on that.

First of all, when you go back to 2020 that you referenced, and we did power through that personally, what I looked at that is I looked at that as not an economic issue. That was obviously a pandemic kind of an issue and I think I anticipated it have a clear beginning and a clear end. And so in that sense, I think it's easier to make that decision, whether that's right or wrong, with that kind of a thought process in mind. In this case, we're seeing unprecedented change from an economic standpoint. We're seeing consumer sentiment down. I mean, I'll have to go through all the economic data. You probably know this better than me, so there's a lot of uncertainty there. But I don't want to be misinterpreted that we're going to disadvantage this company in a rebound. No way. We're going to make sure that we're responsible in the sense of the resources and the restructuring that John talked about, too. We're going to make sure that we're well positioned in the key areas, too, that if we have a rebound, we'll be able to respond with the right kind of capacity and the right kind of product. So I feel like we're balancing that well right now.

Okay. All right. I appreciate that. And then second point, sort of piggybacking on I think it was Block's question earlier. Not going to ask you for the specifics on '24, but just thinking about this year. The price you took earlier this year certainly contributed to your revenue growth as we think forward to next year and your ability to take price again or potentially have to give price, given how much the macro has changed and how the demand dynamics have changed, how do you feel about pricing and products? Any opportunity to take that up again next year? Or on the flip side, are you potentially getting some pressure there where you might have to give a little bit?

Mike, I appreciate the question, but as far as price goes, we wouldn't make an announcement until our doctors really know in that sense, and we're still working through 2024.

Okay. All right, thanks.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Shirley Stacy for any further remarks.

Thank you, operator, and thank you for joining the call today. We look forward to speaking to you at upcoming financial conferences and industry meetings. If you have any questions, please follow up with Investor Relations Team and Jeff and Jason we certainly will get back to you after the call and speak on one and one Thanks everyone, have a great day.

Thank you. Ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.+