Align Technology held an earnings call for the second quarter of 2023. Shirley Stacy, Vice President of Corporate Communications and Investor Relations, and Joe Hogan, President and CEO, and John Morici, CFO, were present. The call was recorded and will be available on their website for one month. There will also be a telephone replay available. Forward-looking statements were made during the call, and historical financial statements and reconciliations were posted on their website.

Align Technology's President and CEO, Joe Hogan, reported a better-than-expected quarter with Q2 revenues and operating margins that exceeded their guidance. Teen and younger patient volumes increased due to momentum in both submitters and utilization as well as continued growth from Invisalign First. System and services revenues increased due to increased scanner volumes across the regions, higher services and non-system revenues, and higher subscription revenues from iTero scanners.

In Q2 of 2023, Invisalign saw a 5.4% sequential increase in total clear aligner revenues, and 4.3% year-over-year. Non-case revenues were up 6.2% sequentially and 18% year-over-year. The successful DSP subscription program was extended to DSO partners and drove strong volume growth in touch-up cases. Total clear aligner volumes were up 5% sequentially and up 1% year-over-year.

In Q2, clear aligner volumes increased both sequentially and year-over-year in the Americas, EMEA, and APAC. In the Americas, this growth was driven by increased teen case starts from Invisalign First and adult patients from the GP dentist channel. In EMEA, the growth was driven by increased adoption of Invisalign Moderate, Invisalign Comprehensive three and three products, and an increase in teen case starts from Invisalign First and Invisalign Teen case packs. In APAC, the growth was driven by improving trends in China, increased Invisalign submitters and higher utilization, especially for teen patients, and the rollout of the Invisalign Comprehensive three and three product in Hong Kong, Korea, Taiwan, and India.

In Q2, Invisalign saw growth in clear aligner cases for teenagers worldwide, driven by increased submitters and utilization in the APAC and EMEA regions. In June, Invisalign hosted the APAC Summit in Singapore, showcasing Invisalign and iTero products, the Align Digital platform and recent and upcoming innovations. The Summit highlighted the experience of digital transformation and how it improves the patient treatment journey. Invisalign also introduced Teen Case Packs in the US and Canada, and in Q1 and Q2 launched them in France, Scandinavia and Iberia.

In Q2 of '23, Invisalign First saw a sequential increase in clear aligner volumes from the Americas region, driven by DSO customers. To increase awareness and educate young adults, parents and teens, Invisalign invested in top media platforms, influencers and brand ambassadors such as Marshall Martin, Rally Shaw and Jeremy Lin. In the Americas, 9.2 million consumers visited Invisalign's website, representing a 17% growth year-on-year.

In the second quarter of 2021, Align Technology's total revenue was $1.002 billion, a 6.3% increase from the prior quarter and a 3.4% increase from the corresponding quarter of the previous year. Align Technology partnered with influencers in the EMEA region to reach consumers on social media, resulting in 1.7 billion media impressions and 9.7 million website visitors. In the APAC region, the company saw an increase in brand interest with a 270% year-over-year increase in website visitors in India and a 46% year-over-year increase in Japan. The company's My Invisalign consumer and patient apps have been downloaded 3.1 million times and has over 350,000 monthly active users. Additionally, ClinCheck Live Update was used on over 580,000 cases and the Invisalign Practice App was used by 88,000 doctors.

In Q2, clear aligner revenues were up 4.3% year-over-year and 5.4% sequentially. ASPs for comprehensive treatment were down sequentially and up year-over-year, while ASPs for non-comprehensive treatment were up sequentially and year-over-year. In Q1 '23, the company launched Invisalign Comprehensive three and three products in most markets, which offers three additional aligners for three years at the 2022 Invisalign comprehensive product price. On average, Invisalign doctors complete a comprehensive Invisalign treatment with two or fewer additional aligners.

In Q2 '23, Invisalign's clear aligner revenues were impacted by foreign exchange, but their systems and services revenues increased due to higher scanner volume, higher revenues from their certified preowned program, and higher services revenue from their larger base of scanners sold. Invisalign anticipates continued growth from their Comprehensive 3 and 3 product, which will provide doctors with flexibility and allow them to recognize more revenue upfront. They have also added total clear aligner revenue per case shipment to their financial slides as a more indicative measure of their overall growth strategy.

In the second quarter of 2021, systems and services revenue was impacted by foreign exchange, both positively and negatively. Systems and services deferred revenue decreased sequentially, but increased year-over-year due to increased scanner sales and the deferral of service revenues. Overall gross margin increased 1.2 points sequentially and 0.3 points year-over-year, though it was negatively impacted by foreign exchange. Clear aligner gross margin increased 0.7 points sequentially due to lower mix of additional aligners, favorable manufacturing variances, and higher ASPs.

In the second quarter, Clear Aligner's gross margin was down 0.9 points year-over-year due to increased manufacturing spend and a higher mix of aligner volume, while Systems and Services gross margin was up 5.3 points year-over-year. Operating expenses were up 8.5% year-over-year, primarily due to higher incentive compensation and investments in sales and R&D. Operating income was $171.9 million, resulting in an operating margin of 17.2%, up 3 points sequentially but down 2.2 points year-over-year.

The second quarter of 2021 saw a year-over-year decrease in operating margin, attributed to investments in go-to-market teams and technology, as well as unfavorable foreign exchange impacts. On a non-GAAP basis, operating margin was up 2.8 points sequentially and down 2 points year-over-year. Interest and other income and expense net was a loss of $0.3 million compared to an income of $1.1 million in the first quarter and a loss of $14.6 million in the second quarter a year ago. The GAAP and non-GAAP effective tax rates were both 34.8% and 20% respectively. Net income per diluted share was $1.46, up sequentially $0.32 and up $0.02 compared to the prior year. On a non-GAAP basis, net income per diluted share was $2.22, up $0.40 sequentially and up $0.07 year-over-year.

In Q2 2023, cash, cash equivalents and marketable securities were $133.8 billion, with $314.3 million held in the U.S. and $719.5 million held by international entities. The company completed a $75 million equity investment in Heartland Dental and authorized a new $1 billion stock repurchase program. Accounts receivable balance was $908.4 million and the days sales outstanding was 81 days. Cash flow from operations was $251.9 million and capital expenditures were $58.5 million, resulting in free cash flow of $193.3 million. For Q3 2023, the company expects worldwide revenue to be in the range of $990 million to $1.01 billion, with GAAP and non-GAAP operating margins expected to be slightly up from Q2 2023.

The company anticipates a 7% year-over-year increase in worldwide revenue for 2023 and expects their GAAP and non-GAAP operating margins to be slightly above 17% and 21% respectively. They also plan to invest $200 million in capital expenditures, primarily for building construction and manufacturing capacity. Joseph Hogan commented that their Q2 results show their resilience and adaptability in the current economic climate, and they have launched several digital innovations such as ClinCheck Live Update and Invisalign Personal Plan to improve practice productivity and treatment quality.

Invisalign Smile Architect allows dentists to integrate clear aligner therapy into their treatment plans with the help of artificial intelligence and virtual care. In addition, Cowen being computed tomography or CVCT helps visualize the patient's roots. Invisalign Outcome Simulator Pro combines a patient's photo with a 3D treatment simulation to create a personalized view of their new smile. Itero-exocad Connector integrates iTero intraoral camera and NIRI images with exocad DentalCAD 3.1 software. Align is looking to continue to lead the transformation of the digital orthodontic industry by improving clinical outcomes and elevating the patient experience.

Joseph Hogan discussed the importance of the teen market to the company and highlighted the success of Invisalign First product line. He also mentioned that the company has various business models and plans to help with the teen market, as well as technology improvements and products that are targeted towards them. He believes that the investments and products they have in place will result in growth and higher penetration in the teen market.

Joseph Hogan is providing an update on China's current business tenor in response to Jeffrey Johnson's inquiry. He reports that the business is doing well, with good sequential momentum and a good start in the first quarter. He also mentions that the third quarter is a big teen season in China and that they are confident in their positioning there.

Joe Hogan discussed the Invisalign Palate Expander, which has had a limited rollout in Canada with positive feedback. He noted that it is not only a new device, but also requires regulatory qualifications in each area for scaling up. He said that more details will be available at the investor conference on September 6th, which will include information about the production, software, and treatment planning of the device.

John Morici explains that the slight decrease in the ASP for comprehensive Q-over-Q is due to product mix and discounts, partially offset by price decreases. Joseph Hogan adds that EMEA and APAC performed well, with Iberia, the U.K., and the Nordic countries showing strong growth.

John Morici states that the company has seen improving trends in the second quarter and their guidance reflects that. He also mentions that the company is confident in their guidance for the year and that they are looking at normal metrics and indices to help them with that.

In the second quarter, teen season had good results and is expected to continue in the third quarter, as well as adults being an important market for Align Technology. 18,000 touch-up cases, which would have been lower stage products in the past, have been adopted into the DSP program and has doubled from last year. At the Investor Day in September, John Morici will provide more detail about the impact of the DSP program and how it has become more important.

John Morici states that the DSP program is accretive to their case volumes, as it is resulting in an increase of 1.5 points on their overall reported volumes. The majority of the DSP program is for retention, with a subset of touch-up cases. The DSP program is generating some of the highest margins from their product portfolio due to its straightforward cost to serve.

Joseph Hogan explains that the orthodontic industry has been facing a down cycle due to the cost of raw materials for wires and brackets being 3.5 times higher than Invisalign. This has made it more difficult for the orthodontic community to switch to clear aligners. However, Invisalign First has seen more interest in Phase I treatments than expected.

Joseph Hogan and John Morici discuss the decision to move from a quarterly to a full-year guidance. They attribute this decision to the good second quarter results and their confidence in the current economic situation. They feel that they can provide a more accurate prediction of the fourth quarter with the two quarters of data they have.

Joseph Hogan answered Elizabeth Anderson's question about Align Technology's approach to sales, explaining that their sales practices are consistent and dynamic, with no big changes in the number of salespeople, how they are trained, or how they go to market. He also mentioned that the iTero and Invisalign sales forces work closely together. Align Technology has seen stability turning to improving trends, and they are comfortable with their outlook for the third quarter and the total year.

Joseph Hogan and John Morici discussed the seasonality of their business and Michael Ryskin asked about their decision to hold an Analyst Day and their long-term guidance. Joseph Hogan explained that they usually hold an Analyst Day every two years and that it is a good way to reinitiate the investor base and to answer questions. Shirley Stacy asked if there were any more questions.

John Morici confirms that the company saw an increase in doctors shipped to both North America and APAC, with China being a major factor in the APAC increase. He does not elaborate on the monthly cadence of trends in the US and EMEA, instead opting not to get into the month-by-month activity.

Joseph Hogan states that scanners are not a "bad guy" in terms of segment gross margin. He explains that the company has upper-end product lines with good prices, but there is sensitivity in the marketplace when it comes to capital expenditures. CPOs, or certified preowned products, help the company to fight on the lower end of the market and they have the confocal imaging scanners that they lead with.

John Morici discussed how freight costs have been decreasing year-over-year, resulting in positive tailwinds for gross margins. He believes this trend will continue as long as there is no inflationary pressure from raw materials and other inputs. Align is also hosting an Investor Day on September 6, 2023 in Las Vegas.

The operator thanked participants for their participation and concluded the conference, inviting people to contact Investor Relations if they had any questions.

This summary was generated with AI and may contain some inaccuracies.