The operator welcomes listeners to the Align Technology third quarter 2023 earnings call and introduces the host, Shirley Stacy. She is joined by Align's president and CEO, Joe Hogan, and CFO, John Morici. The company's financial results were released earlier in the day and are available on their website. The call will be recorded and archived for one month. The information discussed will include forward-looking statements and the company assumes no obligation to update them. Historical financial statements and slides are available on the website. DSP touch-up cases and revenues have been reclassified and are now included in reported clear Aligner volumes and metrics.

In the third quarter earnings call, Align Technologies' President and CEO Joe Hogan discussed the company's lower than expected demand and challenging macro environment. Despite this, the company reported a 7.8% increase in worldwide revenues, driven by growth in all regions and record clear liner shipments to younger patients. However, there was a decline in orthodontic case starts and patient appointments, reflecting a larger industry trend.

In the third quarter, our systems and services revenues increased by 4.9% compared to last year, driven by higher iTero scanner volumes and increased services revenue. However, there was a decrease in revenues compared to the previous quarter due to a weaker capital equipment cycle and lower non-systems revenues. Non-case revenues were up 13.5%, mainly due to growth in Vivera retainers and the Invisalign Doctor Subscription Program. Clear aligner volumes were down compared to the previous quarter but showed a slight increase compared to last year, with strong demand for teen and younger patient treatments.

In the third quarter of the year, the number of doctors using invisalign increased, with the highest number in two years. This was driven by the Americas and APAC regions. There was also an increase in orthodontist submitters, particularly for teenage cases. However, there was a decrease in GP dentists submitting cases, especially in the Americas. The overall clear aligner volumes were higher in APAC and Latin America, as well as North America for teenage cases. However, there was a decrease in EMEA and North America for adult cases, due to summer seasonality. In North America, there was growth in invisalign comprehensive and DSP touchup cases. In EMEA, there was a decrease in clear aligner volumes due to summer seasonality, but there was growth in certain regions such as Italy, Benelux, Turkey, and the Middle East.

In Q3, clear liner volumes in APAC were up year over year due to increased adoption of invisalign moderate and Invisalign Teen Case packs. This was driven by growth in China and other key markets in the region. The rollout of Invisalign comprehensive three and three product in APAC has been successful, with a majority of cases being comprehensive. The company has also increased its marketing efforts to create awareness and educate young adults, parents, and teens about the benefits of the invisalign brand.

The market for clear liner orthodontic treatment, especially among teens and kids, is still largely untapped. Invisalign is faster and more effective than traditional braces, but the majority of cases still use braces. To increase Invisalign's share of the market, the company is focusing on differentiation through campaigns such as "Invis is Drama Free" and using patient stories to highlight the benefits of Invisalign for adults. They are also engaging with influencers and creators on social media to reach younger audiences. These efforts have resulted in billions of impressions and millions of website visitors globally.

The company saw expansion in Japan and India through partnerships with influencers and the use of digital tools. In Q3 of 2023, total revenues were $960.2 million, down 4.2% from the previous quarter but up 7.8% from the same quarter a year ago. Clear aligner revenues were down 4.5% sequentially, but up 8.5% year over year. Invisalign ASPs for comprehensive and non-comprehensive treatments were down sequentially but up year over year.

The decrease in ASPs on a sequential basis is due to larger discounts, higher sales credits, and unfavorable product mix, partially offset by higher additional liners and favorable foreign exchange. On a year over year basis, the increase in non-comprehensive ASPs is a result of price increases, higher additional aligners, and favorable foreign exchange, partially offset by product mix shift. The launch of the Invisalign comprehensive Three and Three product has been well-received and is expected to increase, allowing for more upfront revenue recognition and a shorter deferred revenue period. As additional aligners for this product are shipped, there is expected to be a positive impact on ASB. As the company's revenue from subscriptions, retainers, and other ancillary products continues to grow, traditional metrics that focus solely on case shipments may become less relevant. A new metric, total clear aligner revenue per case shipment, has been added to better reflect the company's overall growth strategy.

In Q3 '23, the company's clear aligner revenues were impacted by unfavorable foreign exchange, resulting in a decrease of approximately 0.3% sequentially. However, on a year over year basis, clear aligner revenues were positively impacted by foreign exchange, resulting in an increase of approximately 0.5%. Additionally, Q3 '23 systems and service revenues were down 2.5% sequentially, mostly due to unfavorable ASPs and lower revenues from the certified preowned program. On a year over year basis, systems and services revenue were up 4.9% due to higher scanner volume and revenues from certified preowned and leasing rental programs. Foreign exchange also had an impact on systems and services revenues, with a decrease of approximately 0.4% sequentially but an increase of approximately 0.3% year over year. The company's deferred revenues for both clear aligners and systems and services increased sequentially and year over year, and will be recognized as additional liners are shipped and services are provided. As the company expands its scanner portfolio and introduces new products, there are more opportunities for customers to upgrade, trade-in, and purchase certified preowned scanners.

The company is focused on developing new capital equipment opportunities to meet the digital transformation needs of customers and DSO partners. Gross margin for the third quarter was 69.1%, impacted by foreign exchange and higher manufacturing spend. Clear aligner gross margin was down sequentially but roughly flat year over year due to increased manufacturing spend and higher ASPs. Systems and services gross margin was down sequentially and year over year due to lower ASPs, but partially offset by favorable manufacturing variances and higher service revenues. Operating expenses were $496.7 million, down sequentially and up year over year, primarily from lower consumer marketing spend and lower incentive compensation.

Operating expenses increased by $21.2 million year over year due to higher incentive compensation and investments in sales and R&D. However, controlled spending on advertising and marketing helped to manage costs. On a non-GAAP basis, operating expenses were down 9.3% sequentially and up 3.3% year over year. Operating income and margin also increased, but were negatively impacted by foreign exchange. On a non-GAAP basis, operating margin was 21.8%, up 0.5 points sequentially and 1.6 points year over year. Interest and other income expense net was a loss, primarily due to foreign exchange. The GAAP effective tax rate for the third quarter was lower than the previous quarter and the same quarter of the previous year, due to new tax guidance and lower US taxes on foreign earnings.

In the third quarter of 2022, the company changed its methodology for calculating its non-GAAP effective tax rate, resulting in a 20% rate for the quarter. Net income per diluted share was $1.58, impacted by foreign exchange. On a non-GAAP basis, net income per diluted share was $2.14. Cash and marketable securities increased to $1.3 billion, with a majority held by international entities. Accounts receivable decreased and overall day sales outstanding increased. Cash flow from operations was $287.2 million and capital expenditures were $21.6 million. Free cash flow was $265.6 million. The company's fourth quarter outlook will be discussed next.

In Q4 of 2023, the company expects a decrease in worldwide revenue due to a challenging macro environment and unfavorable foreign exchange rates. Both clear aligner and systems and services revenues are expected to be down, and the company anticipates a decrease in operating margin due to restructuring. The company also plans to repurchase $250 million of its common stock during the quarter. For the full year of 2023, the company expects its worldwide revenue to be in the range of $3.83 to $3.85 billion, assuming no unforeseen circumstances.

Align expects their full year 2023 GAAP operating margin to be one point lower than 2022 and their non-GAAP operating margin to be slightly above 21%. They also anticipate investing approximately $200 million in capital expenditures for 2023, primarily for building construction, improvements, and manufacturing capacity for international expansion. Despite weaker consumer sentiment and increased headwinds, Align is confident in their ability to drive the digital revolution in the dental industry with their clear aligners, scanners, and digital platform. They have recently introduced new innovations to improve treatment planning and practice productivity, which have gained significant adoption.

Align Technology, a company focused on digital orthodontics and restorative dentistry, is launching the Invisalign Pallet expander (IPE) system in Canada this quarter. This system provides a safe and effective alternative to metal expanders and will help the company tap into the teen market. Despite the challenging operating environment, the company remains committed to balancing investments in growth drivers and improving operating margins. They are closely monitoring the situation in the Middle East and have contingency plans in place to ensure business continuity. The call then opens up for questions from analysts.

Brandon Vazquez asks a question about the macro trends in the dental space and how they have affected Align Technology's performance in the third quarter. CEO Joseph Hogan explains that while the third quarter was strong for teens, the fourth quarter is primarily an adult season and projections are based on September data. Vazquez then asks about the teen market and if Align Technology is taking share within it. Hogan responds that while the teen market is declining overall, Align Technology is seeing growth and attributes it to their clear aligner technology.

Joseph Hogan discusses the company's recent success and their focus on innovation. He mentions the launch of new products and a commitment to growing revenue in 2024. He also mentions the importance of staying focused on the consumer and taking things quarter by quarter. The operator then moves on to questions from analysts.

Joseph Hogan and Jon Block discuss the impact of market conditions on their company's performance. They mention the new technology they presented at an Investors conference and their plans to expand their market penetration. They also mention the growth of DSP and changes in their business model. However, they acknowledge the uncertainty of the marketplace and the need to get through the current quarter before making more specific predictions for 2024. They also discuss the performance of different regions, with North America and EMEA being affected more than APAC.

The speaker is struggling to understand the current state of the consumer market and the company's performance in the last seven weeks. They mention the difficulty in predicting the third quarter due to seasonality in Europe, the impact of the Chinese market, and the lack of adult cases in the United States. The speaker asks for elaboration on these factors and their effect on the company's performance.

The company is making headcount reductions and cutting SG&A spend in order to preserve margin and continue investing for future growth. They are prioritizing investments in R&D and sales and go-to-market activities. They are also continuing to see margin accretion in the fourth quarter. The company is also producing in Israel despite the current situation.

The speaker discusses the current state of their business in Israel and how it is being managed amidst potential challenges. They mention having a dedicated team and being able to handle the situation for now, but are cautious about the future due to the possibility of war. The next question asks about the trend in teen case volume and the speaker explains that there has been growth in this area, particularly in Europe, North America, and China. They also mention the success of Invisalign First and clarify that their fourth quarter guidance takes into account the current macro environment and potential future challenges.

The speaker discusses the success of their portfolio, specifically with the invisalign first product for younger patients and permanent dentition. They also mention good growth and strong results in advertising and digital platforms. They anticipate a tough macro environment for the fourth quarter due to lower orthodontic case starts and patient traffic. They will follow up with two callers who were not able to ask their questions.

Joe Hogan and John Morici discuss the company's focus on delivering improved operating margins, despite a reduction in revenue guidance. They mention that each quarter has a different personality in terms of operating profit, but they feel good about the fourth quarter. They also highlight the importance of responsible cost management and prioritizing investments in technology. They expect clear liner volumes to remain stable in the fourth quarter, with no improvement in adult volumes.

The speaker discusses the decline in adult cases in the third quarter and mentions that it is expected to continue in the fourth quarter. They clarify that this trend is seen across all geographies, not just in North America. The speaker also mentions potential factors contributing to this decline, such as student loan repayments. The speaker then addresses a question about operating margins in the fourth quarter, stating that they expect improvement on a non-GAAP basis and are working to improve gross margins as well.

The speaker discusses the decision to implement layoffs and the contrast with their decision to power through the pandemic in 2020. They explain that the pandemic had a clear beginning and end, making it easier to make decisions, while the current economic situation is unprecedented and uncertain.

The speaker wants to make it clear that the company will not disadvantage itself in a rebound and will be responsible with resources and restructuring. They want to be well positioned in key areas to respond to a rebound with the right capacity and product. When asked about pricing for the current year and potential changes for next year, the speaker does not provide specifics and states that no announcement will be made until the doctors are aware. The call concludes with a reminder to follow up with Investor Relations.

The speaker thanks the audience for attending the conference and announces that the program is now over. They can now disconnect and the speaker wishes them a good day.

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