Align Technology, Inc.

Greetings. Welcome to the Align Q3 2022 earnings call. At this time, all participants are in the listen mode only. A question and answer session will follow the formal presentation. Please note this conference will be recorded. I would now like to turn the conference over to our host, Shirley Stacey with Align Technology. You may begin.

Good afternoon and thank you for joining us. I'm Shirley Stacey, Vice President of Corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO, and John Marici, CFO. We issued third quarter 2022 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. A telephone replay will be available today by approximately 5.30 p.m. Eastern Time through 5.30 p.m. Eastern Time on November 9th. To access the telephone replay, domestic callers should dial 866-813-9403 with access code 119351. International callers should dial 929-458-6194 using the same access code. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events 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 flawed-looking statement. We have posted historical financial statements, including the corresponding reconciliations, including our GAAP to non-GAAP reconciliations, if applicable, and our third quarter 2022 conference call slides on our website under quarterly results. Please refer to these files for more detailed information. With that, I'd like to turn the call over to Align 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 Q3 results and discuss the performance of our two operating segments, system and services, and clear aligners. John will provide more detail on our financial performance on our view for the remainder of the year. Following that, I'll come back, summarize a few key points, and open the call to questions. Our third quarter results reflected continued macroeconomic uncertainty and weaker consumer confidence, as well as significant impact from unfavorable foreign exchange rates across currencies that affect our operations. On a constant currency basis, total Q3 revenues were reduced by $25 million, or 2.7% sequentially, and $57.4 million, or 6.1% year-over-year. one of the largest quarterly foreign exchange impacts in our history. We remain confident in the execution of our strategic growth drivers despite the continuing economic headwinds. In Q3, we reached our 14th millionth Invisalign patient milestone during the quarter, which includes nearly 4 million teenagers and kids as young as six years old who have been treated with Invisalign clear aligners. In Q3, Team K starts of 200,000 We're up 13% sequentially and just off slightly compared to Q321 a year ago, when a record 206,000 teenagers started Invisalign treatments. We're also excited to be launching significantly new products and technologies that further enhance the Align Digital platform. Leading to digital transformation of the practice of dentistry, during the quarter, we also began to commercialize ClinCheck Live Update software, Invisalign Practice App, Invisalign Personal Plan, Invisalign Smile Architect, the Invisalign Outcome Simulator Pro with in-face visualization, ConeBeam computer tomography integration with ClinCheck software Invisalign, virtual AI software, and iTero ExoCAD Connector. These technology advancements represent an important expansion of our digital platform that we believe will help our doctor customers increase treatment efficiency and deliver superior clinical outcomes and patient experiences, positioning us to drive growth when the market inevitably rebounds. We'll be showcasing these innovations next month at the Invisalign Ortho Summit in Las Vegas, the premier education and networking experience for Invisalign practices with the most peer-to-peer presentations of any Invisalign education event. The Q3 systems and services interest in our iTero scanners was good with increased product demos across the regions. Doctors are increasingly recognizing the substantial benefits of inter-world scanning and end-to-end digital workflows with the iTero scanner and imaging systems. At the same time, increasing inflation, rising interest rates, and less patient traffic in dental practices are lengthening sales cycles and conversion time. For Q3, systems and services revenues of 157.5 million were down sequentially year over year. On a constant currency basis, unfavorable foreign exchange reduced Q3 22 systems and services revenues by approximately 4.1 million, or 2.5% sequentially, and approximately 9.9 million or 5.9 year-over-year. For Q3, scanner services' year-over-year revenue growth was strong across all regions, particularly due to increased subscription revenue driven by growth of the installed base of iTero scanners. Year-over-year growth also reflects increased sales of iTero wand sleeves and continued growth of our scanner leasing rental programs. We continue to work closely with our doctor customers to support their practice growth and digital transformation goals. This includes understanding different ways to enable them to navigate to more uncertain economic environment. Over the past year, we've had good success rolling out new leasing programs in Latin America and certified pre-owned, or CPO as we call it, options in India and North America. We're also looking at new opportunities on the capital equipment side for our DSO partners. This is a natural progression in an equipment business with a large and growing installed base. As we introduce new products, There are more opportunities for customers to upgrade, to make trade-ins, and to provide refurbished scanners for emerging markets, too. We expect to continue to roll out programs that are especially helpful for customers in the current macroeconomic environment. It's selling the way doctors and customers want to do business and leveraging our balance sheet. We're still early. We're pleased with the contribution and margin accretion we're seeing. For our clear aligner segment, macroeconomic uncertainty and weighting consumer confidence continues to impact the dental market overall. making for a challenging operating environment across the board. For Q3, third-party reports indicate there are fewer new patient visits, less traffic flow, and lower orthodontic case starts overall. Our clear aligner volumes further reflect the underlying orthodontic market trends and a shift away from adults toward teens in Q3. Q3 clear aligner revenues were down 8.2% sequentially and down 12.5% year-over-year compared to Q3 21 year-over-year revenue growth rates of plus 35%. On a constant currency basis, Q3 2022 clear aligner revenues were reduced by unfavorable foreign exchange of approximately 21 million, or approximately 2.8% sequentially, and approximately 47.4 million, or approximately 6.1% year over year. For the quarter, Q3 aligner volumes reflect a sequential increase in Invisalign shipments from Asia Pacific and Latin America, as well as North American Invisalign team cases, offset by lower volume EMEA in North America, primarily Invisalign adult cases. For Q3, Invisalign First for kids as young as six grew year over year and was strong across all regions. On a trailing 12-month basis, as of Q3, Invisalign clear aligner shipments for teens and young kids using Invisalign First up year over year to over 734,000 cases. For Q3, the total number of new Invisalign-trained doctors increased sequentially, 8.5%, driven by North America and Asia Pacific. In terms of Invisalign submitters, the total number of doctors shipped for Q3 increased sequentially to 84.4 thousand doctors, the second highest number this year, driven by Asia Pacific and the Americas. From a channel perspective, ortho submitters were slightly year-over-year up, especially from doctors submitting teen cases offset by a few GP dentists year-over-year, especially in EMEA. For other non-case revenues, which include retention products such as the VERA retainers, clinical training and education, accessories, e-commerce, and our new subscription programs such as our DSP, Q3 revenues were up both sequentially and year-over-year. This reflects strong growth in retainers sequentially and year-over-year growth across all regions driven by more submitters. In the U.S., revenues for our doctor subscription program increased sequentially and year over year. I'm very pleased to see continued momentum in non-case revenues driven by subscription-based programs that we expect to continue to expanding across the business. Now, let's turn to the specifics around the third quarter results, starting with the Americas. The Q3 Invisalign case volumes for Americas was down sequentially single-digit percentages and primarily due to lower Invisalign adult shipments. The environment remains challenging. and feedback from our customers indicates consumer financing and patient no-shows affecting their practices in Q3, especially with adult patients. Q3 Invisalign volume also reflects increased case submissions from orthodontic channel and sequential growth in the teen segment. For Q3, teen patients were most resilient, reflecting continued momentum in younger patients with Invisalign First, as well as the new Invisalign Teen Case Pack. During Q3, Invisalign Teen Case Packs grew both sequentially and year over year. As a reminder, Invisalign Teen Case Packs, a new subscription program that enables orthodontists to buy clear aligners and packs in advance. They also include exclusive practice development benefits with the Invisalign brand and require an incremental volume commitment from doctors. Teen Case Packs are currently available in the U.S., Canada, and France, and we expect to be expanded more in the May region. Turning to our international business for Q3, Invisalign clear aligner volume was down very slight sequentially, 1.4%, with strong sequential growth for APAC offset by lower volume in EMEA. For EMEA, Q3 operating environment was challenging. Inflation in the Eurozone is more than 10%, and global macroeconomic factors weighed on consumer sentiment and purchasing decisions, especially for adult patients, which compounded the impact of Q3 summer seasonality. Similar to the Americas, doctors in EMEA also reported increased appointment cancellations and the impact of less patients financing their purchases. EMEA teen patients also resilient in Q3 increased sequentially in Iberia, as well as France, where we introduced teen case packs during the quarter. In APAC, Q3 sequential growth was led by China, Japan, and ANZ, despite ongoing COVID restrictions and lockdowns in parts of China and Japan. On a year-over-year basis, Invisalign case volumes reflected increased shipments across almost all markets, led by Taiwan, Thailand, India, and Korea, driven by increased submitters. In Q3, APAC sequential growth also reflects strong demand from our expanded Invisalign clear aligner product portfolio in China. Recall in late April Q2, we introduced two new products that better serve the expanding market in China, Invisalign Adult and Invisalign Standard clear aligners leverage our proven technology while broadening our appeal to more consumer segments. Q3 was the first full quarter offering these new products that provide doctors and patients in China with broader clinical and affordable options for moderate to complex adult cases. Finally, I'm pleased to share that the Invisalign system was recently awarded the Gold Design Award for 2022, making it the first orthodontic appliance to win the prestigious award in Japan. In the judges' assessment of the Invisalign system, they emphasized that the opportunity for teeth straightening is high in Japan, and cited the barrier to adoption by Japanese consumers as resistance to metal braces, and praised the Invisalign system as an orthodontic solution that can improve the quality of life during treatment. We certainly recognize the importance of the Japanese market for digital orthodontics, and it's one of the reasons we opened our first office in Tokyo nearly 15 years ago and established treatment planning operations in Yokohama a few years ago. Turning to new innovations, we continue to deliver our technology roadmap. As I mentioned earlier, during the quarter, we began to commercialize several new products and services that we previously announced would come to market in the second half of 2022. These technology advancements illustrate our commitment to continuous innovation in digital orthodontics and remain excited about the transformational projects that we're working on as we continue to drive the evolution of our industry. No other dental company has the experience, including over 14 million patients treated to date, to lead to transformation of the practice of dentistry. Our consumer marketing focused on educating consumers about the Invisalign system and driving that demand to Invisalign doctors' offices, ultimately capitalizing on the massive market opportunity to transform 500 million smiles globally. In Q3, we built on our successful Invis is Media campaign and continued our launch of the Invis is Drama Free targeted at teens and Invis When Everything Clicks targeted at adults. Our teen campaign Invis is Drama Free highlights the benefits of Invisalign while humorously juxtaposing them with the significant trade-offs involved with using braces. Our Invis is When Everything Clicks campaign showcases Invisalign treatment transforming smiles and the resulting confidence it gives to young adults. During Q3, we had over 4.3 billion impressions delivered and 14 million visits to our website, a 1.6% year-over-year increase as a result of right-sizing our media investments. We're also right-sizing our consumer media investments across all Quora and Maya markets, impacting the impressions and unique visits. In the U.S., we continued our influencer and creator-centric campaigns, partnering with leading Smile Squad creators like Olympic gold medalist Suni Lee, Michael Lee, Josh Wishers, and Marseille Martin. Each of these creators shared their personal experience of Invisalign treatment and why they chose to transform their smile with Invisalign aligners. Most recently, Suni Lee shared her positive experience with Invisalign in major media programming, including Good Morning America, People.com, resulting in over 93 million impressions. We continue to invest in consumer advertising across APAC regions, resulting in a 72% year-over-year increase in impressions and 29% year-over-year increase in unique visitors. Our ongoing campaigns were omnipresent across the top social media platforms such as TikTok, Snapchat, Instagram, and YouTube to increase awareness of the Invisalign brand with young adults and teens. In Q3, we launched a global plot on the Roblox platform within the popular game Live Topia, creating a fun experience for players to learn about the benefits of Invisalign treatment. To date, we had over 5.9 million impressions delivered and over 2.6 million unique visitors on the game experience. Adoption of my Invisalign consumer and patient app continues to increase with two plus two million downloads to date. Usage of our key digital tools also continued to increase. Live update was used by 41,000 doctors On more than 395,000 cases, reduced time spent in modifying treatment by 18%. Invisalign practice app has been downloaded 314,000 times to date. Further, we received more than 110,000 patient photos and our virtual care capability to date, providing rich global data to leverage our AI capabilities and improve our services for doctors and patients. The investments that we make to drive patient demand and conversion to support our doctor customers is unparalleled in our industry, leveraging the global recognition of the Invisalign system. No other dental company equals our brand strength today. For more details on our consumer marketing programs, please see our Q3 22 earnings and conference slides. Turning to ExoCAD. Overall, I'm very pleased with our progress with the ExoCAD business and its leadership in restorative dentistry. In addition to the iTero ExoCAD connector I mentioned previously, During the quarter, we also introduced iTero Neary. Neary is near-infrared technology, interaural camera images that are now automatically imported into DentalCAD when designing restorations, enabling technicians to visualize the internal and external tooth structure and optimize the process of margin line tracing. The new XSnap module is a model attachment for a printable 3D articulated system featuring a spherical head which allows a precisely executed movement. And Ivoclar's Evolution Dental System, a complete workflow for digital production of high-quality removable dentures, is now available on ExoCAD. Together, the iTero and ExoCAD product portfolios help accelerate the digital transformation of dental practices by facilitating the way doctors and labs collaborate to deliver better care for their patients. As part of the Align Digital platform, The integration of iTero's digital scanning and ExoCAD's complete software solution delivers seamless end-to-end digital workflows from diagnosis to treatment, planning, and then fabrication. Customers are already utilizing the automated workflows, unlocking efficiencies and productivities, which are more important than ever in the current economic climate. With the recent integration of iTero Neary and inter-world camera images, unique to iTero Element 5D imaging systems, and Exocad's Regica software release align as redefining restorative visualization and treatment planning for the doctors and labs. We are committed to continually innovating the dental industry to drive efficiency and clinical excellence for the benefit of our customers and their patients. With that, I'll now turn it over to John.