Align Technology, Inc.

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?

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.

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?