Align Technology, Inc.

Welcome to Align Technologies' third quarter 2023 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your phone. To remove yourself from the queue, simply press star 1-1 again. Please note that this conference call is being recorded. I would now like to turn the conference over to your host, Shirley Stacey, with Align Technologies. You may begin.

Thank you. 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 Marucci, CFO. We issued third quarter 2023 financial results today via Business Wire, 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 fbc.gov. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statements. have posted historical financial statements including the corresponding reconciliations including our gap to non-gap 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 invisalign 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 aligners. John 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 Gage Report, which reflect more than 1,200 North American ortho practices, 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 Invisalign 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 pre-owned, or what we call CPO, sales scanner leasing and rental programs, as well as increased services revenue. Q3 systems and services revenues were down sequentially, primarily due to a weaker capital equipment cycle, as well as lower non-systems revenues. This was partially offset by higher scanner volumes in the Americas, reflecting an increased mix of Itero 5D Plus scanners, including more trade-in trade-ups for DSO customer and Q3. Q3 non-case revenues were up 13.5% year-over-year, primarily due to continued growth from Vivera retainers and increased adoption of Invisalign Doctor Subscription Program, or DSP, our monthly subscription-based clear aligner program, which includes retainers, low-stage touch-up, and clear aligner treatment. For Q3, we shipped over 19,000 DSP touch-up cases, primarily in North America, an increase of more than 70% year-over-year from Q3-22. DSP continues to be well-received by our customers and is currently available in the U.S., Canada, Iberia, and the Nordics. We are excited about the DSP as proving helpful to doctors and their patients. We're continuing to expand the program in EMEA and with certain DSO partners in Q4. For Q3, total clear aligner volumes were down 3.3% sequentially and up 2.3% year-over-year, primarily reflecting weaker-than-expected demand for orthodontic treatment, especially for adult patients. As I said earlier, despite soft consumer trends, our teen and younger patient business was strong across all regions, up both sequentially and year-over-year, primarily due to continued adoption of Invisalign First for kids as young as 6 years old. In terms of Invisalign submitters, the total number of doctors shipped for Q3 increased sequentially to approximately 85.2 thousand doctors, the highest number in two years, driven by the Americas and APAC regions. From a channel perspective, orthodontist submitters were up year over year, especially from doctors submitting teenage cases, offset by fewer GP dentists year over year, particularly in the Americas. On a geographic basis, Q3 clear aligner volumes reflect a sequential increase in Invisalign shipments from the APAC and Latin American regions, as well as North American Invisalign teenage cases. This is offset by lower volume and more pronounced softness from summer seasonality in EMEA and North America, primarily Invisalign adult cases. For the Americas, Invisalign case volume 2323 was down sequentially, primarily due to lower Invisalign adult shipments in the GP channel and slightly down year over year. Q323 clear aligner volumes reflect increased emitters in the ortho channel, with an increase in teen and younger case starts driven by momentum from Invisalign first. This is reflected in September gauge data, which shows Invisalign ortho starts performed better than wires and brackets and other clear aligners. In North America, adoption of Invisalign comprehensive 3-in-3 product drove sequential volume growth in Q323 Invisalign DSP touch-up cases in North America also drove growth sequentially year over year. For May, Q3 clear liner volumes were down sequentially, primarily from the impact of Q3 summer seasonality when doctors' offices are closed for summer vacations and more consumers are traveling. This was partially offset by sequential growth in Italy, Benelux, Turkey, and the Middle East. Year over year, clear liner volumes were up reflecting continued adoption of Invisalign Moderate the comprehensive 3-in-3 product, as well as an increase in teen case starts, driven primarily by Invisalign First and our new Invisalign teen case packs. For APAC, 2-3 ClearLiner volumes grew up sequentially and up year-over-year, reflecting improving trends in China, as well as other key markets like India, Taiwan, Korea, Japan, and Thailand. 2-3 APAC results also reflected increased Invisalign submitters and higher utilization especially for teen patients driven by growth from Invisalign first in the orthodontic channel during our typically strong teen season in China. Q3 APAC results also reflect growth in the GP channel with increased Invisalign submitters and higher utilization sequentially in year over year. During Q3, we continued the rollout of the Invisalign Comprehensive 3-in-3 product in APAC, most recently launched in China. Invisalign Comprehensive 3-in-3 is also available in Hong Kong, Korea, Taiwan, and India. We are pleased with the adoption of the 3-in-3 product in APAC, where the majority of cases treated are comprehensive, allowing our doctor customers more flexibility within the Invisalign product portfolio. During the quarter, we also shipped to a record number of doctors in APAC, increasing both sequentially and year-over-year. Invisalign is the most trusted brand in the orthodontic industry globally, and it's important that we continue to create demand for Invisalign clear aligners, especially given the macroeconomic pressures on doctors and their patients. In QCO3, we delivered 11.1 billion impressions and had 27.7 million visits to our websites globally. To increase awareness and educate young adults, parents, and teens about the benefits of the Invisalign brand, we continue to invest and create campaigns in top media platforms such as TikTok, Instagram, YouTube, Snapchat, WeChat, and Dillion across markets. The underlying market opportunity for clear aligner treatment, especially for teens and kids, remains huge and significantly under-penetrated. We know Invisalign clear aligner treatment is faster and more effective than braces, yet the vast majority of orthodontic cases are still treated using brackets and wires. Differentiation is key to increasing Invisalign's share of the orthodontic case starts, especially among teens and their parents. We are continuing to differentiate differentiate through novel campaigns such as our new Invisis Drama Free Teen Campaign, which uses humor to juxtapose the significant benefits of Invisalign treatment over metal braces. Similarly, to differentiate Invisalign treatment for adults, we launched new campaigns globally using powerful patient stories that share how important a smile is and how Invisalign treatment increases self-confidence that transforms lives. Reaching young adults as well as teens and their parents also requires the right engagement to Invisalign influencers and creator-centric campaigns, which delivered 5.8 billion impressions in the Americas in Q3. Creators such as Michael Cimino, Jalen Hall, NFL player Darren Warren, and also Leilani Green showed their results and why they chose to transform their smiles with Invisalign aligners. In the immediate region, we partnered with influencers to reach consumers across social media platforms, including TikTok and Meta, and launched our global consumer campaign for teens and parents of teens, highlighting the benefits of Invisalign treatment versus braces. In Germany, we continue to see positive engagement with our patient testimonial campaigns launched in the previous quarter. Our consumer campaigns delivered more than 1.4 billion media impressions and 6.9 million visitors to our website. We continue to invest in consumer advertising across the APAC region, resulting in more than 3.9 billion impressions and 11.9 million visitors to our websites in the quarter. We expanded our reach in Japan and India via Meta and YouTube and partnered with key influencers to reach consumers across social media. We saw increased brand interest from consumers as evidenced by an over 800% increase in unique visitors to our website in India and 135% increase in Japan. Finally, digital tools such as my Invisalign consumer and patient app continue to increase with 3.4 million downloads to date and over 367,000 monthly active users representing a 19% year-over-year growth. With that, I'll now turn the call over to John.

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 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 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 aligners 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 3-in-3 product. The 3-in-3 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 date. At the 2022 Invisalign Comprehensive product price. Invisalign Comprehensive 3 in 3 product is available in North America and in certain markets in EMEA and APEC, most recently launching in China, Korea, Hong Kong, and Taiwan. We are pleased with the continued adoption of the Invisalign Comprehensive 3 in 3 product and anticipate it will continue to increase, providing doctors the flexibility they want and allowing us to recognize more revenue up front. with deferred revenue being recognized over a shorter period of time compared to our traditional Invisalign comprehensive product. As we begin to ship more additional aligners for comprehensive 3-in-3 products, we expect to see an ASB benefit. As revenues from subscriptions, retainers, and other ancillary products continue to grow globally, some of the historical metrics that only focus on case shipments are expected to account for a lesser percentage of our overall growth. In our earnings release and financial slides, you will see that we have added our total clear aligner revenue per case shipment, which we believe to be a more indicative measure of our overall growth strategy. Q3-23 clear aligner revenues were impacted by unfavorable foreign exchange of approximately $2 million, or approximately 0.3% sequentially. On a year-over-year basis, clear aligner revenues were favorably impacted by foreign exchange of approximately $3.8 million or approximately 0.5%. Clear align deferred revenues on the balance sheet increased $14.1 million or up 1.1% sequentially and up $116 million or up 9.9% year-over-year and will be recognized as additional aligners are shipped. Q323 systems and service revenues of $165.3 million were down 2.5% sequentially, mostly due to unfavorable ASPs and lower revenues from our certified pre-owned program, partially offset by higher scanner volume and higher services revenues. On a year-over-year basis, Q323 systems and services revenue were up 4.9% due to higher scanner volume, higher services revenue, from our larger base of scanners sold and higher revenues from our certified pre-owned and leasing rental programs partially offset by unfavorable asps q323 systems and services revenues were impacted by unfavorable foreign exchange of approximately 0.7 million dollars or approximately 0.4 percent sequentially on a year-over-year basis system and services revenues were favorably impacted by foreign exchange of approximately $0.4 million or approximately 0.3%. Systems and services deferred revenues on the balance sheet was down $4.4 million or 1.6% sequentially primarily due to the decrease in the deferral of service revenues included with scanner purchases and essentially flat or up slightly to 0.1 million or 0.1% year over year. Services deferred revenues will be recognized relatively over the service period. As our scanner portfolio expands and we introduce new products, we increase the opportunities for customers to upgrade, make trade-ins, and purchase certified pre-owned scanners in certain markets. Developing new capital equipment opportunities to meet the digital transformation needs of our customers and DSO partners is a natural progression for our equipment business with a large and growing base of scanners sold. Moving on to gross margin. Third quarter overall gross margin was 69.1%, down 2.1 points sequentially and down 0.5 points year over year. Overall gross margin was unfavorably impacted by foreign exchange by approximately 0.1 points on a sequential basis and favorably impacted by foreign exchange by approximately 0.1 points on a year-over-year basis. Clear aligner gross margin for the third quarter was 70.7%, down 1.7 points sequentially, primarily from higher manufacturing spend and a higher mix of additional liner volume and lower ASPs. Clear aligner gross margin for the third quarter was roughly flat year-over-year, primarily due to increased manufacturing spend as we continue to ramp up operations at our new manufacturing facility in Poland. partially offset by higher ASPs. Systems and services gross margin for the third quarter was 61%, down 4.1 points sequentially, primarily from lower ASPs, partially offset by favorable manufacturing variances, lower service and freight costs, and higher services revenues. Systems and services gross margin for the third quarter was down 2.3 points year-over-year, primarily from lower ASPs, partially offset by favorable manufacturing variances, lower service and freight costs, favorable foreign exchange, and higher service revenues. Q3 23 operating expenses were $496.7 million, down sequentially 8.3%, and up 4.5% year over year. On a sequential basis, operating expenses were down $44.9 million, primarily from lower consumer marketing spend and lower incentive compensation. Year-over-year operating expenses increased by $21.2 million, primarily due to higher incentive compensation in our continued investments in sales and R&D activities, partially offset by controlled spending on advertising and marketing as part of our efforts to proactively manage costs. On a non-GAAP basis, excluding stock-based compensation and amortization of acquired intangibles related to certain acquisitions, operating expenses increased were 458.2 million dollars down 9.3 percent sequentially and up 3.3 percent year over year our third quarter operating income of 166.3 million dollars resulted in an operating margin of 17.3 percent up 0.1 points sequentially and up 1.2 points year over year operating margin was unfavorably impacted by approximately 0.3 points sequentially, primarily due to foreign exchange. The year-over-year increase in operating margin is primarily attributable to operating leverage partially offset by investments in our go-to-market teams and technology, as well as unfavorable impact from foreign exchange by approximately 0.1 point. On a non-GAAP basis, which excludes stock-based compensation and amortization of intangibles related to certain acquisitions, operating margin for the third quarter was 21.8%, up 0.5 points sequentially, and up 1.6 points year over year. Interest and other income expense net for the third quarter was a loss of $4.2 million compared to a loss of $0.3 million in the second quarter and a loss of $21 million in the third quarter a year ago, primarily due to foreign exchange. The GAAP effective tax rate for the third quarter was 25.1%, lower than the second quarter effective tax rate of 34.8%, and lower than the third quarter effective tax rate of 40.7% of the prior year. The third quarter GAAP effective tax rate was lower than the second quarter effective tax rate, primarily due to the application of newly issued tax guidance and lower U.S. taxes on foreign earnings in Q3. As a reminder, in Q4 2022, we changed our methodology for the computation of our non-GAAP effective tax rate to a long-term projected tax rate and have given effect to the new methodology from January 1, 2022, and recast previously reported quarterly periods in 2022. Our non-GAAP effective tax rate in the third quarter was 20%, reflecting the change in our methodology. Third quarter net income. per diluted share was $1.58, up sequentially 12 cents and up 65 cents compared to the prior year. Our EPS was unfavorably impacted by 8 cents on a sequential basis and unfavorably impacted by 5 cents on a year-over-year basis due to foreign exchange. On a non-GAAP basis, net income per diluted share was $2.14 for the third quarter. down $0.08 sequentially and up $0.51 year-over-year. Note that the prior year 2022 non-GAAP net income and prior year 2022 non-GAAP EPS reflects the Q4-22 change in our methodology for the computation of our non-GAAP effective tax rate. Moving on to the balance sheet. As of September 30, 2023, cash, cash equivalents, and short- and long-term equivalents marketable securities were $1,301.9 million, up sequentially $268.1 million and up $160.9 million year over year. Of our $1.3 billion balance, $381 million was held in the U.S. and $920.6 million was held by our international entities. Q3 accounts receivable balance was $904.2 million, down sequentially. Our overall day sales outstanding was 84 days, up approximately three days sequentially, and down approximately two days as compared to Q3 last year. Cash flow from our operations for the third quarter was $287.2 million. Capital expenditures for the third quarter were $21.6 million, primarily related to our continued investments to increase aligner manufacturing capacity and facilities free cash flow defined as cash flow from operations less capital expenditures amounted to 265.6 million dollars now turning to our fourth quarter outlook for q423 assuming no circumstances occur that are beyond our control we anticipate our worldwide revenue to be in the range of $920 to $940 million, down sequentially from Q3 of 23. We expect both clear aligner and systems and services revenues to be down sequentially, reflecting a more challenging macro environment for doctors and patients with fewer orthodontic case starts overall, unfavorable foreign exchange given the strengthening of the U.S. dollar against key currencies, and longer sales cycles for capital equipment purchases. For our clear aligner business, we expect clear aligner teen volume to be seasonally lower in Q4 of 23, and we don't anticipate improvement in adult volumes. For Q4 of 23, we also expect clear aligner ASPs to be down sequentially primarily due to the strengthening U.S. dollar. For our systems and services business, we anticipate increasing headwinds for macro uncertainty and potential supply issues related to the war in the Middle East. We expect our Q4 23 gap operating margin to be down sequentially from Q3 of 23 due to restructuring primarily related to severance as we adjust headcount for this environment. We anticipate our non-gap operating margin to be up sequentially from Q3 of 23. During Q1 23, we announced that our Board of Directors authorized a new $1 billion stock repurchase program to succeed the 2021 $1 billion program. Currently, $1 billion remains available for repurchase under the 2023 stock repurchase program. During Q4 23, we expect to repurchase up to $250 million of our common stock through either or a combination of open market repurchases or an accelerated stock repurchase agreement. For full year 2023, assuming no circumstances occur that are beyond our control, we anticipate our 2023 worldwide revenue to be in the range of $3.83 billion to $3.85 billion. We also expect our full year 2023 gap operating margin to be roughly one point lower than 2022 and our 2023 non-gap operating margin to be slightly above 21%. For 2023, we expect investments in capital expenditures to be approximately $200 million. Capital expenditures are expected to primarily relate to building construction and improvements, as well as manufacturing capacity in support of our continued international expansion. With that, I'll turn it back over to Joe for final comments. Joe?

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're very excited about the recent innovations developed to further revolutionize digital treatment planning for orthodontics and also restorative 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, and Invisalign Smile Architect, iTero ExoCAD 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 in 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. IPE is our first direct printed orthodontic device that provides a safe, comfortable, and clinically effective alternative to metal pallet expanders and boost 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.

Operator? Certainly. Ladies and gentlemen, as a reminder, if you do have a question at this time, please press star 11 on your telephone. To remove yourself from the queue, simply press star 11 again. And our first question comes from the line of Jason Bettner from Piper Sandler. Your question, please.

Hi, Jason.

Jason, you might have your phone on mute.

Robert, do you want to go to the next question?

Certainly.

Then we'll come back.

Certainly. One moment. And our next question comes in line. Brandon Vasquez 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 on, 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?

You know, when you look at the fourth quarter and the way we've done our forecast overall, you know, 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 You know, China is a big teen season in the third quarter, too. So, you know, when you look at the gauge data for September and what we see in October so far, you know, and even some of the consumer, you know, profiles around, you know, how they're feeling about their finances and all, we 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 teams 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 team 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.

And we were happy to see that change and engage data that showed, you know, wires and brackets going down and competitive aligners going down and us going up. But, you know, 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. So 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. Hi, Jeff.

Hey, Jeff.

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

Hey, guys. Can you hear me okay? Yeah, John. Just fine. All right. So far, so good. Maybe a couple questions. You know, John, I'll start. Right now, you just seem highly tethered to the consumer. But in 24, you know, 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, you know, even the revised guidance, you'll grow year over year in 2H23. But if I annualize your 4Q number and just sort of run rate that, you arguably land down year over year with a, you know, call it a more dynamic set of innovations. 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. You know, I, that's one of the things we talk about obviously here is with what we presented at the investors conference and the new technologies 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 anybody, um, you know, we can, we can't fight a market that's, uh, from a down to the standpoint, 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, you know, 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, and also the efficiency gains that we show, you know, 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 that 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 those, 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 got, 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. You know, Joe, you referenced the October. What was the 3Q deviation? I mean, it seems like it was largely North America and EMEA. Did APAC perform as expected? You know, 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, you know, 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, to elaborate because clearly the exit rate in the quarter was very different than the way things started out. Thank you.

Yeah, John. Um, you know, third quarters, I call our most nonlinear quarter and it's the most difficult to predict. And it's because it has, you 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, John. And in this case, it did not come back in the way that we had hoped it would. Secondly is your 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 questions. My question is, so if we think about, like, obviously we're talking about consumer weakness and sort of the cyclicalness of the business. If we think about, like, sort of the headcount reduction and the SG&A spend, can you help us, like, parse out, like, 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 like how you need to invest again on the up cycle, um, in order to like continue to push penetration and what's obviously a very like largely under penetrated 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, help grow the business. Um, 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, 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 and not able to produce? If any more details you could provide on that, obviously, unfortunate situation.

Back to Joe. 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 things get worse, the war over there, we can't guarantee what we have. But we have a terrific team there. It's a 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 Erin 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 America's region, and 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 the 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 the 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 performed extremely well. We saw strength across every geography. We saw in Europe. We saw in North America. We also saw in China. I think our portfolio helps us a lot. Invisalign First, we led with that. Remember, those are patients that are anywhere between 6 and 10 years old. We really have terrific results in those areas. But also with permanent dentition, we saw some good growth too. So, you know, 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, you know, 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. John?

And just on the fourth quarter, Aaron, really taking what we see in September, it 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 Q4. Okay.

Thank you.

You're welcome. thank you one moment for our next question and our next question comes from the line of jeff johnson from baird your question please hey jeff jeff i don't know if you're on a speakerphone 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.

Sorry, Jeff, if you could hear us. We just can't pick it up.

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.

Yeah, Nate, we hear you fine.

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 4Q 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 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?

That's it. We'll see the 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 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 a margin basis.

Okay, great. And if I could just ask a follow-up on the 4Q guidance for clear aligner 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, you know, how should we think about adult cases relative to the 381,000? I guess when we take that together, you know, given how it sounds like September shaped up, should we expect, you know, 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, you know, 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 know, you would expect to see adults down as well.

Great. Thank you for the caller.

Thank you. One moment for our next question. And our next question. comes from the line of Brendan Kuya from Jefferies. 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 U.S., or does it also extend outside the U.S. as well? If you have any chance, are you 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 psyche 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. And then just a follow-up, John, on the fourth quarter margins, operating margins up with grabs down sequentially. Is that all coming from OPEX, or would you expect gross margins to bounce up sequentially as well?

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

Fair enough. Thank you.

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

Thanks for taking the question, guys. I've got a couple real quick here. First, hopefully you can hear me. Yeah, we can hear you, Mike. Great. First of all, I ask on the sort of the right sizing or some of the layoffs you discussed. I'm thinking back to 2020, sort of a 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. 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. So just contrasting that with a decision to implement some cuts here, I mean, does that mean anything in terms of your thoughts on the duration of the macro slowdown? Why, you know, if this is just macro-related and, as you said, September, you know, slowed pretty suddenly, if there is a rebound, you know, why not continue to invest given the balance sheet's strong, the free cash flows are strong? Just sort of, you know, compare and contrast and weigh out your thinking on that.

Mike, you know, first of all, when you go back to 2020 that you referenced and we, we did power through that. Um, you know, personally, what I looked at that is I looked at that as not an economic issue, you know, that was obviously a pandemic kind of an issue. And I think it had, uh, I anticipated to have a clear beginning and a clear end. And so in that sense, it's, it's, 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 don't 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, you know, I feel like we're balancing that well right now.

Okay. All right. I appreciate that. And then the second point, sort of piggybacking on I think it was Blanc's question earlier, I'm 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, you know, 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?

Hey, 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, you know, we're still working through 2024. Okay. All right.

Thanks.

Thank you.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Shirley Stacey 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 the Investor Relations team. And Jeff and Jason, we certainly will get back to you after the call and speak on our one-on-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.