Shirley Stacy, Vice President of Corporate Communications and Investor Relations, introduces Joe Hogan, President and CEO, and John Morici, CFO, for the conference call discussing Align Technology's fourth quarter and full year 2023 financial results. The call will be available on the website and will include forward-looking statements. Historical financial statements and reconciliations are also available on the website. Joe Hogan provides an overview of the results and highlights from the Systems, Services, and Clear Aligners segments. John Morici discusses the Q4 financial performance and outlook for 2024. Joe Hogan concludes by summarizing key points and opening the call to questions. The fourth quarter results exceeded expectations for revenues and earnings.

In the fourth quarter, the company achieved several milestones, including treating 17 million Invisalign patients and selling 4 million Vivera Retainer cases and over 100,000 iTero scanners. Total revenues exceeded expectations for the full fiscal year, with a non-GAAP operating margin above 21%. Clear Aligner volumes were slightly lower year-over-year, but there was growth in touch-up cases under the Invisalign Doctor Subscription Program. Non-case revenues were up, mainly due to Vivera Retainers and Invisalign DSP retainer revenues. Sequentially, total revenues were down slightly due to lower teen case starts, particularly in the U.S.

In the fourth quarter, Align Technology saw a decrease in Clear Aligner volumes for the Americas and APAC regions, but an increase for the EMEA region. This was partly offset by increased revenues from System and Services and an increase in Clear Aligner volume for adults and noncomprehensive cases. The December gauge practice analysis tool showed a decline in new patients, total exams, and total starts, particularly among teens and kids. However, there was a record number of teen cases shipped in Q4 compared to previous years. In fiscal 2023, total Invisalign Clear Aligner shipments for teens and younger patients reached 809,000 cases, up 8% from the previous year. The FDA recently cleared the Invisalign Palatal Expander System for commercial use in the United States, which is applicable for growing children, teens, and adults, and has potential for early intervention treatments.

In addition to Invisalign First Aligners, IPEs provide a solution for treating common skeletal and dental malocclusions in growing children, with the added feature of mandibular advancement for teenage patients. IPE is currently available in limited markets and will be expanding pending regulatory approvals. A new tool, ClinCheck smile video, will be launched to help improve patient understanding and confidence in Invisalign treatment. It will simulate the doctor's treatment plan with a video of the patient's face, leading to higher treatment acceptance. The latest innovation in the iTero family of inter-oral scanners was also introduced.

The iTero Lumina inter-oral scanner is a new technology designed to meet the needs of doctors and patients. It offers a smaller wand with faster scanning, higher accuracy, and superior visualization. The scanner has a wider field of capture and can scan at twice the speed, making it more efficient for dental practices. Align has filed over 30 patent applications for this technology. Initial feedback from doctors has been positive, noting that it is faster, clearer, and less invasive for patients. The scanner is currently available for orthodontic workflows and will be available for restorative workflows in the second half of 2024. A global broadcast to unveil the scanner and provide more information is planned for February 15.

In the fourth quarter, the company's total revenues were down slightly compared to the previous quarter but up compared to the same quarter last year. The decrease in revenue was primarily due to lower volumes, but this was offset by higher average selling prices (ASPs) and non-case revenues. The ASPs for comprehensive treatment were up both sequentially and year-over-year, while the ASPs for noncomprehensive treatment were down sequentially but up year-over-year. The company also implemented a 5% global price increase for some of its Invisalign products starting in January 2024.

The Invisalign Comprehensive Three and Three product is available in various markets and has been well-received, resulting in increased revenue. Foreign exchange had a negative impact on Clear Aligner revenues in Q4 '23, but they were still higher than the previous year. Deferred revenues for Clear Aligners also increased. Systems and Services revenues were up in Q4 '23 due to higher ASPs and an increase in CAD/CAM and services revenue, but were impacted by foreign exchange. Overall, the Systems and Services business is primarily driven by CAD/CAM and services revenues.

The company's deferred revenues on the balance sheet decreased sequentially and year-over-year due to the recognition of services revenue. Gross margin for the fourth quarter was 70%, up from the previous quarter and the same period last year. The increase in gross margin was impacted by foreign exchange and higher costs for manufacturing and freight. Clear Aligner gross margin increased slightly from the previous quarter and the same period last year. Systems and Services gross margin also increased significantly from the previous quarter and the same period last year, due to higher ASPs and improved manufacturing efficiencies.

During Q4 '23, the company incurred $14 million in restructuring and other charges, leading to operating expenses of $498 million, which were relatively flat compared to the previous quarter and down 1.4 points year-over-year. Operating income was $171.5 million, resulting in an operating margin of 17.9%, up 0.6 points sequentially and 5.4 points year-over-year. Excluding certain expenses, operating expenses were $446.7 million, down 2.5% sequentially and 2.8% year-over-year, and operating margin was 23.8%. Interest and other income and expense net was $1.3 million, compared to a loss of $4.2 million in the previous quarter and income of $2.7 million in the same quarter last year, primarily due to favorable foreign exchange.

The GAAP effective tax rate for the fourth quarter was 28.3%, higher than the previous quarter and lower than the same quarter in the previous year. This was primarily due to a change in methodology for computing non-GAAP effective tax rate. Net income per share was $1.64, unfavorably impacted by foreign exchange. On a non-GAAP basis, net income per diluted share was $2.42. Cash, cash equivalents, and marketable securities decreased sequentially and year-over-year. Align also purchased shares of its own stock through a share repurchase program.

The company has $650 million available for stock repurchases and had a Q4 accounts receivable balance of $903.4 million. Cash flow from operations was $46.9 million and capital expenditures were $33.4 million. The company expects revenues to be up slightly in Q1 2024 and mid-single digits for the full year. Clear Aligner and Systems and Services revenues are expected to grow year-over-year, with ASPs also increasing slightly. GAAP and non-GAAP operating margins are expected to be above 2023 levels.

Align Technologies, a leader in digital orthodontics and dentistry, expects to invest approximately $100 million in capital expenditures for fiscal 2024. These investments will primarily focus on building construction and manufacturing capacity to support their continued expansion. The company's CEO, Joseph Hogan, is pleased with their fourth quarter and fiscal 2023 results, and is proud of their execution of their product roadmap and innovation pipeline. Align is committed to driving growth through international expansion, patient demand, orthodontist utilization, and GP dentist treatment. Hogan is also excited about the next wave of innovation that will differentiate Align and increase their share of the large untapped market opportunity. He specifically mentions the introduction of iTero Lumina, a new inter-oral scanner with advanced visualization capabilities to support doctors and enhance patient comfort during treatment.

The iTero Lumina scanner, combined with the recent acquisition of Cubicure, will revolutionize digital scanning and 3D printing in dentistry. This will allow for more unique and sustainable aligner configurations and expand the clinical applicability of the Invisalign system. Align has a strong competitive advantage with technology innovation, a direct sales force, a trusted brand, and global scale. They are committed to continuously improving and serving their customers.

Align addresses the issue of DTC clear aligners and their recent bankruptcy, stating their belief in a doctor-centered model for orthodontic treatment. They have introduced a program to help former DTC patients seeking help from Invisalign providers. The company recommends seeking the advice of a licensed orthodontist or dentist. The operator then opens the call for questions, with the first being about the components of the mid-single-digit guide for 2024. The company clarifies that Systems and Services and Clear Aligners will be in the same range, with low single-digit ASP improvement and low to mid-single-digit case growth.

John Morici clarifies that they are expecting mid-single digit growth in segments and lower ASP impact due to lower stage products. Joe Hogan adds that they feel good about China's performance and competitive position. Elizabeth Anderson asks about the 1Q dip in operating margins and John Morici explains that it is due to initial expenses and investments that will be leveraged throughout the year.

John Morici, CEO of a company, is answering questions about their financial performance. Jeff Johnson asks about the company's operating margin, which has been in the low to mid-21% range for the past three years, lower than pre-COVID levels. John explains that they are focused on increasing volume to leverage their manufacturing capabilities and drive growth, which should help improve their margins. Jeff also asks about the company's iTero product, which has a strong competitive position but may be reaching the end of its useful life.

The speaker believes that the new Lumina product has the potential to cause dentists to upgrade from the larger iTero scanner to the smaller one. The company has already sold 100,000 units and plans to upgrade them to better position them for the transition to Lumina. There will be a fee for upgrading from the 5D plus to Lumina. The speaker also mentions that some markets have already adopted the new scanner, but others may take a "wait-and-see" approach. The speaker is asked about innovation in the '24 guide and whether it will be seen in the '24 or '25.

In response to a question about the impact of new products on revenue growth, CEO Joseph Hogan explains that it will be a ramp, with the new technology beginning to have an effect in 2024. He also discusses the potential for scaling and the impact on the current guidance. The analyst then asks about the low level of CapEx and the timeline for the direct fabrication initiatives, and Hogan mentions the potential for gross margin benefits in 2025. The analyst also asks about the guidance and Hogan notes that it takes into account the current state of the market.

John Morici and Joseph Hogan discuss the current macro environment and how it relates to their company's guidance for the year. They believe that while the economy is not great, it is stable and they are implementing new products to help grow in this environment. When asked about the ramp up in margins, Hogan mentions that as they scale their 3D printing capabilities, they expect costs to decrease. Morici adds that previous years' CapEx was mainly for building new locations, but now they can add capacity within existing buildings. The next question is from Brandon Vazquez with William Blair.

Brandon Vazquez asks about the company's guidance and the expected growth in the Clear Aligner business. John Morici clarifies that both the teen and adult segments are expected to show positive growth, with adults potentially growing faster. Brandon also asks about the ramp-up of IPE and Lumina, and Joseph Hogan explains that regulatory approvals are needed for both products to fully enter the market. The restorative scanner for GPs will be released in the third quarter and IPE is still awaiting approval in Europe.

The company is expecting to launch IPE in Australia in the second quarter and will be scaling it. They also mentioned that noncomprehensive mix may offset ASPs. The market for adults is showing signs of improvement and the company expects this to continue in 2024. The economic platform is more stable compared to last year.

During a recent earnings call, John Morici, the CFO of Align, discussed the company's gross margin and share gains in the teen market. He mentioned that the non-comp DSP products have the highest gross margin and are in demand by customers. As a result, the company expects to see an increase in gross margin. When asked about the company's recent share gains in the teen market, CEO Joseph Hogan attributed it to various factors, including the Teen Guarantee program, the company's portfolio, and the uniqueness of Invisalign First. He also noted that the firmer economic platform is leading to more confidence among customers.

John Morici explains that the success of DSP has followed a step function, with more doctors signing up and utilizing the program over time. The company plans to expand the program to other countries and sees it as a valuable supplement to a doctor's practice. Michael Ryskin asks about the road map for Cubicure and Direct 3D printing, and Joseph Hogan responds that it is a 1- to 3-year journey.

The company is confident in their ability to make aligners and will report on their progress quarter by quarter. They are focusing on scalability of resin and the Cubicure process, which will take time. The first products to ramp up will likely be retainers, followed by comprehensive cases. The revenue guidance for 2024 in the Systems and Services segment may seem low, but there are still unknowns about the macro economy and they want to make sure they are properly positioned for the launch of Lumina. They were pleased with the performance in Q4 and will update as they go along.

During the earnings call, the company discussed the impact of their recent launches on the margin cadence, stating that there will be some upfront costs in the first quarter but that these are factored into their guidance. They also mentioned tailoring offerings to direct-to-consumer (DTC) customers, but clarified that their focus remains on doctors. The company sees potential in the DTC market, but it is difficult to quantify at this time. They also noted that their relationships with dental service organizations (DSOs) have become stronger globally.

The speaker discusses two companies, Heartland and another one, that are growing in the orthodontics and general practice fields. They have good relationships with these companies and use their portfolio to help them grow. The next speaker, Brandon Couillard, asks about the positive shift in consumer confidence and case starts in January, as well as the growth outlook for 2024. The speaker cannot break it down by region, but feels good about the geographies overall. The fourth quarter operating cash flow was weak, but the company has a strong cash-generating model and was able to use cash for a buyback. The Q&A session has ended.

Shirley Stacy is thanking everyone for joining the call and invites them to upcoming financial conferences and industry meetings. She encourages any follow-up questions to be directed to Investor Relations. The operator then ends the call.

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