Align Technology, Inc.

Greetings. Welcome to the Align fourth quarter and 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Shirley Stacey, with Align Technology. You may begin.

Thank you. Good afternoon. 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 fourth quarter and full year 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 by approximately 5.30 p.m. Eastern Time. through 5.30 p.m. Eastern Time on February 15th. To access the telephone replay, domestic callers should dial 866-813-9403 with access code 328900. 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 forward-looking statements. We have posted historical financial statements, including the corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our fourth quarter and full year 2022 conference call slides on our website under Align 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 fourth quarter results and discuss a few highlights from our two operating segments, systems and services, and clear aligners. John will provide more detail on our Q4 financial performance and comment on our views for 2023. Following that, I'll come back and summarize a few key points and open the call to questions. You'll note that we have shortened our formal remarks in order to leave more time for Q&A. Overall, I'm pleased to report fourth quarter results that reflect a more stable environment for doctors and their patients in the recent quarters, especially in the Americas and EMEA regions, as well as parts of APAC. For Q4, Trends in consumer interest for orthodontic treatment, patient traffic and doctor's practices, and itero scanner demos improved. However, the unfavorable effect of foreign exchange on our fourth quarter and full year 2022 results reduced our revenues and margins significantly. Despite the large impact of unfavorable foreign exchange, Q4 revenues of $901.5 million increased sequentially from Q3, reflecting growth in systems and services, as well as slight increase in clear aligner shipments. This is the first quarter in a year that our total revenues and clear aligner volumes increase sequentially. As we move through 2023, I'm hopeful that we'll see continued stability and an improving operating environment, but remind everyone that the macroeconomic situation remains fragile. Regardless, we are confident in our large untapped market opportunity for digital orthodontics and restorative dentistry. We anticipate 2023 will be an exciting year for new innovation at Align, and will begin to commercialize one of the largest new product and technology cycles in our 25-year history. The Q4 assistance and services revenue of $169.9 million were up 7.8% sequentially and down 21.3% year over year. On a constant currency basis, Q4 assistance and services revenues were impacted by unfavorable foreign exchange of approximately $2.7 million or 1.5% sequentially and approximately $11.2 million or 6.2% year-over-year. For Q4, assistance and services revenues increased sequentially, driven by growth in the Americas and EMEA regions, reflecting continued sales of inter-oral scanners, especially the iTero 5D. Q4 sequential growth also reflects continued growth of our Scanner rental programs, as well as initial deployment of a certified pre-owned, what we call CPO scanner leasing, rental program with desktop metal that I'll describe in more detail shortly. We continue to develop new capital equipment opportunities to meet the digital transformation needs of our customers and DSO partners, which is a natural progression for our equipment business with a large and growing base of scanners sold. As our scanner portfolio expands and we introduce new products, we increase the opportunities for customers to upgrade, to make trade-ins and provide refurbished scanners for emerging markets. We expect to continue rolling out programs such as leasing and rental offerings that help customers in the current macroeconomic environment by leveraging our balance sheet and selling the way our customers want to buy. On a year-over-year basis, Q4 services revenues increased primarily due to increased subscription revenue, resulting in a larger number of field scanners. We also had higher non-case systems revenues related to our scanner leasing rental programs previously mentioned. To help accelerate the adoption of digital orthodontics and restorative dentistry, in Q4 we announced a strategic cooperation with Desktop Metal to supply iTero Element Flex scanners to desktop labs, one of the largest lab networks in the US serving general dentists. The iTero Element Flex is now the preferred restorative scanner for desktop labs and will connect dentists directly to a suite of offerings from desktop labs that simplifies the digital design and manufacture of restorations with both traditional and digital technologies. Our collaboration with Desktop Metal reflects our commitment to a relationship we expect will evolve and expand to being advanced restorative workflows to market. We see significant opportunities to enable dentists to use scan data to directly order restorative services or printed ready digital files from desktop labs that can be used for 3D printing in their offices. In addition to iTero scanners, we're also excited about extending the benefits of the Align digital platform, including the Invisalign system and ExoCAD software to desktop labs customers as well. For Q4, total clear-liner revenues of $731.7 million were down slightly, 0.2% sequentially, and down 10.3% year-over-year. On a constant currency basis for Q4, clear-liner revenues were impacted by unfavorable foreign exchange of $13.4 million, or 1.8% sequentially, and $56.4 million, or 7.2% year-over-year. Q4 total clear-liner volumes of $583,000 was up slightly sequentially, reflecting growth from the Americas and EMEA regions, offset by lower APAC volumes, primarily in China. For the Americas, Q4 clear aligner volumes were down slightly sequentially, reflecting lower ortho cases, especially teen starts, as compared to the typical higher teen season in Q3, offset primarily by an increase in adult patients from the GP-dentist channel. For Q4, clear aligner volume from DSO customers continue to outpace non-DSO customers. For EMEA, Q4 clear aligner volume increased sequentially in all markets and across products, especially recently launched Invisalign Moderate, iGo Plus, and iGo Express, which enable GP dentists to treat a broader range of cases, mild to moderate types of malinclusions, and can easily be integrated in a wide range of restorative treatments in a dental practice. EMEA had a strong sequential growth in the teen market segment with continued demand for Invisalign teen case packs, which are available in France and Iberia, as well as Invisalign first treatment for kids as young as six years old. APAC, Q4 clear liner volumes were lower sequentially due primarily to China, which continues to be impacted by COVID. In Q4, ongoing COVID restrictions and lockdowns in China persisted throughout the quarters. Outside of China, APAC volumes increased sequentially, led by Japan, Taiwan, India, and Southeast Asian markets. On a year-over-year basis, Q4 clear aligner case volumes reflected increased shipments led by Korea, India, Japan, Taiwan, and Vietnam. While the easing of COVID restrictions in China and the more recent downward trend in COVID infection rates are encouraging, many uncertainties remain, including the lingering impacts from COVID across the population and the time and effort needed to restore consumer confidence. For the other non-case revenues, which include retention products such as our Vivera retainers, clinical training and education, accessories, e-commerce, and new subscription programs such as our DSP, fourth quarter revenues were down slightly sequentially and up double digits year over year. For retention and e-commerce products, Q4 revenues were relatively unchanged from Q3. We are pleased with our subscription-based programs like DSP, which increased sequentially and year-over-year, and expected to continue expanding DSP offerings in other regions. For Q4, the total number of new Invisalign-trained doctors decreased sequentially, due primarily to fourth quarter being a seasonally slower period for clinical education with holidays, et cetera, as well as fewer trainings in China and Brazil. This was offset by somewhat significantly higher numbers of new Invisalign doctors trained in the Mayas. Teen orthodontic treatment is the largest segment of the orthodontic market worldwide and represents our largest opportunity for clear aligner sales to orthos. We continue to focus on gaining share from traditional metal braces through teen-specific sales and marketing programs and product features, including Invisalign First for kids as young as six, which is up sequentially across all markets. For Q4, total clear aligner teen cases were down sequentially due primarily to the impact of COVID in China. as well as seasonally fewer teen starts in North America as compared to Q3. According to the December Gage Report, which tracks approximately 1,000 orthos in the United States and Canada, new patient exams for teens slowed in Q4, while new patient exams for adults improved slightly. A smaller pool of potential teen patients may put pressure on traditional orthos and cause them to go between clear aligners and wires and brackets, especially those practices that have failed to understand the significant benefits of adopting more efficient digital workflows, believing metal braces are more profitable. In EMEA, Q4 was a record quarter for teen case starts. On a year-over-year basis, Q4 teen case starts were relatively unchanged. For Q4, Invisalign First increased year-over-year and was strong across all regions. Invisalign First's clear line of treatment is designed for predictive results and a positive experience while addressing the unique needs of growing children from as young as six to treat phase one. For the full year, Invisalign clear aligner shipments for teens and young kids was approximately 733,000 cases. Our teen case mix overall was a record 31% of Invisalign cases shipped for the year. Finally, in Q4, the total number of doctors shipped was 82.9 thousand doctors, a slight decrease due primarily to the impact of COVID in China. And off our Q3 22 high point, which included a major DSO onboarding in North America. For the full year of 2023, we also shipped to the highest cumulative number of Invisalign-trained doctors, over 124,000 doctors, reinforcing our commitment to doctor-directed care for clear-liner treatment to achieve the safest and best possible clinical treatment outcomes for patients. With that, I'll now turn the call over to John.

Thanks, Joe. Before I go through the details of our Q4 results, I want to comment on two items in our fourth quarter financial results. Restructuring and other charges. During Q4 2022, we incurred a total of $14.3 million of restructuring and other charges, of which $2.9 million was included in the cost of net revenues and $11.5 million included in operating expenses. Restructuring and other charges included $8.7 million of severance-related costs and $5.6 million of certain lease terminations and asset impairments, primarily related to rightsizing operations in Russia in light of business needs. Second, non-GAAP tax rate. In Q4 2022, we changed to a long-term projected tax rate for our non-GAAP provision for income taxes. Our previous methodology for calculating our non-GAAP effective tax rates included certain non-recurring and period-specific items that produce fluctuating effective tax rates that management does not believe are reflective of the company's long-term effective tax rate. We have recast non-GAAP results for our provision for income taxes. effective tax rate, net income, and diluted net income per share for each reporting period in 2022 to reflect this change. We did not make any changes to the results reported for 2021 as reflecting the change in our methodology for the computation of the non-GAAP effective tax rate was immaterial to our 2021 results. Refer to the section in our Q4 press release titled Recast of Financial Measures for Prior Periods in 2022 for tax rate change under unaudited GAAP to non-GAAP reconciliation for further information. Now for our Q4 financial results. Total revenues for the fourth quarter were $901.5 million, up 1.3% from the prior quarter and down 12.6% from the corresponding quarter a year ago. On a constant currency basis, Q4 2022 revenues were impacted by unfavorable foreign exchange of approximately $16 million, or approximately 1.7% sequentially, and approximately $67.6 million year-over-year, or approximately 7%. For clear aligners, Q4 revenues of $731.7 million were flat sequentially, primarily from lower ASPs, mostly offset by higher volumes. On a year-over-year basis, Q4 clear aligner revenues were down 10.3%, primarily due to lower volumes and lower ASPs, partially offset by higher non-case revenues. For Q4, Invisalign ASPs for comprehensive treatment were flat sequentially and decreased year-over-year. On a sequential basis, ASPs reflect the unfavorable impact from foreign exchange, partially offset by higher additional aligners and product mix shifts. On a year-over-year basis, the decline in comprehensive ASPs reflect the significant impact of unfavorable foreign exchange, product makeshift, and higher discounts, partially offset by higher additional liners and per-order processing fees. For Q4, Invisalign ASPs for non-comprehensive treatment decrease sequentially and year-over-year. On a sequential basis, the decline in ASPs reflect product makeshift, unfavorable impact from foreign exchange, and higher discounts, partially offset by higher additional aligners. On a year-over-year basis, the decline in ASBs reflects the significant impact of unfavorable foreign exchange, product makeshift, and higher discounts, partially offset by higher additional aligners and per-order processing fees. As we mentioned last quarter, as our revenues from subscriptions, retainers, and other ancillary products continue to grow and expand globally, Some of the historical metrics that focus only on case shipments do not account for our overall growth. In our earnings release and financial slides, you will see that we've added our total clear aligner revenue per case shipment, which is more indicative of our overall growth strategy. Clear aligner deferred revenues on the balance sheet increased $56.4 million, or 4.8% sequentially, and 171.9 million dollars or up 16.2 percent year-over-year and will be recognized as the additional aligners are shipped q4 2022 systems and services revenues of 169.9 million dollars were up 7.8 percent sequentially primarily due to higher scanner volume services and exocad revenues partially offset by lower asps and we're down 21.3 percent year-over-year primarily due to lower scanner volume and ASPs, partially offset by higher services revenue from our larger installed base of scanners and increased non-system revenues related to our certified pre-owned and leasing and rental programs. Q4 2022 systems and services revenue were unfavorably impacted by foreign exchange of approximately $2.7 million or approximately 1.5% sequentially. On a year-over-year basis, system and services revenue were unfavorably impacted by foreign exchange of approximately $11.2 million or approximately 6.2%. Systems and services deferred revenues on the balance sheet was up $9 million or 3.4% sequentially and up $42.9 million or 18.7% year-over-year, primarily due to the increase in scanner sales and the deferral of service revenues included with the scanner purchase, which will be recognized relatively over the service period. Moving on to gross margin, fourth quarter overall gross margin was 68.5%, down one point sequentially, and down 3.7 points year over year. Overall, gross margin was unfavorably impacted by foreign exchange on our revenues by approximately 0.6 points sequentially and 2.2 points on a year-over-year basis. Clear aligner gross margin for the fourth quarter was 70.8%, down 0.1 points sequentially due to lower ASPs, higher warranty and restructuring costs, partially offset by improved manufacturing absorption and lower training costs. Clear aligner gross margin for the fourth quarter was down 3.4 points year over year, primarily due to lower ASPs, increased manufacturing spend as we continue to ramp up operations at our new manufacturing facility in Poland, and a higher mix of additional aligner volume. Systems and services gross margin for the fourth quarter was 58.8%, down 4.6 points sequentially due to lower ASPs, and higher inventory costs and manufacturing inefficiencies, partially offset by higher services revenues and lower freight costs. Systems and services gross margin for the fourth quarter was down 5.9 points year-over-year for the reasons stated previously. Q4 operating expenses were $505 million, up sequentially 6.2% and down 3.6% year-over-year. On a sequential basis, operating expenses were up $29.5 million, mainly due to restructuring and other charges and our continued investment in sales and R&D activities, along with higher consulting expenses. Year-over-year, operating expenses decreased by $18.6 million, primarily due to controlled spend on advertising and marketing as part of our efforts to proactively manage costs as well as lower incentive compensation partially offset by restructuring and other charges. On a non-GAAP basis, excluding stock-based compensation, restructuring and other charges, and amortization of acquired intangibles related to certain acquisitions, operating expenses were up, were $459.7 million, up 3.7% sequentially, and down 7% year-over-year. Our fourth quarter operating income of $112.7 million resulted in an operating margin of 12.5% down 3.6 points sequentially and down 8.9 points year-over-year. Operating margin was unfavorably impacted by 0.9 points sequentially, primarily due to foreign exchange and lower gross margin. The year-over-year decrease in operating margin is primarily attributed to lower gross margin investments in our go-to-market teams and technology, as well as unfavorable impact for foreign exchange by approximately 4.2 points. On a non-GAAP basis, which excludes stock-based compensation, restructuring, and other charges, and amortization of intangibles related to certain acquisitions, operating margin for the fourth quarter was 18.3%, down 1.9 points sequentially, and down 6.4 points year-over-year. Interest and other income expense net for the fourth quarter was income of $2.7 million compared to a loss of $21 million in the third quarter and a loss of $0.9 million in Q4 of 2021, primarily due to net foreign exchange gains from the strengthening of certain foreign currencies against the U.S. dollar. The GAAP effective tax rate in the fourth quarter was 63.8% compared to 40.7% in the third quarter and 13.2% in the fourth quarter of the prior year. The fourth quarter GAAP effective tax rate was higher than third quarter effective tax rate primarily due to decreased earnings in low-tax jurisdictions and an increase in the amount of U.S. minimum tax on foreign earnings. Our non-GAAP effective tax rate was 20% in the fourth quarter and reflects the change in our methodology that was discussed earlier. Our non-GAAP effective tax rate was 11.5% in the fourth quarter of the prior year in 2021, which does not reflect the change in our methodology. Fourth quarter net income per diluted share was 54 cents, down sequentially 39 cents, and down $1.86 compared to the prior year. Our earnings per share was unfavorably impacted by 4 cents on a sequential basis and 22 cents on a year-over-year basis due to foreign exchange. On a non-GAAP basis, net income for diluted share was $1.73 for the fourth quarter, up 10 cents sequentially, and down $1.10 year-over-year. Note that the prior year 2021 non-GAAP net income for diluted share or prior year 2021 EPS does not reflect the Q4 2022 change in our methodology for the computation of the non-GAAP effective tax rate. Moving on to the balance sheet. As of December 31st, 2022, cash and cash equivalents and short-term and long-term marketable securities were $1 billion. down sequentially $99.5 million, and down $255.1 million year over year. Of our $1 billion balance, $387.9 million was held in the U.S., and $653.7 million was held by our international entities. In October 2022, we purchased approximately 848,000 shares of our common stock and an average price of $188.62 per share through a $200 million accelerated share repurchase under our May 2021 $1 billion stock repurchase program. We have $250 million remaining available for repurchase under this program, and we plan to repurchase this remaining amount starting in Q1 2023 through either either or a combination of open market repurchases or an accelerated stock repurchase agreement completing the repurchases in Q2 of 2023. Q4 accounts receivable balance was $859.7 million flat sequentially. Our overall day sales outstanding was 85 days down one day sequentially and up approximately seven days as compared to Q4 last year. Cash flow from operations for the fourth quarter was $144.7 million. Capital expenditures for the fourth quarter were $53.2 million, primarily related to our continued investment to increase aligner manufacturing capacity and facilities. Free cash flow, defined as cash flow from operations, less capital expenditures, amounted to $91.5 million. We exited fiscal 2022 with a strong balance sheet. including $1 billion in cash and investments, a healthy cash flow position, and no long-term debt. As we announced with our earnings, Alliance Board of Directors has authorized a new $1 billion stock repurchase program to succeed the current $1 billion program. This new $1 billion program reflects the strength of our balance sheet and our cash flow generation as well as management and our board's continued confidence in our ability to capitalize on large market opportunities in our target markets and trajectory for growth while concurrently returning capital to our shareholders. Now turning to our outlook. As Joe mentioned earlier, we are pleased with our Q4 results and what appears to be a more stable environment in North America and EMEA. We are cautiously optimistic for continued stability and improving trends as we move through the year. However, the macroeconomic environment remains fragile, and given continued global challenges and uncertainty, we are not providing full-year revenue guidance. We would like to see improvements in the operating environment and consumer demand signals, including stability in China, before revisiting our approach. At the same time, we are confident in our large untapped market opportunity for digital orthodontics and restorative dentistry, and our ability to make progress towards our strategic initiatives. We intend to focus on the things we can control and influence, which includes strategic investments in sales, marketing, technology, and innovation. For full year 2023, assuming no additional material disruptions or circumstances beyond our control, we anticipate our 2023 non-GAAP operating margin to be slightly above 20%. With this backdrop for Q1 2023, we anticipate clear aligner volumes to be down sequentially, primarily due to weakness in China from COVID, partially offset by some stability from our Americas and EMEA regions. We anticipate clear aligner ASPs to be up from Q4 2022, primarily due to higher pricing and unfavorable foreign exchange rates. We anticipate itero scanner and services revenue to be down sequentially as the business follows a more typical capital equipment cycle. Taken in total, we expect Q1 2023 revenues to be about flat to Q4 of 2022. We expect our Q1 2023 non-GAAP operating margin to be consistent with our Q4 2022 non-GAAP operating margin as we continue to make investments in R&D and other go-to-market activities. For 2023, we expect our investments in capital expenditures to exceed $200 million. Capital expenditures primarily relate to building construction and improvements, as well as additional manufacturing capacities to support our international expansion. With that, I'll turn it back over to Joe for final comments. Joe?

Thanks, John. In closing, we're pleased with our fourth quarter results and the improved trend in sequential growth we saw in the Americas and the Maya region's and parts of APAC that reflect a more stable environment for doctors and their patients. While it's still very early and many uncertainties remain, we're hopeful that we'll see continued stability across the business and regions, especially in China. As we continue to work through these challenges, we're confident in our ability to focus on our customers and deliver key technology and innovation that furthers our leadership position in digital orthodontics and restorative dentistry. We are balancing investments to deliver shareholder value through transformative digital orthodontic solutions unique to Align. Align is a purpose-driven business, and we are committed to helping doctors transform smiles and change lives of millions of people around the world. Over the last year, we have flooded our customer base with a lot of new technology that represents one of the largest new product cycles in our history. But there is still a great deal of room for innovation. In the next one to three years, you should expect to see new platforms from us that will continue to revolutionize doctors' practices and patients' expectations for doctor-led treatment. In scanning, making it simpler and faster. In software, saving both doctors and patients more time with improved clinical outcomes. In direct 3D printing and evolution in both product and material science. These three platforms will give doctors tools only dreamt of before. with a singular focus to make the Invisalign system the standard of orthodontic and restorative care. And we couldn't be more excited about it. Thank you for your time today. We look forward to updating you on our next earning call. Now I'll turn the call back over to the operator for questions. Operator?

Thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. The first comes from Jason Bednar with Piper Sandler. You may proceed.

Thanks. Good afternoon. Thanks for taking the questions. You know, Joe and John, you know, congrats on seeing the stability return to the business. Maybe I'll start with that point. If you could talk about maybe what's changed versus, say, three to six months ago. The adult part of the market still sounds maybe a little sluggish, but you also saw that sequential improvement. Teams are holding in. Could you maybe speak to the visibility you have today versus where you sat last summer or in the fall? What has led to the greater confidence in demand forecasting today?

Hey, Jason, it's Joe. You know, first of all, I think we have a more stable macroeconomic environment. I mean, obviously, 2022 is pretty unprecedented when you think about, you know, China's situation, Ukraine's situation in Europe. You know, the rapid increase in Federal Reserve rates, it really, you know, flipped the economy in a lot of ways. So, I mean, we're working for a better platform in that sense. And I think, you know, obviously Powell's comments today and 0.25 increase and all. I mean, it shows a little bit of confidence, you know, on the Fed's part in the sense of what they're seeing and what they're directing to. So I just say, Jason, from a broad standpoint, you know, we feel really good about our portfolio. We feel good about the technology we talk about and all those things. We're just looking for a stable platform from an economic standpoint to operate from.

Okay. All right. No, that's helpful. It definitely sounds more macro related than anything else. But that's helpful. And then maybe, Joe, I wanted to pick up on the one point you mentioned regarding the bracket and wire piece. It sure seems like maybe a profit-motivated decision for docs, maybe short-sighted but still profit-motivated as they focus on the cost of brackets and wires versus that clear liner lab fee. What do you think it's going to take to reverse that trend back to clear liners picking up meaningful share, I guess especially with teens? Do market volumes need to come back in a bigger way to convince doctors to free up more chair time with clear liners, or is there something you can do on your end to really stimulate that shift back towards Invisalign? Thank you.

Yeah, Chase, that's a great question. You know, first of all, I mean, doctors are doing what they think are in their best financial interest, and from a patient standpoint, too. You know, a stronger macroeconomic environment will help in that sense because they'll have higher patient traffic, and the tradeoff won't be as severe in that sense because of the patient throughput. But, you know, where we help is in technology, and that's why we emphasize the technology developments and investments that we're making that are really significant as we launch them this year. And like I talked about with just software alone to pick one, in the sense of being able to move patients through faster, being able to have doctors really do cases a lot faster before with our products like IPP in different areas. So those technology advancements are really important. And then how we put those together in business models, like our digital subscription programs, really help doctors get over that line too. So I feel we have a good format to be able to address that going forward. But again, I'll emphasize, we need a market that we can stand on in a sense and predict. All right, thanks so much.

Congrats again. Appreciate it. Next question, please.

Absolutely. The next question comes from Jeff Johnson with Bayer. You may proceed.

Hi, Jeff. Thanks, guys. Hey, guys. Good afternoon. Joe, I just want to ask a couple questions here. I guess one just on the clear aligner volume guidance for 1Q. You know, it sounds like it's because China, you know, incrementally weaker stability in America's EMEA. You kind of had that in the press release. But you got some hedging words in there about, you know, primarily due to weakness in China and some stability in the Americas and EMEA. I mean, should we be thinking at this point that your Americas and EMEA are kind of on a I'm kind of a baseline here, and I know obviously macro can change from here, but assuming that macro change away, are we kind of at a baseline level now on absolute volumes for America's EMEA? And do you think China, you know, could it be a recovery play throughout this year? Are you seeing any early signs of some pickup in some of those big dental hospitals or of the new adult and standard product there or anything?

Jeff, you know, first of all, on the front end with, you know, Western economies is, we just see stability. You know, that's what we talked about. That's what we see versus before, you know, we saw the market falling away from us. But right now we see it being stable and feel better about that point. On China, I mean, uncertainty in China is incredible when you think about a billion people being sick there right now or have been sick, you know, the last couple of weeks. And, you know, Jeff, I've refused to give a forecast, you know, over a number of quarters now because a lot of it has to do with the uncertainty that we see, you know, in China specifically, which, you know, You know, our second biggest market in the world. So I don't want to try to forecast China right now. I can tell you right now it's a blur for us and very difficult. But, you know, just we feel good about where we stand with the MAIA and the states from a stability standpoint. And, you know, we try to reflect as much in our words what we see for the first quarter for you, too.

Understood. And I'm sure there's going to be a lot more questions here on the short-term things. I wanted to look or ask you about the desktop metal wheel, though. You know, on that, right now, is it all for kind of, you know, milling, using iTero to connect to the lab there? for milling and or 3D printing of just restorations. Are you guys doing any early work with them on 3D printing of clear aligners? And just kind of, again, kind of update us maybe with your most recent thoughts on when we might start seeing 3D printing of aligners in the office and kind of your competitive, you know, advantages you think you can, as a line, carve out in that kind of setting. Thanks.

Yeah, Jeff, that's a good question. You know, the desktop metal is primarily we think about a restorative play. You know how labs play a huge role in restorative dentistry with general dentists. I mean, they're really strong partners in that sense. What desktop metal represents is you see a lot of 3D printing going on. There's some really great resin development around restorative kinds of things, dentures, different areas that desktop metal leads in. And, you know, our iTero scanner can really help with that, too. Also, we have a vision of ortho-restorative, where you use our orthodontic procedures in order to reduce the amount of tooth loss mass that often comes with restorative procedures, too, that we'll work together with Desktop about. The idea of printing aligners and standard types of STL kind of processes from a 3D standpoint, I don't see that. And honestly, Jeff, I'm not one to think that doctors should turn their offices into production facilities. 3D printing is hard. The materials are difficult. There's a lot of doctors actually trying it. But I feel like doctors are much better being physicians and doctors in that sense than trying to run a manufacturing operation.

Even in that first case to try to seal the deal and really lock that patient in as a paying customer.

You know, Jeff, I just think there's some things that kind of make sense from a productivity standpoint and some things that don't. Maybe the technology changes to the point, Jeff, we'll have a different conversation. But as it stands today, I really don't believe that.

Understood. Thank you.

Yeah, thanks, Jeff.

Thank you. Our next question comes from Elizabeth Anderson with Evercore. You may proceed.

Hi, guys. Thanks so much for the question. Hi. I was wondering if you could talk about, one, how you sort of think about the OPEX spend in terms of particularly sales and marketing in this environment. Do you sort of, you know, obviously with the uncertain demand profile, are there things that you're doing incrementally, you know, in the fourth quarter and the first quarter that sort of switch that spend around?

Yeah, I think what we always look at, Elizabeth, this is John, we're always looking at trying to find the right return on investment. So if you see some of the markets stabilize and start to come back that we see, that's where we'll continue to make investments. And as we see volume come back, we'll invest even more. Like we talked about some of the stability in Americas and EMEA. So we'll constantly look at trying to find the right return on investment. And as those markets stabilize and come back, you'll see us continue to invest in there. And as we said, you know, last year we kind of had to pare some of that back based on the conditions, and ideally we could be in a better situation where we can make additional investments this year.

That makes sense. And maybe I was wondering if you could talk a little bit more about the GP demand profile, because that was interesting how that was sort of holding up on a relative basis. I heard what you said, obviously, about the teen commentary. Is it something about that market or maybe the lower price points per year case or anything like that that would sort of be impacting that. I'd be just curious to get more color on that.

Elizabeth, it's Joe. Could you restate that question? I didn't quite get the entire question.

I think in your prepared remarks, you talked about the GP dentist sort of strength versus the ortho on a relative basis in the quarter. So I was wondering if you could talk more about sort of the underlying color about why you sort of think that is at this point.

Yeah, that's a good question. When you think about it, we're an elective procedure, right? And so someone's going to go to an orthodontist on a procedure like this to have their teeth straightened. With a GP, a dentist, there's patient traffic there constantly with cleaning and restorations and different things. And so just it's an area right now where since it's not just elective procedures there, we feel GPs are just seeing more patients than an ortho would when you compare period to period.

Got it. Thank you.

Thank you.

Thank you. The following question comes from John Block with . You may proceed.

Hi, John. Thanks, guys. Good afternoon. Hey, Joe. Maybe for the first one, John or Joe, can you talk about the 5.5% price increase for 2023? The one cue guide says lower cases, lower scanner and services, but revs flat. Clearly, ASP benefits, and I think you realize the 5.5% of the docs stays on comprehensive or goes to 3x3, but how do we think about what flows to realized ASP? John, is that sort of a, I don't know, a plus 2% or 3% from the 4Q22 levels when we think about 1Q23 and into the balance of 23%?

That's a good way to look at it, John, because you're going to have some cases that kind of, you know, carry over where they, you know, kind of order them and they get shipped a little bit later. And then you're right, you're going to have some mixed shift between the three by three, which is kind of the same price, and then the full comprehensive. So two to three percent in that first quarter is about in that range.

Okay, John, there's a question.

Go ahead, John. I'm sorry, I know it was a clarifying question. That was just 2% to 3% sequential, John, correct, from the 4Q to the 1Q? Yep, that's correct. Okay. Okay, and sorry, in the second question, just on the op margins, I think you said 18% non-GAAP for 1Q greater than 20% for the year. You know, I'll just sort of load up a model in questions here. Do we think about a sequential improvement for each of the quarters throughout 2023? And then that might be for John. And, Joe, for you, just talk to us on how you're comfortable – you know, on that OM guide, when you still have a lot of moving parts with the economy, you've got what's going on in China, I think you framed it as a fragile environment. How do you get, you know, comfortable with that OM guide? There's enough wiggle room, I suppose, in the op-ex where you feel you could titrate spend accordingly. Thanks, guys.

Yeah, I'll take the modeling question, John. Yes, you would expect that, just like we have in maybe prior years and so on, as you start to get that volume leverage, you'll start to see some of that up margin improvement as you go throughout the year. So kind of starts at that lower point and you would model it to see some improvement as you go through the year. And like we said, total year, you know, slightly above the 20%.

And John, on the OM guide and the confidence of it, the confidence is related to what we see right now and what we think is some macro trends that are much more stable than what we've experienced before. So, you know, from that, we understand our costs, and we know what we have give and take. John and I watch it closely, and, you know, we obviously manage it as a percentage of what total revenues are, too. So if revenues have to adjust, we have to adjust, too. But, you know, again, I think we know what the levers are in this business. And, you know, within the context of stability, we feel we can manage to the numbers that we've given you.

Fair enough. Thanks, guys.

Thanks, John.

Thank you. Our next question comes from Nathan Rich with Goldman Sachs. Your line is open.

Hi, good afternoon. Thanks for the question. Joe, I just wanted to kind of follow up on your comments about starting to commercialize, you know, obviously a product and technology cycle that you seem very excited about and that sort of, you know, ortho and restorative vision. I guess, could you maybe just kind of help crystallize that for us in terms of how that kind of comes to market in 2023 and the kind of type of investment that the company needs to make to kind of go after that opportunity?

Yeah, you know, Nathan, you know, overall, obviously we, we do spend a significant amount on R and D in the business. And, you know, the foundation of that is the history of Align because basically we're revitalized, you know, we're revolutionized digital orthodontics overall and, But what we see is it's not just invention for invention's sake. We're always after how can we do these cases faster? How do we do them more predictably? How do we make this simpler for doctors, a better treatment for patients overall and experience? And just to give you one statistic, right, so versus wires and brackets, which we talked about in the script, on an average we do patient cases five months faster and 35% fewer visits to a doctor. And you do that through technology, right? You do that through remote monitoring. You do that through the consistency of your algorithms and moving teeth. and knowing when those teeth are going to land as long as, you know, patients wear. And so the technology I talked about in those three areas, you know, first of all, whether it's scanning, we get better on scanning every year. AI is a real important part of that because through AI you can anticipate a lot of things moving scans through a lot faster. Inventions last year like IPP and Invisalign, a personal plan, those kinds of technologies really reduce the traffic and communications between a doctor and us in the sense of setting up treatment plans. And lastly, 3D printed devices, as I mentioned, has always been the holy grail because we're the biggest 3D printer in the world, but we don't really 3D print devices. We print molds, which you vacuum form over top of it. When you vacuum form over top of a mold, you can't control wall thickness as you can in 3D printing. And wall thickness is really critical to move teeth. So all these inventions take a lot of time and money overall, but we just see a huge opportunity for us to be able to increase clinical efficacy, efficiency for doctors and patient experience and That's why we're so excited about it.

Okay, great. And then just a quick clarification. On the adult side, you know, cases were up 7% sequentially. It sounds like, you know, you saw modest improvement in North America. I think that was the case in APAC as well. I guess I didn't hear reference to adult as you were talking about EMEA. I guess was the kind of adult dynamic kind of more in, you know, one thing about the Western economy is more in North America. Just curious if you also saw the same thing play out in EMEA as well.

If I get the question right, Nathan, I mean, in May it was great, both adults and teens. We felt good about it. You know, you always go around, I call it the dark side of the moon in Europe in third quarter, right? But when they came out from the third quarter, we had a good fourth quarter from that. And so we felt good on both the adult side and the teen side in Europe.

Okay. Thank you.

Yeah. Thank you, Nathan.

Thank you. Our next question comes from Kevin Caliendo with UBS. You may proceed.

Hi, thanks for taking my question. Hi, guys. I always struggle with this number that you really haven't grown the number of docs, and it's been a while. And I understand that when demand is down, you don't ship to docs every quarter, but even the ones that are registered Invisalign users haven't really grown. And I guess my question is, you know, is there – an issue with that? Like, why hasn't that number really expanded over the last four to five quarters? And do you need it as part of your growth algorithm, you know, to keep expanding the number of doctors? Is it just a change in culture in the world right now? Or is it competitive pressures? Or is it just harder to find docs who are willing to do this? Because the penetration of clear aligners, you know, would suggest there's, you know, a lot of doctors out there that could be doing this.

I think I'm in doctors both on the orthodontic side and on the GP side. I mean, obviously I think you're right about that. And I mean, obviously we expand a lot globally too. So everything you said is true. I'll just give you one word on your questions, China. China's like, you know, it's down. We shipped the thousands of doctors in China we can't shift to right now. And that's the answer to your question in the sense of why it's gone down. There's no systemic overall issue in the sense of us being, you know, penetrated to the point that we can't find more doctors. It's just we can't escape the downdraft of China right now.

And your equation is right. It's new doctors, doctors ship to, as well as utilization. Those are the two key metrics that help us grow our business.

Can I ask a quick follow-up? You talk about the need to see consumer demand signals improving. How far ahead can you actually see that, meaning – Is there something in ordering and planning? Can you see three months ahead or six months ahead in terms of you're starting to see demand increase? Or is it really real time, like we're starting to see an inflection point? I guess it gets to the point of what do you need to see in terms of consumer demand? How far forward can you look before you can really feel comfortable that there's been an inflection point?

Kevin, you know, when we look at things, we're a real-time business, obviously, you know, when you're a 3D printing business like we do and what we make. And there's no leading indicator that would say, you know, that has an R-squared of over nine, you know, 90%. But what we watch closely are the consumer confidence indices in the States and Europe where we can get good ones. Now, they're more confirming than they are predictive in what we're seeing, but they reflect the, I think, best from a, a demand standpoint of what we can expect. And the consumer confidence indices that we see both in Europe and the States have flattened out or turned slightly positive in the last month or so.

Thanks, Kevin. Next question, please.

Absolutely. Our next one comes from Brandon Vasquez with William Blair. You may proceed.

Hi, everyone. Thanks for taking the question. I wanted to ask one to kind of go back to a couple of those we're trying to get at. you know, you, you're, you guided to a full year, uh, op margin about 20%. And you're a little bit below that now, of course, probably transient. The question being, do you need sequential improvements in sales to then drive the sequential improvements and op margins through the year? Like, how should we be thinking about that? Um, or are you prepared to kind of deliver that 20%, even if let's say we're just stable through the rest of the year, rather than improving.

Yes, good question. I mean, you know, we would expect as, you know, as we start to see demand, as it's stabilized, as things change in the world and give us a better operating environment, we would expect to see some sequential improvement in revenue as you go through the year. And, you know, that would help us get some of the leverage that we need from an operator standpoint.

Thanks, Brandon.

Got it.

Next question, please.

Absolutely. The next question comes from Erin Wright with Morgan Stanley. You may proceed.

Great, thanks. Just to follow up to that last question, just to clarify, I understand you're not giving the full year guidance from a volume perspective, but if you do continue to see the environment as what you're saying sustained where it is today or get slightly better, you are in a position to grow volume year over year in 2023? And then just a separate question on subscription offerings, particularly in retainers, and I'm curious how that's resonating with customers today as another revenue driver for the practice, and when do you think that that will be material in terms of contributions? Thanks.

I can start on the volume. I mean, we would expect, you know, as we're watching a lot of the signals closely, we try to get more color around Q1, and the rest of the year will play out as things as things in the world change to the situation. So we'll watch volume closely. But like I said, we would expect some sequential improvement as you go forward through the year, but we're not getting into the specifics of what it is for total.

All right, so on the DSP program, originally that was targeted primarily at retainers or orthodontists because a lot of orthodontists were making their own retainers in the back room and, you know, for wires and brackets. And so we signed up. We also, you know, obviously do the touch-up cases with that too as 10 aligners or less. That's worked out well. And I think what you're referring to in the end is that's a subscription program to the doctor, but we also have a subscription program we offer from the doctor through the patients. And we're implementing that now. There's a lot of enthusiasm from our doctors about that because it becomes a reoccurring revenue stream for them that they haven't many of them haven't tapped into before. And so we feel good about that. And, you know, we'll be working closely with our doctors to implement that more fully this year.

Thank you. Next question, please.

Absolutely. The next question comes from Michael Ryskin with Bank of America. You may proceed.

Great. Thanks, guys. I'll throw in a couple just real quick. Some of them are very fast. First, on China, I think you mentioned that you used the word it's a blur, which is kind of understandable. But Any thoughts on VVP or any of the local conditions on the ground? Can you tell what's going on there while the COVID situation is ongoing, or is it just kind of a box? And then I also wanted to ask, on the tax rate, the non-GAAP tax rate, you know, you called out 20% of 4Q. Should we sort of assume that the tax rate go forward?

So, Michael, this is John. On tax rate for the non-GAAP tax rate, assume 20% going forward.

On China, BPP, I mean, obviously, that program over there, we talked about it several times. You know, it's in Tier 3, Tier 4 cities. It's really not in the middle of our portfolio. It was picked up by some Chinese competitors. We're primarily private over there. We will sell, you know, the public hospitals. The program's not, you know, exclusive in that sense, too. So, I mean, we feel like we can manage in China right now around this fine.

All right, thanks.

Thank you. Well, thank you, everyone. We appreciate your time today. This concludes our conference call. We look forward to speaking to you at upcoming financial conferences and industry meetings, including Chicago Midwinter, IDF, and AAO. If you have any follow-up questions, please contact our investor relations line. Have a great day.

This concludes today's conference. Thank you for your participation. You may now disconnect your lines.