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spk08: 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 fourth quarter and full year 2023 financial results today via BusinessWire, which is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately one month. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events and product outlook. These forward-looking statements are only predictions and involve risks and uncertainties that are described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission, available on our website and at SEC.gov. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statements. We've posted historical financial statements, including the corresponding reconciliations, including our gap to non-gap reconciliation, if applicable, and our fourth quarter and full year 2023 conference call slides on our website under quarterly results. Please refer to these files for more detailed information. With that, I'll turn the call over to Align Technology President and CEO, Joe Hogan. Joe?
spk10: Thanks, Shirley. Good afternoon, and thanks for joining us on our call today. I'll provide an overview of our fourth quarter and full results. and discuss a few highlights from our two operating segments, systems, services, and clear aligners. John will provide more detail on our Q4 financial performance and comment on our views for 2024. Following that, I'll come back and summarize a few key points and open the call to questions. I'm pleased to report fourth quarter results with better than expected revenues and earnings. As of the end of Q4, we achieved several major milestones, including 17 million Invisalign patients treated, including 4.7 million teens, plus 4 million Vivera retainer cases, and over 100,000 iTero scanners sold. And for the full year, fiscal year 2023, total revenues exceeded our prior outlook, and we delivered fiscal 2023 non-GAAP operating margin above 21%. For Q4, total revenues were up 6.1% year over year, reflecting increased systems and services revenues, Strengthened clear aligner volumes for teens and international doctors, as well as continued growth from Invisalign touch-up cases under our Invisalign Doctor Subscription Program, or DSP. Our Q4 systems and services revenues were up year over year, primarily due to increased services, CAD-CAM, and non-systems revenues, including scanner leasing and rental programs, and certified pre-owned scanner sales. Q4 total clear aligner shipments were slightly lower year over year. On a year-over-year basis, clear aligner volumes were down for the Americas and EMEA regions and were up for the APAC regions. The Q4 clear aligner shipments include approximately 20,000 Invisalign DSP touch-up cases, primarily in North America, and an increase of more than 60% year-over-year from Q4-22. DSP continues to be well-received by our customers and is currently available in the U.S. and Canada, Iberia, Nordics, and most recently the UK. We're excited that DSP is proving helpful to doctors and their patients as we continue to expand the program. For fiscal 2023, total Invisalign DSP touch-up cases shipped were 73,000, up 85% year-over-year. For non-case revenues, Q4 was up 13.3% year-over-year, primarily due to continued growth from Vivera retainers along with Invisalign DSP retainer revenues. On a sequential basis, Q4 total revenues were down slightly, 0.4%, primarily reflecting anticipated seasonally lower teens case starts, especially in the U.S., ortho channel, and unfavorable foreign exchange, offset somewhat by increased revenues from systems and services, as well as an increase in clear aligner volume for adults and noncomprehensive cases, and stronger volumes from Canada and the EMEA region. Q4 total aligner shipments were slightly lower sequentially. On a sequential basis, clear liner volumes were down for the Americas and APAC regions and were up sequentially for the EMEA region. The December gauge practice analysis tool that collects and consolidates data from approximately 1,000 orthodontic practices across the U.S. and Canada reported year-over-year decline for new patients, total exams, and total starts, particularly among teens and kids. It also shows a year-over-year decline for wires and brackets and total clear liner starts. with Invisalign case starts better than the clear aligner brands. In the teen segment for Q4, 197,000 teens and younger patients started treatment with Invisalign clear aligner systems, up 6% year over year, and where a record number of teen cases shipped compared to prior fourth quarters. Q4 teen starts were down sequentially, consistent with historical seasonality, primarily in China, as well as seasonally fewer teen starts in North America compared to Q3. For fiscal 2023, total Invisalign clear aligner shipments for teens and younger patients reached a total of 809,000 cases, up 8% compared to the prior year, and made up 34% of total clear aligner shipments. During Q4, we announced that the US Food and Drug Administration cleared the Invisalign Pallet Expander System, we call it IPE, Invisalign Pallet Expander, for commercial availability in the United States. The FDA 510 clearance is for broad, patient applicability, including growing children, teens, and adults. Full early intervention treatments, such as phase one or early interceptive treatment, makes up about 20% of the orthodontic case starts each year and is growing. Together with Invisalign first aligners, IPEs provide doctors with a solution set to treat the most common skeletal, dental malocclusions in growing children. The addition of mandibular advancement features to Invisalign aligners also provides doctors with more options for treating skeletal, dental jaw imbalances, and bite correction, and for their growing patients during their teenage years. Essentially, we now have an Invisalign digital treatment solution for every phase of treatment. IP is currently available on a limited basis in Canada and the United States, and we recently received regulatory clearance in Australia and New Zealand, where we anticipate commercialization in Q2. We expect IPE to be available in other markets pending future applicable regulatory approvals. We're also launching ClinCheck Smile Video, the next generation of in-face visualization with AI-assisted video that is expected to be available to all doctors who use the Invisalign practice app and ClinCheck treatment planning software. This new tool is designed to help improve patients' understanding and the confidence in Invisalign treatment and is based on ITERA inter-oral scanners and doctor's ClinCheck plan for Invisalign treatment. ClinCheck Smile video simulates the doctor's ClinCheck treatment plan with a short video of a patient's face, and they talk and smile, which helps patients visualize their potential new smile and can lead to a higher patient treatment acceptance. We expect to roll out ClinCheck Smile video in Q1 24 in North America and EMEA, followed by APAC later in the year. Before I turn the call over to John for a fourth quarter financial review, I want to share one more exciting news. Today we introduce the latest innovation in the iTero family of inter-oral scanners. The iTero Lumina inter-oral scanner designed to meet the needs of doctors and their patients by offering smaller wand with unparalleled data capture capabilities for effortless scanning by clinical members. The iTero Lumina inter-oral scanner is a breakthrough technology with 3x wider field of capture and a 50% smaller wand that delivers faster scanning, higher accuracy, and superior visualization for greater practice efficiency. ITERA Lumina quickly, easily, and accurately captures more data while delivering exceptionally scanned quality and photorealistic images that eliminate the need for interaural photos altogether. Doctors can now scan at twice the speed with a wide field of capture, multi-angled scanning, and large capture distance, meaning they can capture more dentition in greater detail throughout the scanning process. To date, Align has filed over 30 patent applications covering technology related to the ITERA Lumina interoral scanner. I believe ITERA Lumina has the potential to set a new standard of care for dental practices by simplifying the scanning of complex oral regions while offering superior chair-side visualization and more comfortable experience for patients, especially kids. Initial doctor feedback has been very positive, noting that ITERA Lumina scanner is much faster clear, less invasive for their patients, and the imaging and visualization translates to better communications and patient experience. The IteroLumina inter-oral scanner is available now with orthodontic workflows and will be available in the second half of 2024 restorative workflows, although we expect that GP practices can benefit now from the new scanning technology. A global broadcast will unveil IteroLumina and provide attendees with insights and detailed information from our ITERO team and early customer users is planned for February 15th. Registration will open on February 1st, and the link has been provided in our financial slides as well as in today's press release. With that, I'll turn the call over to John.
spk15: Thanks, Joe. Now for our Q4 financial results. Total revenues for the fourth quarter were $956.7 million, down 0.4% from the prior quarter and up 6.1% from the corresponding quarter a year ago. On a constant currency basis, Q4 23 revenues were impacted by unfavorable foreign exchange of approximately $12.8 million or approximately 1.3% sequentially and were favorably impacted by approximately $13.8 million year-over-year or approximately 1.5%. For clear aligners, Q4 revenues of $781.9 million were down 1.6% sequentially primarily from lower volumes. On a year-over-year basis, Q4 clear aligner revenues were up 6.9%, primarily due to higher ASPs and non-case revenues, slightly offset by lower volumes. For Q4, Invisalign ASPs for comprehensive treatment were up sequentially and up year-over-year. On a sequential basis, ASPs reflect higher additional aligners, partially offset by the unfavorable impact from foreign exchange. higher sales credits, and higher discounts. On a year-over-year basis, the increase in comprehensive ASPs reflect higher additional liners, price increases, and favorable impact from foreign exchange, partially offset by higher discounts in product mix to lower ASP products. For Q4, ASPs for noncomprehensive treatment were down sequentially and up year-over-year. On a sequential basis, the decline in ASPs reflect the unfavorable impact from foreign exchange a product makeshift to lower ASP products and higher net revenue deferrals, partially offset by price increases and lower discounts. On a year-over-year basis, the increase in ASPs reflect price increases, the impact from favorable foreign exchange, and higher additional aligners, partially offset by a product makeshift to lower ASP products and higher discounts. Last quarter, we announced about a 5% global price increase for some Invisalign products, across most markets, effective January 1, 2024. Invisalign Comprehensive 3-in-3 product is available in North America and 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 compared to our traditional Invisalign comprehensive product. Q423 clear aligner revenues were impacted by unfavorable foreign exchange of approximately $10.7 million, or approximately 1.4% sequentially. On a year-over-year basis, clear aligner revenues were favorably impacted by foreign exchange of approximately $12 million, or approximately 1.6%. Clear aligner deferred revenues on the balance sheet increased $14.9 million, or 1.2% sequentially, and $74.6 million, or up 66.1% year-over-year, and will be recognized as the additional aligners are shipped. Q423 systems and services revenues of $174.8 million were up 5.8% sequentially, primarily due to higher ASBs and an increase in CAD, CAM, and services revenue, partially offset by lower volumes. And we're up 2.9% year over year, primarily due to higher services revenues from our larger base of scanners sold and increased non-system revenues related to our CPO and leasing rental programs, mostly offset by lower ASPs and scanner volume. CAD, CAM, and services revenues for Q4 represent approximately 50% of our systems and services business. Q423 systems and services revenues were unfavorably impacted by foreign exchange of approximately $2.1 million or approximately 1.2% sequential. On a year-over-year basis, systems and services revenue were favorably impacted by foreign exchange of approximately $1.9 million or approximately 1.1%. Systems and services deferred revenues on the balance sheet We're down $4.3 million, or 1.6% sequentially, and down $13.1 million, or 4.8% year over year, primarily due to the recognition of services revenue, which is recognized readily 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, fourth quarter overall gross margin was 70%, up 0.9 points sequentially and up 1.5 points year over year. Q4 non-GAAP gross margin was 70.5%, up 0.9 points sequentially, and up 1.2 points year over year. Overall gross margin was unfavorably impacted by foreign exchange by approximately 0.4 points sequentially and favorably impacted by approximately 0.4 points on a year over year basis. Clear aligner gross margin for the fourth quarter was 71.1%. up 0.4 points sequentially, primarily due to lower manufacturing spend, partially offset by higher freight costs. Clear Atlanta gross margin for the fourth quarter was up 0.3 points year-over-year, primarily due to higher ASPs and favorable foreign exchange, partially offset by higher manufacturing spend and freight costs. Systems and services gross margin for the fourth quarter was 64.8%, up 3.8 points sequentially due to higher ASPs, partially offset by higher service and freight costs. Systems and services gross margin for the fourth quarter was up six points year over year due to improved manufacturing efficiencies and favorable foreign exchange, partially offset by lower ASPs. Before I go into the details, I want to note that during Q4 23, we incurred a total of $14 million of restructuring and other charges primarily related to post-employment benefits. Q4 operating expenses were $498 million, roughly flat sequentially and down 1.4 points year over year. On a sequential basis, operating expenses were up slightly primarily due to restructuring and other charges offset by lower employee compensation. Year over year, operating expenses decreased by $7.1 million primarily due to controlled spend on advertising and marketing as part of our efforts to proactively manage costs partially offset by employee-related costs and slightly higher restructuring 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 $446.7 million, down 2.5% sequentially and down 2.8% year-over-year. Our fourth quarter operating income of $171.5 million resulted in an operating margin of 17.9%, up 0.6 points sequentially, and up 5.4 points year-over-year. Operating margin was unfavorably impacted by approximately 0.6 points sequentially, primarily due to foreign exchange. The year-over-year increase in operating margin is primarily attributed to operating leverage and proactively managing our costs, as well as favorable impact from foreign exchange by approximately 0.6 points. On a non-GAAP basis, which excludes stock-based compensation, restructuring, and other charges, the amortization of intangibles related to certain acquisition, operating margin for the fourth quarter was 23.8%, up two points sequentially, and up 5.5 points year over year. Interest and other income and expense. Net for the fourth quarter was an income of $1.3 million compared to our loss of $4.2 million in the third quarter, an income of $2.7 million in Q4 2022, primarily driven by favorable foreign exchange. The gap effective tax rate for the fourth quarter was 28.3%, higher than the third quarter effective tax rate of 25.1% and lower than the fourth quarter effective tax rate of 63.8% in the prior year. The fourth quarter GAAP effective tax rate was higher than the third quarter effective tax rate primarily due to one-time benefit related to tax guidance issued in Q3, actually offset by lower U.S. taxes on foreign earnings in Q4. 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 1st, 2022. Our non-GAAP effective tax rate for the fourth quarter was 20%, reflecting the change in our methodology. Fourth quarter net income per share was $1.64. up sequentially $0.06 and up $1.10 compared to the prior year. Our EPS was unfavorably impacted by $0.07 on a sequential basis and favorably impacted by $0.08 on a year-over-year basis due to foreign exchange. On a non-GAAP basis, net income per diluted share was $2.42 for the fourth quarter, up $0.28 sequentially and up $0.69 year-over-year. Moving on to the balance sheet. As of December 31st, 2023, cash, cash equivalents, and short and long-term marketable securities were $980.8 million, down sequentially $321.2 million, and down $60.8 million year-over-year. Of our $980.8 million balance, $196.1 million was held in the U.S., and $784.7 million was held by our international entities. In October 2023, we purchased approximately 1 million shares of our common stock at an average price of $190.56 per share through a $250 million accepted share repurchase. And in November and December 2023, we purchased approximately 466,000 shares of our common stock at an average price of $214,000. dollars and 81 cents per share through a 100 million dollar open market purchase both under alliance current 1 billion dollar stock repurchase program we have 650 million dollars remaining available for repurchase of our common stock under this stock repurchase program q4 accounts receivable balance was 903.4 million dollars slightly down sequentially Our overall day's sales outstanding was 85 days, flat sequentially and year over year. Cash flow from operations for the fourth quarter was $46.9 million. Capital expenditures for the fourth quarter were $33.4 million, primarily related to our continued investments to increase Alignum manufacturing capacity and facilities. Free cash flow, defined as cash flow from operations, Less capital expenditures amounted to $13.5 million. Now turning to our outlook. Assuming no circumstances occur beyond our control, we provide the following framework for Q1 and fiscal 2024. For Q1 2024, we expect our worldwide revenues to be in the range of $960 million to $980 million, up slightly from Q4 of 2023. We expect clear aligner volume and ASPs to be up slightly sequentially. We expect systems and services revenue to be down slightly sequentially, although less than the historical seasonal decline given the launch of the itero-lumina for ortho workflows in Q1 2024. We expect our Q1 2024 gap operating margin and non-gap operating margin to be slightly above Q1 2023 gap operating margin and non-GAAP operating margin, respectively. For full year, we expect fiscal 2024 total revenues to be up mid-single digits over 2023. We expect fiscal 2024 clear aligner and systems and services revenues to grow year over year in the same approximate range as our 2024 total revenues. We expect fiscal 2024 clear aligner ASBs to be up slightly year over year, primarily due to price increases and favorable foreign exchange, partially offset by a higher mix of non-comprehensive products which have lower ASPs. We expect fiscal 2024 GAAP operating margin and non-GAAP operating margin to be slightly above the 2023 GAAP operating margin and non-GAAP operating margin, respectively. We expect our investments in capital expenditures for the fiscal 2024 to be approximately $100 million. Capital expenditures are expected to primarily relate to building construction improvements, as well as manufacturing capacity in support of our continued expansion. In summary, I am pleased with our fourth quarter and fiscal 2023 results, and I am especially proud of our continued focused execution of our product roadmap and innovation pipeline. we are committed to delivering on our strategic growth drivers of international expansion, patient demand, orthodontist utilization, and GP dentist treatment to extend our leadership in digital orthodontics and dentistry. I believe that the next wave of innovation that we are introducing into the market will further differentiate, align, and allow us to continue to increase our share of the large untapped market opportunity of 22 million annual orthodontic case starts as well as an additional 600 million consumers who could benefit from a healthy, beautiful smile using Invisalign clear aligners. With that, I'll turn it back to Joe for final comments. Joe?
spk10: Thanks, John. In closing, while I'm pleased with our better than expected fourth quarter results and start to the year, I'm even more excited about Align innovation in 2024 and our next wave of growth drivers. When I spoke to you About a year ago, I discussed the innovations that we were planning to bring to market that would continue to revolutionize the orthodontic and dental industry and scanning software and direct 3D printing. We are delivering on that promise. With the introduction of ITERA Illumina powered by multi-direct capture technology, we are pushing the boundaries of what inter-oral scanners can do. ITERA Illumina is a combination of years of research and development to offer visualization capabilities that support doctors' clinical decisions while also enhancing their patients' comfort and overall treatment experiences. Building on more than 20 years of expertise in revolutionizing imaging technologies, the ITERA Luminous Scanner elevates the standard in digital scanning to achieve exceptional clinical outcomes and increase practice efficiency. The ITERA Scanner is at the forefront of digital dentistry. With the closing of our acquisition of Cubicure, a pioneer of direct 3D printing solutions for polymer additive manufacturing, we will enable the next generation of 3D-printed products, helping to create more unique configurations for aligners that are more sustainable and also efficient solutions. We also expect it to extend and scale our printing, materials, and manufacturing capabilities for our 3D-printed product portfolio, which now includes the Invisalign Pallet Expander system. And with the introduction of IPE, we have expanded the clinical applicability of the Invisalign system to nearly 100% of the orthodontic case starts. The ability to direct 3D print, IPE, will eventually lead to other direct printed products with the goal of direct 3D printed Invisalign clear aligners, which we hope to achieve in the next couple of years. As a company, Align has multifaceted competitive advantage. Technology innovation, where we invest up to $300 million in R&D per year to bring in some of the most disruptive products in digital dentistry and orthodontics, to the market in a highly regulated industry, a direct sales force that consists of 5,000 highly trained specialists, a doctor-centered model because we understand the importance of doctor-directed care, a billion-dollar brand trusted by over 17 million patients worldwide, and global scale in manufacturing to deliver millions of customized clear aligner parts every day. We are extremely pleased with our latest innovations in commercialization of products to better serve our doctor, customers, and their patients. Our belief in the future business overall is unwavering. Before we turn the call over to the operator, I want to address an important matter regarding DTC or direct-to-consumer clear aligners in our industry. Alliant has always believed that a doctor-centered model for orthodontic treatment is the safest for patients, and we're always looking for new and better ways to support doctors as they work to create better smiles for their patients. Recent news regarding the bankruptcy of a DTC clear aligner company has led many consumers to reach out to Invisalign providers to address their unmet needs, including helping those DTC patients with incomplete treatments. To support these former DTC patients who are seeking help from Invisalign providers and practices, in Q4, we introduced a program in the U.S. and select other markets offering up to a 50% off Invisalign case submission and Vivera retention to help offset any additional costs to finish their treatment. We want to help everyone achieve a healthy, beautiful smile and strongly recommend that individuals who have impacted by this matter seek the advice of a licensed orthodontist or dentist. Our concierge team is always available to answer questions and help connect consumers with Invisalign practices. With that, I'll thank you for your time today. We look forward to updating you on our next earnings call. Now I'll turn the call over to the operator for questions.
spk16: Thank you. At this time... 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 1-1 on your telephone keypad and wait for your name to be announced. You may press star 1-1 again if you would like to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
spk17: One moment for questions. Our first question comes from Elizabeth Anderson with Evercore ISI.
spk16: You may proceed.
spk06: Hi, guys. Congrats on the quarter, and thanks so much for the question. Hey, I was wondering if you could walk us through the components of the mid-single-digit guide for 2024. I understand what you said that, like, systems and services and clear aligners would be in the same range. I guess I'm just sort of thinking about like how to think about that. It seems like maybe it's like low single digit ASP improvement and then sort of, you know, low to mid single digit case growth. Is that the right way to think about it? Like what else can you, is there anything else you can sort of clarify on that and sort of how do you expect at least currently the sort of pacing of the year to progress?
spk15: Yeah, Elizabeth, hi, this is John. You have it framed the right way. We're looking at the segments up mid single digits. And then ASPs, because of the price increase, we have some offset due to some of the lower stage products that we have, including these DSP touch-ups and so on, that you would expect then a little bit lower of ASP impact year over year.
spk06: Got it. That makes sense. And then separately, how has the volume in sort of market in China been progressing across the fourth quarter and maybe into the first quarter so far as you can comment?
spk10: Hey, Elizabeth, it's Joe. You know, we felt good about China last year, but remember, we had year-over-year comparisons that were really favorable because of the COVID shutdown over there last year. But, you know, overall, as we exited the year, we felt good about our performance there, and we feel good about, you know, as we move into 2024, about our competitive position there in a China market that I think is a little more predictable because it's not the overhead that we've seen with COVID over the last, really, several years.
spk06: Got it. And sorry, maybe one last one for me. Can you just remind us the sort of one-two dip in the operating margins and then how it sort of steps up across the year? I understand the guidance you gave for the first quarter of the year, but just why that first quarter has a sort of different perspective than the rest of the year? Thanks.
spk15: Yeah, so we wanted to give, you know, to prior year because in that prior year, when you start the year, you have certain expenses that you incur right at the beginning, payroll taxes and other things that you incur initially, some of the investments that you make that you then get leverage on as you go through the year. So it's similar to how we positioned things from last year in 2023. Perfect.
spk05: Thanks so much, guys. Thanks, Elizabeth.
spk16: Thank you. One moment for questions. Our next question comes from Jeff Johnson with Baird. You may proceed.
spk17: Hey, Jeff. Hey, thanks. Good afternoon, guys.
spk07: Hey, can you hear me okay? Yeah, we'll hear you fine.
spk20: All right, great. Hey, John, maybe I want to follow up on Elizabeth's margin question there beyond just the one cue. You know, let's say you get your guidance this year on operating margin. It's up nominally from 2023 levels. You know, it would be three years in a row kind of in that low to mid 21% range. I think pre-COVID you were up in the 25% range or so. what's it going to take to get those margins moving back towards those pre-COVID? You've taken price increases two years in a row. It feels like your R&D should be coming down a little bit. Obviously, with Cuba Cure and that, I know you're continuing to invest aggressively, but IT is out, Lumina now out, things like that. So just help us understand, when can we start to see a path back towards getting those margins maybe up a few points from where they've settled in the last few years?
spk15: Yeah, Jeff, this is John. Really, when you start to get some of that volume leverage, we're positioned as having our manufacturing and the organization that we have that's really set to drive more growth. And once we get some of that volume leverage, we should see that benefit showing up in our numbers. And it's really what we saw as we went through the quarters last year, where you see some of that volume benefits. you get that benefit as well when you go through the year. But really looking to try to drive as much volume as we can, and you'll start to see some of that leverage that shows up in our numbers.
spk20: All right. Fair enough. And then, Joe, you know, I think we've talked for many years now how ITERO has carved out such a commanding or, you know, strong competitive position. You've sold a ton of ITEROs over the last five, six years or so. They're all probably getting, you know, I don't know, close to their end of their useful life or so, you know, Lumina for the first time. Feels like that kind of product with the better form factor, especially things like that, that could really cause some of these docs to say, you know, I got to get rid of this big Itero and go back down to this much smaller one and things like that. Just things that would actually matter to the docs. And I'm sure the technology does this too. I don't want to just put it on the side. But just thinking there, is this the kind of product that can finally kick off that multi-year upgrade strategy or path in Itero that, you know, we've kind of been waiting to see?
spk10: You know, Jeff, the easy answer and the quick answer is yes. I mean, it's just a brand new platform. Now, we've set up, you know, I mentioned in my script about we have 100,000, you know, units out there that we've sold so far. About a third of those are 5D pluses, which are upgradable by just a one switch out. This is the way we've designed Lumina. And so that part's easy. Also, we've been really aggressively upgrading our installed base between E1 and E2 out there too to better position it for this kind of a move. So, As we develop Lumina, we had exactly in mind what you just questioned, and we think we're in a good position to do that.
spk20: And if you switch out that wand from the 5 to the Lumina, there is a fee there, right? It's not like, hey, you bought this knowing that you could always upgrade at no charge to Lumina?
spk10: There's no charity here to line. There'll be a charge.
spk19: I like to hear that.
spk10: God bless capitalism. Thanks, Joe.
spk16: Thank you. One moment for questions. Our next question comes from John Block with Stifel. You may proceed.
spk32: Hey, John. Hey, guys.
spk31: Good afternoon.
spk32: So, Joe, maybe this one's for you. You know, video 1Q24, IPE, some markets today, but more in the common. IPE should help longer-term with teams. Docs might take a little bit of a wait-and-see approach. You talked about the new scanner. You know, in your opinion, like, is innovation, are we seeing that in the 24 guide? Or is that more of like a ramp into 25? And maybe even to take that a step further, John, for you, is there a way to sort of quantify out of that mid-single-digit revenue growth, what can you attribute to these new products coming on board in 24? I'm just trying to think about the impact of 24. Is this more the ramp or the slope into 25 for the innovation heading?
spk10: John, I like the way you set that up. It's a ramp. It really is. But we feel good that we can play offense with these product lines. Now, you know, we still have to scale IPE. We have a great team that knows how to scale and we'll get through that. Obviously, you know, Lumina is a completely different set of, you know, outside of the computer itself, the wand itself is, you know, we feel good about the scale part of that. And, you know, as we sell through the marketplace, but overall, I think the way you described it as a ramp of this new technology really beginning in 2024 is a good foundation for that kind of a thought process.
spk32: In any way to quantify what's in there from the current guide or no? Is that just too difficult to tease out? It really is just too early. Okay, okay. So second one is maybe multi-part, but just first on the CapEx, 100 mil. I mean, I was really surprised on how low that number was for this year. You know, it was 400 million in 21, 300 million in 22. And I was maybe even more surprised when I think about the direct fabrication initiative. So I know the slides say hoping to print Invisalign clear liners, you know, quote, unquote, in the next couple of years. Do we still think retainers, 2H24, 1H25, when do we feel like, you know, you've proved it out, so to say? And do we start to see gross margin benefits from this as early as next year, you know, turning accretive in 2025? And then, you know, admittedly, just a jump to another question. For the guidance, can you just help us what's embedded in there? And I bring that up because we've seen this big move in U.S. consumer confidence. Europe still seems very choppy. So when we tie it back to your guidance for the year, what are you extrapolating out, if you would, for the current macro? Thanks, guys.
spk15: I'll start with that, John, in terms of the current guidance. Look, we're looking at the environment that we're all in. It's not a Great economy, most places, but it is more stable and we're building off of that. And then as Joe said, we're doing things to play offense, new products that we have with Lumina and IP and so on, which we think can help us grow in this environment.
spk10: John, your question about the ramp up the margin piece or part of that, what's that mean in 2025 or whatever? You know, look, we feel confident, and as you know from our discussions and, you know, our analyst presentations last year is, you know, 3D printing is foundationally, you know, it can be less expensive if we scale it. And so, I mean, we'll start to see that come through as we scale that, but we need time to scale this. No one's ever had this polymer before that has to scale. No one's ever used a cubicle system to the degree that we need to use it. Now, we did this with 3D systems years ago because we basically scaled those systems through our team, and the team knows how to do that. I just can't tell you specifically within those next one to three years, with this being the first year, exactly when that really hits that hyperbolic side.
spk15: And just to close on the CapEx, those prior years, a lot of that was equipment. Of course, we were always adding capacity. But a lot of that was very much unique for buildings, adding buildings for our locations, manufacturing, and so on. And when we add some of the capacity that we're adding for our manufacturing, it will go in existing buildings. So you don't have to add another building in most cases for this. So that's why the CAPEX is where it is.
spk09: All good. Thanks for the call, guys. Thanks, John.
spk16: Thank you. One moment for questions. Our next question comes from Brandon Vasquez with William Blair. You may proceed.
spk04: Hey, everyone. Thanks for the question. Hey, on the guidance, Maybe one other way I wanted to ask you and see if I could tease out a little bit of color on what's assumed here. You know, if I kind of go back to some old sequentials in the teen side, assuming that's a little less susceptible to macro headwinds, you can probably kind of get to a low single-digit volume growth, I think, for the entire clear liner business already. That's probably not even including some DSP. So am I thinking about this correctly, that really out of adults on a year-over-year basis for full year 24, You're really assuming kind of flattish, maybe even down, depending on how teens and some of the DSP cases are doing?
spk15: I would characterize it, Brandon, this is John, that both teen and adult are positive on a year-over-year basis. Expect maybe adults to grow faster, as we've seen, compared to teens grow faster than adults, as we've seen in the past. But I would expect both of them to be up and show our numbers that way.
spk04: Okay. And then can you just reiterate maybe both for IPE and for Lumina? You know, exciting. It seems like they're going to ramp over the coming quarters. Are there any, like, key quarters and catalysts that we should think about that might take that up? You know, you're talking about a ramp. How do we get to the next level on the ramp on any of those when they go from maybe a limited launch to full market release, anything like that? Thanks.
spk10: Hey, Brandon. Joe again. On the Lumina side, remember our – restorative scanner for GPs comes out in the third quarter. But it's like John indicated, we indicated, we feel we can sell that into the market now with the capabilities it has. But that'll ramp and that'll probably be more hinged to the regulatory approvals we have to get around the world. You know, right now, as I mentioned, we only have the United States and Canada and ANZ. You know, secondly, on IPE, it's the same thing is We're regulatory constrained. We still have to go through Europe. And as I mentioned, IPE will come out in the second quarter in Australia and also. And, you know, as we gate that, obviously, we'll be scaling IPE, too, and, you know, understanding the dynamics around that. So it's more of a ramp, as I mentioned a few calls ago than anything. Okay.
spk04: Thanks, everyone.
spk16: Thank you. One moment for questions. Our next question comes from Jason Bednar with Piper Sandler. You may proceed.
spk21: Hi, Jason. Hey. Hey there. Thanks for taking the questions. I'm going to pile on here on the guidance just to focus there first. You mentioned non-comprehensive mix as being an offsetting factor to ASPs. I know you've got that DSP factor. I thought maybe originally you were signaling adults growing better than teens, but it doesn't seem like that's the case, just given your comments there to Brandon. I guess regardless, on adults, are you seeing this market getting its footing back? It sounds like it, but if you are, what's giving you the confidence or what are you seeing that kind of the day-to-day or month-to-month that's showing adults are coming back into the office for treatment? And then sorry to load a few in here, but should we expect this faster non-comprehensive mix also to have gross margin benefits for the year as well? I think it typically does, but I don't think we've gotten a kind of a gross margin cadence outlook for 2024.
spk10: I'll take the first part of your question and hand the rest off to John. We feel we're on a more stable, I'd call it, economic platform than last year. And so the adult and teen question that you had is we expect that to carry through in 2024, as we indicated with our guidance too. When I look back, everybody has a clearer vision backwards and forward. We look back at last year, a pretty unstable platform that we experienced through the year, and third quarter was a tough one in that sense. But I think we all see it right now. We have more confidence that at least we're dealing with stability from an economic standpoint in most parts of the world from what we've seen.
spk15: And on the non-comprehensive and gross margin questions and related to that, Look, as we have the mix that shifts through and you might have an ASP lower on some of the non-comp DSP and others that fall into that, those are our highest gross margin products from a rate standpoint. They're helpful for us as a business. It's really what that customer wants for him or her to run their practice, and that's how we balance things out. But overall, we expect that we would see benefits in gross margin, just like we're talking about op margin, year-over-year benefits. We should see a benefit as well in gross margin.
spk21: All right. That's helpful. Thank you. And then for the follow-up here, I'll Ask on teens, it does look like you're back to gain share against brackets and wires looks like the kind of the second consecutive quarter of that. I'm curious if you could talk maybe bigger picture, what's changed? What do you think has changed the last three to six months versus maybe the 12 plus months that preceded that? Do you think the the share gains you're seeing versus brackets and wires? Does that have to do with changes you made to that teen guarantee program middle part of last year? Or are there other items at the practice level or associated with your go-to-market activities that are driving that shift?
spk10: You can always say that at Align, there's no single variable equations. And this is another one. You know, the team guarantee we think is some of it. Obviously, our portfolio and how we put that together. Our DSP programs, uniqueness of the biz line first. All those things really help. And, you know, from an adult standpoint, With the firmer economic platform I talked about, I just think there's more confidence out there that we're starting to see bleed through.
spk03: Okay, helpful. Thank you.
spk17: Thanks, Jason.
spk16: Thank you. One moment for questions. Our next question comes from Michael Ryskin with Bank of America. You may proceed.
spk25: Great. Thanks for taking the question, guys. I want to start with DSP, kind of where you left off. really successful obviously and you had a great growth year over year for the whole year but it's kind of moved in sort of like a step function if I just look at the numbers you know six seven nine thousand and then you're kind of like an 11 12 range now you're in the 18 19 20 range is there another step function coming next year is there you know could you dig into a little bit into what's driving that and just sort of where do you see that going over the next couple years
spk15: Yeah, Michael, this is John. I would say as we look to expand this out, it's been successful every place that we've gone. We've seen, as you said, North America starts with this. So you see some doctors start, and then we have more and more doctors that sign up for the program. And then as the doctors sign up for the program, then they end up doing more and more volume with us. We've taken that same approach to other countries, and now we've introduced this in EMEA and other places. And the same thing happens. More and more doctors sign up for it. They start to see the benefits of it, and then they utilize it more. So it's really just a matter of now scaling this to other parts of the world because we find that this is really a nice way to supplement how a doctor wants to run their practice.
spk25: Okay. And maybe a follow-up on a few questions that were asked on cubic cure and direct 3D printing earlier. Really exciting technology that you unveiled late last year, and definitely see the opportunity. help walk us through the roadmap a little bit, sort of like what should we be looking for, you know, as sort of a goalpost six months out, a year out, two years out, just to sort of track progress and see how it's, uh, see how it's progressing.
spk10: You know, Michael, it's Joe again. I think, um, I think the best way for me to describe it to you, it's a, like I said, on my script, it's a one to three year journey. Uh, you know, and, you know, obviously we'll, uh, We know how to make these aligners now. We understand how to do it. It's just scalability of resin in the cubicle process, and that takes time. We'll obviously report on it quarter by quarter, so you really understand where we're going with it and what the hurdles are and what the opportunities are.
spk25: Maybe if I could just tweak that a little bit. Just to help us understand, is there anything in terms of, when you talk about scalability of the resin, and the polymer, you know, if you're looking at comprehensive, non-comprehensive, you know, you talked about retainers and being able to print those. Is there anything in terms of your portfolio that makes some products more amenable or would be amenable earlier than others, or is this just going to be all or nothing?
spk10: I mean, obviously, the scale, you look at retainers first because, you know, units of one, and then you'd end up with, you know, comprehensive full cases in some way, and that's basically how we're around.
spk18: Okay, great. Thanks, guys.
spk02: Thank you, Michael.
spk16: One moment for questions. Our next question comes from Nathan Rich with Goldman Sachs. You may proceed.
spk24: Hey, good afternoon. Thanks for the questions. I wanted to ask on the systems and services revenue guidance for 2024. This looks low to me, just given I think growth in 23 was basically flat, up slightly. With the Lumina launch, we thought it would maybe be up more than it was in 2023. I don't know if you could just maybe elaborate on what you're expecting for that segment.
spk15: Hey, Nate, this is John. We're looking at, like we said, this year, kind of that mid-single digits. We do have Lumina, which helps, but there's also unknowns about the macro economy. We were very pleased with what we saw in the fourth quarter with doctors buying and actually doing better than what we had really guided to. So we're pleased with the performance of Q4, but we just want to make sure that as we ramp up Lumina, that we're properly positioned there, and we'll update as we go along.
spk24: Okay, great. And then just going back to the margin cadence, I guess are there any either upfront or one-time costs associated with either the launches of Illumina or IPE that impact the margin in the early part of the year, just as we think about, you know, cadence and sort of what the right baseline is?
spk15: There is some of that in Q1. You know, we're ramping that up, so it's not a big, huge splash where there's a lot of expenses and it kind of hits all in one quarter. But there is some ramp up. But that's factored into our guide. So when we say that we expect the year of a year in the first quarter to be slightly up, it's factored in. Those expenses are factored in.
spk16: Great. Thank you. Thank you. One moment for questions. Our next question comes from Erin Wright with Morgan Stanley. You may proceed.
spk01: Great. You mentioned at the end of the call some of the DTC customers that you were tailoring some of the offerings to. I guess with this material at all in the quarter, maybe it's not large enough at this point, but any sort of contributions in 2024 as we think about picking up some of that business and then also DSO relationships, has there been any changes there in terms of the relationships on that front? How would you characterize those at this point? Are you seeing any greater traction there? Do some of these new products really move the needle in terms of some of those relationships or conversations you're having? Thanks.
spk10: On the DTC customers, we've always argued that that wasn't our marketplace in the sense of the price point and all, but obviously these patients will pursue treatment now, you know, probably more so for doctors than DTC. And we're just doing what we can in order to support those customers going forward. But again, as I was clear in my script, you know, we're a doctor-focused kind of company, and we'll keep it that way. But we do see this as being a certain opportunity. It's just hard for us to quantify it right now. On the DSO relationships, I'd say they've just gotten stronger all around the globe. You know, two to call out would be, you know, Heartland and Small Docs. You know, Small Docs being more on the ortho side and Heartland, you know, being more on the GP side. But we have really, you know, good relationships, and we leverage our portfolio, you know, well with them to help them grow, and we grow with them. So I feel good about our position with DSOs, and we have good, strong relationships out there with them.
spk28: Okay. Thank you.
spk16: Thank you. One moment for questions. Our next question comes from Brandon Collard with Jefferies. You may proceed.
spk22: Hey, Brandon. Hey, thanks. Good afternoon. Joe, given the positive macro shift we've seen in the last few months with consumer confidence coming back, any chance you can comment on what you've seen in case starts in January in inflection and then with respect to the 24 growth outlook? Any chance you could break that out between Americas and international?
spk10: Yeah, I can't, I really wouldn't break it out between Americas International because we felt good about the geographies in general as you went across the world for, you know, especially, you know, the latter half of the fourth quarter of last year. As we go into this year, you know, as I talked about, we're looking at, I think, a stable economic platform. Some of the data that you cited would, you know, support that overall. And we feel good about our new products. We think we can play offense off it. And that's what we're focused on right now.
spk22: Okay, and then one housekeeping one for you, John. The fourth quarter operating cash flow is pretty weak. Can you just unpack any of the moving parts that might have been one time in the quarter? It looks like there was a spike in prepaid expenses on the balance sheet, but anything you would call out?
spk15: Things that related to like tax payments and things. It's just some timing as things go through the year, but we feel great. I mean, it's a great model, generates a lot of cash and gives us a lot of flexibility and we were able to use use that cash, that $350 million buyback that we did last quarter.
spk12: Gotcha. Thank you.
spk16: Thank you. And we have reached the end of our question and answer session. I will now turn the call back over to Shirley Stacey for closing remarks.
spk08: Thank you, everyone. We appreciate you joining us today. We look forward to speaking with you at upcoming financial conferences and at industry meetings such as Chicago Midwinter. If you have any questions or follow-up, please contact our investor relations. Thanks and have a great day.
spk16: Thank you. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation. Thank you. you Thank you. Bye. music music
spk08: 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 fourth quarter and full year 2023 financial results today via BusinessWire, which is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately one month. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events and product outlook. These forward-looking statements are only predictions and involve risks and uncertainties that are described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission, available on our website and at SEC.gov. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statements. We've posted historical financial statements, including the corresponding reconciliations, including our gap to non-gap reconciliation, if applicable, and our fourth quarter and full year 2023 conference call slides on our website under quarterly results. Please refer to these files for more detailed information. With that, I'll turn the call over to Align Technology President and CEO, Joe Hogan. Joe?
spk10: Thanks, Shirley. Good afternoon, and thanks for joining us on our call today. I'll provide an overview of our fourth quarter and full results. and discuss a few highlights from our two operating segments, systems, services, and clear aligners. John will provide more detail on our Q4 financial performance and comment on our views for 2024. Following that, I'll come back and summarize a few key points and open the call to questions. I'm pleased to report fourth quarter results with better than expected revenues and earnings. As of the end of Q4, we achieved several major milestones, including 17 million Invisalign patients treated, including 4.7 million teens, plus 4 million Vivera retainer cases, and over 100,000 iTero scanners sold. And for the full year, fiscal year 2023, total revenues exceeded our prior outlook, and we delivered fiscal 2023 non-GAAP operating margin above 21%. For Q4, total revenues were up 6.1% year over year, reflecting increased systems and services revenues, Strengthened clear aligner volumes for teens and international doctors, as well as continued growth from Invisalign touch-up cases under our Invisalign Doctor Subscription Program, or DSP. Our Q4 systems and services revenues were up year over year, primarily due to increased services, CAD-CAM, and non-systems revenues, including scanner leasing and rental programs, and certified pre-owned scanner sales. Q4 total clear aligner shipments were slightly lower year over year. On a year-over-year basis, clear aligner volumes were down for the Americas and EMEA regions and were up for the APAC regions. The Q4 clear aligner shipments include approximately 20,000 Invisalign DSP touch-up cases, primarily in North America, an increase of more than 60% year-over-year from Q4-22. DSP continues to be well-received by our customers and is currently available in the U.S. and Canada, Iberia, Nordics, and most recently, the UK. We're excited that DSP is proving helpful to doctors and their patients as we continue to expand the program. For fiscal 2023, total Invisalign DSP touch-up cases shipped were 73,000, up 85% year-over-year. For non-case revenues, Q4 was up 13.3% year-over-year, primarily due to continued growth from Vivera retainers along with Invisalign DSP retainer revenues. On a sequential basis, Q4 total revenues were down slightly, 0.4%, primarily reflecting anticipated seasonally lower teens case starts, especially in the U.S., ortho channel, and unfavorable foreign exchange, offset somewhat by increased revenues from systems and services, as well as an increase in clear aligner volume for adults and non-comprehensive cases, and stronger volumes from Canada and the EMEA region. Q4 total aligner shipments were slightly lower sequentially. On a sequential basis, clear aligner volumes were down for the Americas and APAC regions and were up sequentially for the EMEA region. The December gauge practice analysis tool that collects and consolidates data from approximately 1,000 orthodontic practices across the U.S. and Canada reported year-over-year decline for new patients, total exams, and total starts, particularly among teens and kids. It also shows a year-over-year decline for wires and brackets and total clear aligner starts. with Invisalign case starts better than the clear aligner brands. In the teen segment for Q4, 197,000 teens and younger patients started treatment with Invisalign clear aligner systems, up 6% year over year, and where a record number of teen cases shipped compared to prior fourth quarters. Q4 teen starts were down sequentially, consistent with historical seasonality, primarily in China, as well as seasonally fewer teen starts in North America compared to Q3. For fiscal 2023, total Invisalign clear aligner shipments for teens and younger patients reached a total of 809,000 cases, up 8% compared to the prior year, and made up 34% of total clear aligner shipments. During Q4, we announced that the U.S. Food and Drug Administration cleared the Invisalign Pallet Expander System, we call it IPE, Invisalign Pallet Expander, for commercial availability in the United States. The FDA 510K clearance is for broad patient applicability, including growing children, teens, and adults. Full early intervention treatments, such as phase one or early interceptive treatment, makes up about 20% of the orthodontic case starts each year and is growing. Together with Invisalign first aligners, IPEs provide doctors with a solution set to treat the most common skeletal, dental malocclusions in growing children. The addition of mandibular advancement features to Invisalign aligners also provides doctors with more options for treating skeletal, dental jaw imbalances, and bite correction, and for their growing patients during their teenage years. Essentially, we now have an Invisalign digital treatment solution for every phase of treatment. IP is currently available on a limited basis in Canada and the United States, and we recently received regulatory clearance in Australia and New Zealand, where we anticipate commercialization in Q2. We expect IPE to be available in other markets pending future applicable regulatory approvals. We're also launching ClinCheck Smile Video, the next generation of in-face visualization with AI-assisted video that is expected to be available to all doctors who use the Invisalign practice app and ClinCheck treatment planning software. This new tool is designed to help improve patients' understanding and the confidence in Invisalign treatment and is based on ITERA inter-oral scanners and doctor's ClinCheck plan for Invisalign treatment. ClinCheck Smile video simulates the doctor's ClinCheck treatment plan with a short video of a patient's face, and they talk and smile, which helps patients visualize their potential new smile and can lead to a higher patient treatment acceptance. We expect to roll out ClinCheck Smile video in Q1 24 in North America and EMEA, followed by APAC later in the year. Before I turn the call over to John for a fourth quarter financial review, I want to share one more exciting news. Today we introduce the latest innovation in the iTero family of inter-oral scanners. The iTero Lumina inter-oral scanner designed to meet the needs of doctors and their patients by offering smaller wand with unparalleled data capture capabilities for effortless scanning by clinical members. The iTero Lumina inter-oral scanner is a breakthrough technology with 3x wider field of capture and a 50% smaller wand that delivers faster scanning, higher accuracy, and superior visualization for greater practice efficiency. ITERA Lumina quickly, easily, and accurately captures more data while delivering exceptionally scanned quality and photorealistic images that eliminate the need for interaural photos altogether. Doctors can now scan at twice the speed with a wide field of capture, multi-angled scanning, and large capture distance, meaning they can capture more dentition in greater detail throughout the scanning process. To date, Align has filed over 30 patent applications covering technology related to the ITERA Lumina interoral scanner. I believe ITERA Lumina has the potential to set a new standard of care for dental practices by simplifying the scanning of complex oral regions while offering superior chair-side visualization and more comfortable experience for patients, especially kids. Initial doctor feedback has been very positive, noting that ITERA Lumina scanner is much faster clear, less invasive for their patients, and the imaging and visualization translates to better communications and patient experience. The IteroLumina inter-oral scanner is available now with orthodontic workflows and will be available in the second half of 2024 restorative workflows, although we expect that GP practices can benefit now from the new scanning technology. A global broadcast will unveil IteroLumina and provide attendees with insights and detailed information from our ITERO team and early customer users is planned for February 15th. Registration will open on February 1st, and the link has been provided in our financial slides as well as in today's press release. With that, I'll turn the call over to John.
spk15: Thanks, Joe. Now for our Q4 financial results. Total revenues for the fourth quarter were $956.7 million, down 0.4% from the prior quarter and up 6.1% from the corresponding quarter a year ago. On a constant currency basis, Q4 23 revenues were impacted by unfavorable foreign exchange of approximately $12.8 million or approximately 1.3% sequentially and were favorably impacted by approximately $13.8 million year-over-year or approximately 1.5%. For clear aligners, Q4 revenues of $781.9 million were down 1.6% sequentially primarily from lower volumes. On a year-over-year basis, Q4 clear aligner revenues were up 6.9%, primarily due to higher ASPs and non-case revenues, slightly offset by lower volumes. For Q4, Invisalign ASPs for comprehensive treatment were up sequentially and up year-over-year. On a sequential basis, ASPs reflect higher additional aligners, partially offset by the unfavorable impact from foreign exchange. higher sales credits, and higher discounts. On a year-over-year basis, the increase in comprehensive ASBs reflect higher additional liners, price increases, and favorable impact from foreign exchange, partially offset by higher discounts in product mix to lower ASB products. For Q4, ASBs for noncomprehensive treatment were down sequentially and up year-over-year. On a sequential basis, the decline in ASBs reflect the unfavorable impact from foreign exchange a product makeshift to lower ASP products and higher net revenue deferrals, partially offset by price increases and lower discounts. On a year-over-year basis, the increase in ASPs reflect price increases, the impact from favorable foreign exchange, and higher additional aligners, partially offset by a product makeshift to lower ASP products and higher discounts. Last quarter, we announced about a 5% global price increase for some Invisalign products, across most markets, effective January 1, 2024. Invisalign Comprehensive 3-in-3 product is available in North America and 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 compared to our traditional Invisalign comprehensive product. Q423 clear aligner revenues were impacted by unfavorable foreign exchange of approximately $10.7 million, or approximately 1.4% sequentially. On a year-over-year basis, clear aligner revenues were favorably impacted by foreign exchange of approximately $12 million, or approximately 1.6%. Clear aligner deferred revenues on the balance sheet increased $14.9 million, or 1.2% sequentially, and $74.6 million, or up 66.1% year over year, and will be recognized as the additional aligners are shipped. Q423 systems and services revenues of $174.8 million were up 5.8% sequentially, primarily due to higher ASBs and an increase in CAD, CAM, and services revenue, partially offset by lower volumes. And we're up 2.9% year-over-year, primarily due to higher services revenues from our larger base of scanners sold and increased non-system revenues related to our CPO and leasing rental programs, mostly offset by lower ASPs and scanner volume. CAD, CAM, and services revenues for Q4 represent approximately 50% of our systems and services business. Q4 23 systems and services revenues were unfavorably impacted by foreign exchange of approximately $2.1 million or approximately 1.2% sequential. On a year-over-year basis, systems and services revenue were favorably impacted by foreign exchange of approximately $1.9 million or approximately 1.1%. Systems and services deferred revenues on the balance sheet We're down $4.3 million, or 1.6% sequentially, and down $13.1 million, or 4.8% year-over-year, primarily due to the recognition of services revenue, which is recognized readily 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, fourth quarter overall gross margin was 70%, up 0.9 points sequentially and up 1.5 points year over year. Q4 non-GAAP gross margin was 70.5%, up 0.9 points sequentially, and up 1.2 points year-over-year. Overall gross margin was unfavorably impacted by foreign exchange by approximately 0.4 points sequentially and favorably impacted by approximately 0.4 points on a year-over-year basis. Clear aligner gross margin for the fourth quarter was 71.1%, up 0.4 points sequentially, primarily due to lower manufacturing spend, partially offset by higher freight costs. Clear Atlanta gross margin for the fourth quarter was up 0.3 points year-over-year, primarily due to higher ASPs and favorable foreign exchange, partially offset by higher manufacturing spend and freight costs. Systems and services gross margin for the fourth quarter was 64.8%, up 3.8 points sequentially due to higher ASPs, partially offset by higher service and freight costs. Systems and services gross margin for the fourth quarter was up six points year over year due to improved manufacturing efficiencies and favorable foreign exchange, partially offset by lower ASPs. Before I go into the details, I want to note that during Q4 23, we incurred a total of $14 million of restructuring and other charges primarily related to post-employment benefits. Q4 operating expenses were $498 million, roughly flat sequentially and down 1.4 points year over year. On a sequential basis, operating expenses were up slightly primarily due to restructuring and other charges offset by lower employee compensation. Year over year, operating expenses decreased by $7.1 million primarily due to controlled spend on advertising and marketing as part of our efforts to proactively manage costs partially offset by employee-related costs and slightly higher restructuring 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 $446.7 million, down 2.5% sequentially and down 2.8% year-over-year. Our fourth quarter operating income of $171.5 million resulted in an operating margin of 17.9%, up 0.6 points sequentially and up 5.4 points year-over-year. Operating margin was unfavorably impacted by approximately 0.6 points sequentially, primarily due to foreign exchange. The year-over-year increase in operating margin is primarily attributed to operating leverage and proactively managing our costs, as well as favorable impact from foreign exchange by approximately 0.6 points. On a non-GAAP basis, which excludes stock-based compensation, restructuring, and other charges, the amortization of intangibles related to certain acquisition, operating margin for the fourth quarter was 23.8%, up two points sequentially, and up 5.5 points year over year. Interest and other income and expense, net for the fourth quarter was an income of $1.3 million, compared to our loss of $4.2 million in the third quarter, an income of $2.7 million in Q4 2022, primarily driven by favorable foreign exchange. The gap effective tax rate for the fourth quarter was 28.3%, higher than the third quarter effective tax rate of 25.1% and lower than the fourth quarter effective tax rate of 63.8% in the prior year. The fourth quarter GAAP effective tax rate was higher than the third quarter effective tax rate, primarily due to one-time benefit related to tax guidance issued in Q3, actually offset by lower U.S. taxes on foreign earnings in Q4. 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 1st, 2022. Our non-GAAP effective tax rate for the fourth quarter was 20%, reflecting the change in our methodology. Fourth quarter net income per share was $1.64. up sequentially $0.06 and up $1.10 compared to the prior year. Our EPS was unfavorably impacted by $0.07 on a sequential basis and favorably impacted by $0.08 on a year-over-year basis due to foreign exchange. On a non-GAAP basis, net income per diluted share was $2.42 for the fourth quarter, up $0.28 sequentially and up $0.69 year-over-year. Moving on to the balance sheets. As of December 31st, 2023, cash, cash equivalents, and short and long-term marketable securities were $980.8 million, down sequentially $321.2 million, and down $60.8 million year-over-year. Of our $980.8 million balance, $196.1 million was held in the U.S., and $784.7 million was held by our international entities. In October 2023, we purchased approximately 1 million shares of our common stock at an average price of $190.56 per share through a $250 million accepted share repurchase. And in November and December 2023, we purchased approximately 466,000 shares of our common stock at an average price of $214,000. dollars and 81 cents per share through a 100 million dollar open market purchase both under alliance current 1 billion dollar stock repurchase program we have 650 million dollars remaining available for repurchase of our common stock under this stock repurchase program q4 accounts receivable balance was 903.4 million dollars slightly down sequentially Our overall day's sales outstanding was 85 days, flat sequentially and year over year. Cash flow from operations for the fourth quarter was $46.9 million. Capital expenditures for the fourth quarter were $33.4 million, primarily related to our continued investments to increase Alignum manufacturing capacity and facilities. Free cash flow, defined as cash flow from operations, less capital expenditures amounted to $13.5 million. Now turning to our outlook. Assuming no circumstances occur beyond our control, we provide the following framework for Q1 and fiscal 2024. For Q1 2024, we expect our worldwide revenues to be in the range of $960 million to $980 million, up slightly from Q4 of 2023. We expect clear aligner volume and ASPs to be up slightly sequentially. We expect systems and services revenue to be down slightly sequentially, although less than the historical seasonal decline given the launch of the ITERA Lumina for ortho workflows in Q1 2024. We expect our Q1 2024 gap operating margin and non-gap operating margin to be slightly above Q1 2023 gap operating margin and non-GAAP operating margin, respectively. For full year, we expect fiscal 2024 total revenues to be up mid-single digits over 2023. We expect fiscal 2024 clear aligner and systems and services revenues to grow year over year in the same approximate range as our 2024 total revenues. We expect fiscal 2024 clear aligner ASBs to be up slightly year over year, primarily due to price increases and favorable foreign exchange, partially offset by a higher mix of non-comprehensive products which have lower ASPs. We expect fiscal 2024 GAAP operating margin and non-GAAP operating margin to be slightly above the 2023 GAAP operating margin and non-GAAP operating margin, respectively. We expect our investments in capital expenditures for the fiscal 2024 to be approximately $100 million. Capital expenditures are expected to primarily relate to building construction improvements, as well as manufacturing capacity in support of our continued expansion. In summary, I am pleased with our fourth quarter and fiscal 2023 results, and I am especially proud of our continued focused execution of our product roadmap and innovation pipeline. We are committed to delivering on our strategic growth drivers of international expansion, patient demand, orthodontist utilization, and GP dentist treatment to extend our leadership in digital orthodontics and dentistry. I believe that the next wave of innovation that we are introducing into the market will further differentiate, align, and allow us to continue to increase our share of the large untapped market opportunity of 22 million annual orthodontic case starts as well as an additional 600 million consumers who could benefit from a healthy, beautiful smile using Invisalign clear aligners. With that, I'll turn it back to Joe for final comments. Joe?
spk10: Thanks, John. In closing, while I'm pleased with our better than expected fourth quarter results and start to the year, I'm even more excited about Align innovation in 2024 and our next wave of growth drivers. When I spoke to you About a year ago, I discussed the innovations that we were planning to bring to market that would continue to revolutionize the orthodontic and dental industry in scanning, software, and direct 3D printing. We are delivering on that promise. With the introduction of ITERA Illumina powered by multi-direct capture technology, we are pushing the boundaries of what inter-oral scanners can do. ITERA Illumina is a combination of years of research and development to offer visualization capabilities that support doctors' clinical decisions while also enhancing their patients' comfort and overall treatment experiences. Building on more than 20 years of expertise in revolutionizing imaging technologies, the iTera Luminous Scanner elevates the standard in digital scanning to achieve exceptional clinical outcomes and increase practice efficiency. The iTera Scanner is at the forefront of digital dentistry. With the closing of our acquisition of Cubicure, a pioneer of direct 3D printing solutions for polymer additive manufacturing, we will enable the next generation of 3D-printed products, helping to create more unique configurations for aligners that are more sustainable and also efficient solutions. We also expect it to extend and scale our printing, materials, and manufacturing capabilities for our 3D-printed product portfolio, which now includes the Invisalign Pallet Expander system. And with the introduction of IPE, we have expanded the clinical applicability of the Invisalign system to nearly 100% of the orthodontic case starts. The ability to direct 3D print, IPE, will eventually lead to other direct printed products with the goal of direct 3D printed Invisalign clear aligners, which we hope to achieve in the next couple of years. As a company, Align has multifaceted competitive advantage. Technology innovation, where we invest up to $300 million in R&D per year to bring in some of the most disruptive products in digital dentistry and orthodontics, to the market in a highly regulated industry, a direct sales force that consists of 5,000 highly trained specialists, a doctor-centered model because we understand the importance of doctor-directed care, a billion-dollar brand trusted by over 17 million patients worldwide, and global scale in manufacturing to deliver millions of customized clear aligner parts every day. We are extremely pleased with our latest innovations in commercialization of products to better serve our doctor, customers, and their patients. Our belief in the future business overall is unwavering. Before we turn the call over to the operator, I want to address an important matter regarding DTC or Directive Consumer Clear Aligners in our industry. Aligners always believe that a doctor-centered model for orthodontic treatment is the safest for patients, and we're always looking for new and better ways to support doctors as they work to create better smiles for their patients. Recent news regarding the bankruptcy of a DTC clear aligner company has led many consumers to reach out to Invisalign providers to address their unmet needs, including helping those DTC patients with incomplete treatments. To support these former DTC patients who are seeking help from Invisalign providers and practices, in Q4, we introduced a program in the U.S. and select other markets offering up to a 50% off Invisalign case submission and Vivera retention to help offset any additional costs to finish their treatment. We want to help everyone achieve a healthy, beautiful smile and strongly recommend that individuals who have impacted by this matter seek the advice of a licensed orthodontist or dentist. Our concierge team is always available to answer questions and help connect consumers with Invisalign practices. With that, I'll thank you for your time today. We look forward to updating you on our next earnings call. Now I'll turn the call over to the operator for questions.
spk16: Thank you. At this time... 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 1 1 on your telephone keypad and wait for your name to be announced. You may press star 1 1 again if you would like to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
spk17: One moment for questions. Our first question comes from Elizabeth Anderson with Evercore ISI.
spk16: You may proceed.
spk06: Hi, guys. Congrats on the quarter, and thanks so much for the question. Hey, I was wondering if you could walk us through the components of the mid-single-digit guide for 2024. I understand what you said, that, like, systems and services and clear aligners would be in the same range. I guess I'm just sort of thinking about like how to think about that. It seems like maybe it's like low single digit ASP improvement and then sort of, you know, low to mid single digit case growth. Is that the right way to think about it? Like what else can you, is there anything else you can sort of clarify on that and sort of how do you expect at least currently the sort of pacing of the year to progress?
spk15: Yeah, Elizabeth. Hi, this is John. You have it framed the right way. We're looking at the segments up mid single digits. And then ASPs, because of the price increase, we have some offset due to some of the lower stage products that we have, including these DSP touch-ups and so on, that you would expect then a little bit lower of ASP impact year over year.
spk06: Got it. That makes sense. And then separately, how has the volume in sort of market in China been progressing across the fourth quarter and maybe into the first quarter so far as you can comment?
spk10: Hey, Elizabeth, it's Joe. You know, we felt good about China last year. But remember, we had year over year comparisons that were really favorable because of the COVID shutdown over there last year. But, you know, overall, as we exited the year, we felt good about our performance there. And we feel good about, you know, as we move into into 2024, about our competitive position there in a China market that I think a little more predictable because it's not the overhead that we've seen with COVID over the last really several years.
spk06: Got it. And sorry, maybe one last one for me. Can you just remind us the sort of one-two dip in the operating margins and then how it sort of steps up across the year? I understand the guidance you gave for the first quarter of the year, but just why that first quarter has a sort of different perspective than the rest of the year? Thanks.
spk15: Yeah, so we wanted to give, you know, to prior year because in that prior year, when you start the year, you have certain expenses that you incur right at the beginning, payroll taxes and other things that you incur initially, some of the investments that you make that you then get leverage on as you go through the year. So it's similar to how we positioned things from last year in 2023. Perfect.
spk05: Thanks so much, guys. Thanks, Elizabeth.
spk16: Thank you. One moment for questions. Our next question comes from Jeff Johnson with Baird. You may proceed.
spk07: Hey, Jeff.
spk17: Hey, thanks.
spk07: Good afternoon, guys. Hey, can you hear me okay? Yeah, we'll hear you fine.
spk20: All right, great. Hey, John, maybe I'll follow up on Elizabeth's margin question there beyond just the one cue. You know, let's say you get your guidance this year on operating margin. It's up nominally from 2023 levels. You know, it would be three years in a row kind of in that low to mid 21% range. I think pre-COVID you were up in the 25% range or so. What's it going to take to get those margins moving back towards those pre-COVID? You've taken price increases two years in a row. It feels like your R&D should be coming down a little bit. Obviously, with Cupid Cure and that, I know you're continuing to invest aggressively, but IPE is out, Lumina now out, things like that. So just help us understand, when can we start to see a path back towards getting those margins maybe up a few points from where they've settled in the last few years?
spk15: Yeah, Jeff, this is John. Really, when you start to get some of that volume leverage, we're positioned as having our manufacturing and the organization that we have that's really set to drive more growth. And once we get some of that volume leverage, we should see that benefit showing up in our numbers. And it's really what we saw as we went through the quarters last year, where you see some of that volume benefits. you get that benefit as well when you go through the year. But really looking to try to drive as much volume as we can, and you'll start to see some of that leverage that shows up in our numbers.
spk20: All right. Fair enough. And then, Joe, you know, I think we've talked for many years now how ITERO has carved out such a commanding or, you know, strong competitive position. You've sold a ton of ITEROs over the last five, six years or so. They're all probably getting, you know, I don't know, close to their end of their useful life or so, you know, Lumina for the first time. feels like that kind of product with the better form factor, especially things like that, that could really cause some of these docs to say, you know, I got to get rid of this big iTero and go back down to this much smaller one and things like that. Just things that would actually matter to the docs. And I'm sure the technology does this too. I don't want to just put it on the side. But just thinking there is just the kind of product that can finally kick off that multi-year upgrade strategy or path in iTero that, you know, we've kind of been waiting to see.
spk10: You know, Jeff, the easy answer and the quick answer is yes. I mean, it's just a brand new platform. Now, we've set up, you know, I mentioned in my script about we have 100,000, you know, units out there that we've sold so far. About a third of those are 5D pluses, which are upgradable by just a one switch out. This is the way we've designed Lumina. And so that part's easy. Also, we've been really aggressively upgrading our installed base between E1 and E2 out there too to better position it for this kind of a move. So, As we develop Lumina, we had exactly in mind what you just questioned, and we think we're in a good position to do that.
spk20: And if you switch out that wand from the 5 to the Lumina, there is a fee there, right? It's not like, hey, you bought this knowing that you could always upgrade at no charge to Lumina?
spk10: There's no charity here to line. They'll be in charge. I like to hear that. God bless capitalism. Thanks, Joe.
spk16: Thank you. One moment for questions. Our next question goes from John Block with Stifel. You may proceed.
spk32: Hey, John.
spk31: Hey, guys. Good afternoon.
spk32: So, Joe, maybe this one's for you. You know, video 1Q24, IPE, some markets today, but more in the common. IPE should help longer-term with teams. Docs might take a little bit of a wait-and-see approach. You talked about the new scanner. You know, in your opinion, like, is innovation, are we seeing that in the 24 guide? Or is that more of like a ramp into 25? And maybe even to take that a step further, John, for you, is there a way to sort of quantify out of that mid-single-digit revenue growth, what can you attribute to these new products coming on board in 24? I'm just trying to think about the impact of 24. Is this more the ramp or the slope into 25 for the innovation heading?
spk10: John, I like the way you set that up. It's a ramp. It really is. But we feel good that we can play offense with these product lines. Now, you know, we still have to scale IPE. We have a great team that knows how to scale and we'll get through that. Obviously, you know, Lumen is a completely different set of, you know, outside of the computer itself, the wand itself is, you know, we feel good about the scale part of that. And, you know, as we sell through the marketplace, but overall, I think the way you described it as a ramp of this new technology, really beginning in 2024 is a good foundation for that kind of a thought process.
spk32: in any way to quantify what's in there from the current guide or no? Is that just too difficult to tease out? It really is just too early. Okay. Okay. So second one is maybe multi-part, but just first on the CapEx, 100 mil. I mean, I was really surprised on how low that number was for this year. You know, it was 400 million in 21, 300 million in 22. And I was maybe even more surprised when I think about the direct fabrication initiative. So I know the slides say hoping to print Invisalign clear liners, you know, quote, unquote, in the next couple of years. Do we still think retainers, 2H24, 1H25, when do we feel like, you know, you proved it out, so to say? And do we start to see gross margin benefits from this as early as next year, you know, turning accretive in 2025? And then, you know, admittedly, just a jump to another question. For the guidance, can you just help us what's embedded in there? And I bring that up because we've seen this big move in U.S. consumer confidence. Europe still seems very choppy. So when we tie it back to your guidance for the year, what are you extrapolating out, if you would, for the current macro? Thanks, guys.
spk15: I'll start with that, John, in terms of the current guidance. Look, we're looking at the environment that we're all in. It's not a Great economy, most places, but it is more stable, and we're building off of that. And then, as Joe said, we're doing things to play offense, new products that we have with Lumina and IP and so on, which we think can help us grow in this environment.
spk10: John, your question about the ramp up the margin piece or part of that, what's that mean in 2025 or whatever? You know, look, we feel confident, and as you know from our discussions and, you know, our analyst presentations last year is, you know, 3D printing is foundationally, you know, it can be less expensive if we scale it. And so, I mean, we'll start to see that come through as we scale that. But we need time to scale this. No one's ever had this polymer before that has to scale. No one's ever used a cubicure system to the degree that we need to use it. Now, we did this with 3D systems years ago because we basically scaled those systems through our team, and the team knows how to do that. I just can't tell you specifically within those next one to three years, with this being the first year, exactly when that really hits that hyperbolic side.
spk15: And just to close on the CapEx, those prior years, a lot of that was equipment. Of course, we were always adding capacity. But a lot of that was very much unique for buildings, adding buildings for our locations, manufacturing, and so on. And when we add some of the capacity that we're adding for our manufacturing, it will go in existing buildings. So you don't have to add another building in most cases for this. So that's why the CapEx is where it is.
spk09: All good. Thanks for the call, guys. Thanks, John.
spk16: Thank you. One moment for questions. Our next question comes from Brandon Vasquez with William Blair. You may proceed.
spk04: Hey, everyone. Thanks for taking the question. Hey, on the guidance, Maybe one other way I wanted to ask you and see if I could tease out a little bit of color on what's assumed here. You know, if I kind of go back to some old sequentials in the teen side, assuming that's a little less susceptible to macro headwinds, you can probably kind of get to a low single-digit volume growth, I think, for the entire clear liner business already. That's probably not even including some DSP. So am I thinking about this correctly, that really out of adults on a year-over-year basis for full year 24, You're really assuming kind of flattish, maybe even down, depending on how teens and some of the DSP cases are doing?
spk15: I would characterize it, Brandon, this is John, that both teen and adult are positive on a year-over-year basis. Expect maybe adults to grow faster, as we've seen, compared to teens grow faster than adults, as we've seen in the past. But I would expect both of them to be up and show our numbers that way.
spk04: Okay. And then can you just reiterate maybe both for IPE and for Lumina? You know, exciting. It seems like they're going to ramp over the coming quarters. Are there any, like, key quarters and catalysts that we should think about that might take that up? You know, you're talking about a ramp. How do we get to the next level on the ramp on any of those when they go from maybe a limited launch to full market release, anything like that? Thanks.
spk10: Hey, Brandon. Joe again. On the Lumina side, remember our – restorative scanner for GPs comes out in the third quarter. But it's like John indicated, we indicated, we feel we can sell that into the market now with the capabilities it has. But that'll ramp and that'll probably be more hinged to the regulatory approvals we have to get around the world. You know, right now, as I mentioned, we only have the United States and Canada and ANZ. You know, secondly, on IPE, it's the same thing is We're regulatory constrained. We still have to go through Europe. And as I mentioned, IPE will come out in the second quarter in Australia and also. And, you know, as we gate that, obviously, we'll be scaling IPE too and, you know, understanding the dynamics around that. So it's more of a ramp, as I mentioned a few calls ago than anything. Okay.
spk04: Thanks, everyone.
spk16: Thank you. One moment for questions. Our next question comes from Jason Bednar with Piper Sandler. You may proceed.
spk21: Hi, Jason. Hey. Hey there. Thanks for taking the questions. I'm going to pile on here on the guidance just to focus there first. You mentioned non-comprehensive mixes being an offsetting factor to ASPs. I know you've got that DSP factor. I thought maybe originally you were signaling adults growing better than teens, but it doesn't seem like that's the case, just given your comments there to Brandon. I guess regardless on adults, are you seeing this market getting its footing back? It sounds like it, but if you are, what's giving you the confidence or what are you seeing that kind of the day-to-day or month-to-month that's showing adults are coming back into the office for treatment? And then sorry to load a few in here, but should we expect this faster non-comprehensive mix also to have gross margin benefits for the year as well? I think it typically does, but I don't think we've gotten a kind of a gross margin cadence outlook for 24.
spk10: I'll take the first part of your question and hand the rest off to John. We feel we're on a more stable, I'd call it, economic platform than last year. And so the adult and teen question that you had is we expect that to carry through in 2024, as we indicated with our guidance too. When I look back, everybody has a clearer vision backwards and forward. We look back at last year, a pretty unstable platform that we experienced through the year, and third quarter was a tough one in that sense. But I think we all see it right now. We have more confidence that at least we're dealing with stability from an economic standpoint in most parts of the world from what we've seen.
spk15: And on the non-comprehensive and gross margin questions and related to that, Look, as we have the mix that shifts through, and you might have an ASP lower on some of the non-comp DSP and others that fall into that. Those are our highest gross margin products from a rate standpoint. So they're helpful for us as a business. It's really what that customer wants for him or her to run their practice, and that's how we balance things out. But overall, we expect that we would see benefits in gross margin, just like we're talking about up margin year over year benefits. We should see a benefit as well in gross margin.
spk21: All right. That's helpful. Thank you. And then for the follow up here, I'll ask on teens. It does look like you're back to gaining share against brackets and wires. Looks like the kind of the second consecutive quarter of that. I'm curious if you could talk maybe bigger picture of what's changed or what do you think has changed the last three to six months versus maybe the 12 plus months that preceded that. Do you think the share gains you're seeing versus brackets and wires, does that have to do with changes you made to that P and guarantee program middle part of last year? Or are there other items at the practice level or associated with your go-to-market activities that are driving that shift?
spk10: I can always say that At Align, there's no single variable equations, and this is another one. You know, the teen guarantee, we think, is some of it. Obviously, our portfolio and how we put that together, our DSP programs, uniqueness of the biz line first, all those things really help. And, you know, from an adult standpoint, with the firmer economic platform I talked about, I just think there's more confidence out there that we're starting to see bleed through.
spk03: Okay, helpful. Thank you.
spk08: Thanks, Jason.
spk16: Thank you. One moment for questions. Our next question goes from Michael Riskin with Bank of America. You may proceed.
spk25: Great. Thanks for taking the question, guys. I want to start with DSP, kind of where you left off. Really successful, obviously, and you had great growth year over year for the whole year. But it's kind of moved in sort of like a step function. If I just look at the numbers, you know, 6, 7, 9,000, and then you're kind of like an 11, 12 range. Now you're in the 18, 19, 20 range. Is there another step function coming next year? Is there, you know, could you dig into a little bit into what's driving that and just sort of where do you see that going over the next couple of years?
spk15: Yeah, Michael, this is John. I would say as we look to expand this out, it's been successful every place that we've gone. We've seen, as you said, you know, North America starts with this. So you see some doctors start and then we have more and more doctors that sign up for the program. And then as the doctors sign up for the program, then they end up doing more and more volume with us. We've taken that same approach to other countries, and now we've introduced this in EMEA and other places. And the same thing happens. More and more doctors sign up for it. They start to see the benefits of it, and then they utilize it more. So it's really just a matter of now scaling this to other parts of the world because we find that this is really a nice way to supplement how a doctor wants to run their practice.
spk25: Okay. And maybe a follow-up on a few questions that were asked on cubic cure and direct 3D printing earlier. Really exciting technology that you unveiled late last year and definitely see the opportunity, but could you help walk us through the roadmap a little bit, sort of like what should we be looking for as sort of a goalpost six months out, a year out, two years out, just to sort of track progress and see how it's progressing?
spk10: You know, Michael, it's Joe again. I think the best way for me to describe it to you, like I said in my script, it's a one- to three-year journey. You know, obviously we know how to make these aligners now. We understand how to do it. It's just scalability of resin in the cubicle process, and that takes time. And we'll obviously report on it quarter by quarter so you really understand where we're going with it and what the hurdles are and what the opportunities are.
spk25: Perfect. Maybe if I could just tweak that a little bit. Just to help us understand, is there anything in terms of when you talk about scalability of the resin and the polymer, if you're looking at comprehensive, non-comprehensive, you talked about retainers and being able to print those. Is there anything in terms of your portfolio that makes some products more amenable or would be amenable earlier than others, or is this just going to be all or nothing?
spk10: I mean, obviously, the scale, you would look at retainers first because, you know, units of one, and that's where you'd end up with, you know, comprehensive full cases in some way, and that's basically how we'll run.
spk18: Okay. Great. Thanks, guys.
spk02: Thanks, Michael. Thank you.
spk16: One moment for questions. Our next question comes from Nathan Rich with Goldman Sachs. You may proceed.
spk24: Hey, good afternoon. Thanks for the questions. I wanted to ask on the systems and services revenue guidance for 2024. This looks low to me, just given I think growth in 23 was basically flat, up slightly. With the Lumina launch, we thought it would maybe be up more than it was in 2023. So I don't know if you could just maybe elaborate on what you're expecting for that segment.
spk15: Hey, Nate, this is John. Yeah, we're looking at... Like we said, this year, you've kind of that mid single digits. You know, we do have Lumina, which helps, but there's also unknowns about the macro economy. You know, we were very pleased with what we saw in the fourth quarter with doctors buying and actually doing better than what we had really guided to. So we're pleased with the performance of Q4, but we just want to make sure that, you know, as we ramp up Lumina, that we're we're properly positioned there and we'll update as we go along.
spk24: Okay, great. And then just going back to the margin cadence, I guess, are there any either upfront or one-time costs associated with either the launches of Illumina or IPE that impact the margin in the early part of the year, just as we think about, you know, cadence and sort of what the right baseline is?
spk15: There is some of that in Q1. You know, we're ramping that up so it's not a big, huge splash where there's a lot of expenses and it kind of hits all in one quarter. But there is some ramp up. But that's factored into our guide. So when we say that we expect the year of a year in the first quarter to be slightly up, it's factored in. Those expenses are factored in.
spk16: Great. Thank you. Thank you. One moment for questions. Our next question comes from Erin Wright with Morgan Stanley. You may proceed.
spk01: Great. You mentioned at the end of the call some of the DTC customers that you were tailoring some of the offerings to. I guess with this material at all in the quarter, maybe it's not large enough at this point, but any sort of contributions in 2024 as we think about picking up some of that business and then also DSO relationships, has there been any changes there in terms of the relationships on that front? How would you characterize those at this point? Are you seeing any greater traction there? Do some of these new products really move the needle in terms of some of those relationships or conversations you're having? Thanks.
spk10: On the DTC customers, we've always argued that that wasn't our marketplace in the sense of the price point and all, but obviously these patients will pursue treatment now you know probably more so for doctors than dtc and we're just doing what we can in order to support those customers going forward uh but again as i was clear in my script you know we're we're a doctor focused kind of company and we'll keep it that way but uh we do see this as being a certain opportunity it's just hard for us to quantify it right now on the dso relationships i'd say they've just gotten stronger all around the globe um You know, two to call out would be, you know, Heartland and Small Docs. You know, Small Docs being more on the ortho side and Heartland, you know, being more on the GP side. But we have really, you know, good relationships, and we leverage our portfolio, you know, well with them to help them grow, and we grow with them. So I feel good about our position with DSOs, and we have good, strong relationships out there with them.
spk28: Okay. Thank you.
spk16: Thank you. One moment for questions. Our next question comes from Brandon Collard with Jefferies. You may proceed.
spk22: Hey, Brandon. Hey, thanks. Good afternoon. Joe, given the positive macro shift we've seen in the last few months with consumer confidence coming back, any chance you can comment on what you've seen in case starts in January in inflection and then with respect to the 24 growth outlook? Any chance you could break that out between Americas and international?
spk10: Yeah, I can't – I really wouldn't break it out between Americas International because we felt good about the geographies in general as you went across the world for, you know, especially, you know, the latter half of the fourth quarter of last year. As we go into this year, as I talked about, we're looking at, I think, a stable economic platform. Some of the data that you cited would, you know, support that overall. And we feel good about our new products. We think we can play offense out there. And that's what we're focused on right now.
spk22: One housekeeping one for you, John. The fourth quarter operating cash flow is pretty weak. Can you just unpack any of the moving parts that might have been one time in the quarter? It looks like there was a spike in prepaid expenses on the balance sheet, but anything you would call out?
spk15: Things that related to tax payments and things. It's just some timing as things go through the year, but we feel great. It's a great model. It generates a lot of cash and gives us a lot of flexibility. We were able to use use that cash, that $350 million buyback that we did last quarter.
spk12: Gotcha. Thank you.
spk16: Thank you. And we have reached the end of our question and answer session. I will now turn the call back over to Shirley Stacey for closing remarks.
spk08: Thank you, everyone. We appreciate you joining us today. We look forward to speaking with you at upcoming financial conferences and at industry meetings such as Chicago Midwinter. If you have any questions or follow-up, please contact our investor relations. Thanks and have a great day.
spk16: Thank you. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.
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