The paragraph is from the introduction of Align Technology's Third Quarter 2024 Earnings Call. Shirley Stacy, Vice President of Corporate Communications and Investor Relations, starts the call by welcoming participants and introducing the company's President and CEO, Joe Hogan, and CFO, John Morici. The financial results for the third quarter of 2024 were released via Business Wire and can be accessed on the company's website. The call will include forward-looking statements with inherent risks and uncertainties, and the company's historical financial data and reconciliations are also available online. Shirley then hands over the call to Joe Hogan.

The paragraph discusses the company's third-quarter results, highlighting mixed outcomes. There was strong year-over-year revenue growth in the Systems and Services segment, and good performance in Clear Aligner volumes, particularly in the Asia Pacific, EMEA, and Latin America regions. However, these gains were partially offset by declines in the U.S. market, which remains sluggish. Q3 revenues were $978 million, a 1.8% increase year-over-year, with Clear Aligner volumes up 2.5%. Despite records in several areas, including teen case starts in China and DSP Invisalign Touch-Up cases, total revenues fell slightly short of the company's outlook due to unexpected seasonality and weak consumer sentiment in the U.S. The non-GAAP operating margin improved slightly to 22.1%. Clear Aligner volumes were up year-over-year, driven by growth in China and other international regions, but experienced a slight sequential decline.

In the third quarter, 236,000 teens and younger patients began Invisalign treatment, marking a 9.1% sequential and 6.7% year-over-year increase, driven by growth in the APAC and EMEA regions and the introduction of Invisalign First. Doctor submissions for young patients rose over 6% year-over-year. The Invisalign Palatal Expander, Align's first 3D printed orthodontic appliance, has shown steady momentum in North America, with plans for broader APAC availability pending regulatory approval. Non-case revenues grew due to increased demand for Vivera retainers and the Doctor Subscription Program, which supports Invisalign and non-Invisalign patients. DSP encompasses Invisalign Touch-Up cases, which rose nearly 30% to over 25,000 cases, reflecting broad regional growth. Clear aligner volume from DSO customers also increased, with the DSO business in the U.S. performing strongly, particularly with partners like Smile Doctors and Heartland Dental.

In Q3, there was significant growth in iTero scanner sales driven by investments in digital workflows by DSOs, leading to a 15.6% year-over-year revenue increase for the Systems and Services business. This growth was fueled by higher scanner ASPs, wand upgrades, scanner rentals, and certified pre-owned leasing programs, despite a decrease in scanner volumes. However, sequentially, Q3 revenues declined by 2.9% due to lower scanner ASPs and non-systems revenues, albeit with increased scanner volumes. The new iTero Lumina scanner, featuring advanced technology and improved design, contributed positively to these results, and received favorable feedback from customers, especially in orthodontic workflows. There are plans for a limited market release of restorative software for Lumina in Q1 2025, ahead of full commercialization by the end of that quarter. Additionally, Align announced new scanner innovations to enhance digital dentistry workflows and treatment options in various dental fields, offering advanced assessment tools and personalized health records through the Align Oral Healthcare Suite.

The paragraph discusses recent updates from Align Technology, including the release of the Invisalign Outcome Simulator Pro for enhancing patient education and the iTero Design Suite for in-office 3D printing, now available in select markets. It highlights the innovations in the iTero intraoral scanner that aid doctors in offering various treatment options, enhancing patient experience and decision-making. Additionally, Invisalign Japan received the Good Design Award for 2024 for the iTero Lumina Intraoral scanner, marking its second win in two years. The award is noted for its global recognition in design excellence. The paragraph also mentions organizational changes at Align, including layoffs and restructuring as part of the 2025 operating plan, resulting in the elimination of the position held by Raj Pudipeddi, who will depart in the fourth quarter.

The paragraph announces Frank Quinn's return to Align, highlighting his leadership and expertise in digital dentistry. It then transitions to financial results presented by John Morici, reporting Align's Q3 revenue of $977.9 million, a decrease of 4.9% from the previous quarter but a 1.8% increase from the previous year. For Clear Aligners, revenues were $786.8 million, down 5.4% sequentially due to various factors, including lower volumes, product mix shifts, and geographic mix, partially offset by reduced net revenue deferrals. Year-over-year, Clear Aligner revenues declined 1% due to lower average selling prices, foreign exchange impacts, a UK VAT ruling, and shifts to lower-priced products, partially mitigated by increased volumes and price adjustments.

In Q3 2024, the company experienced a decrease in clear aligner shipment revenue per case compared to the previous year due to factors like unfavorable foreign exchange and UK VAT impacts, although some losses were offset by lower net revenue deferrals and price increases. The Invisalign Comprehensive 3-and-3 product, available in multiple regions, is showing promising adoption, allowing quicker revenue recognition and improved gross margins. Deferred revenues from clear aligners on the balance sheet saw both sequential and year-over-year decreases. Systems and Services revenue reached $191 million, marking a slight sequential decline due to lower average selling prices and fewer upgrades, despite increased scanner volumes. However, on a yearly basis, this segment saw a 15.6% increase, driven by higher ASPs and other non-system revenue sources. Foreign exchange impacts were negligible sequentially but had a minor negative effect on the year-over-year results.

In the third quarter, the Systems and Services deferred revenues decreased by $1.5 million sequentially and $40.6 million year-over-year, primarily due to the recognition of services revenue over the contract period, reflecting shorter service contracts for initial scanner purchases. The overall gross margin for the quarter was 69.7%, showing a slight sequential decrease and a year-over-year increase, with minimal impact from foreign exchange. The Clear Aligner gross margin was 70.3%, declining sequentially and year-over-year due to lower average selling prices (ASPs) and a higher mix of additional aligners, partially offset by reduced manufacturing costs. The Systems and Services gross margin was 67.5%, decreasing sequentially due to mix, but improving significantly year-over-year due to higher ASPs, despite higher service and freight costs. Operating expenses for Q3 were $519.5 million, down sequentially but up compared to the previous year.

In the third quarter, operating expenses decreased sequentially by $56.1 million due to non-recurring legal settlements, advertising, marketing, and employee compensation, but increased year-over-year by $22.7 million primarily due to employee compensation. Excluding certain costs, non-GAAP operating expenses were $472.7 million, a 5.4% sequential drop and a 3.1% year-over-year rise. Operating income was $162.3 million, with an operating margin of 16.6%, showing sequential growth but a year-over-year decline. Foreign exchange positively impacted the margin sequentially but negatively by 0.8 points year-over-year. Non-GAAP operating margin was 22.1%, slightly down sequentially but up year-over-year. Interest and other income were $3.6 million, reversing expenses from previous periods, mainly due to foreign exchange. The GAAP effective tax rate was 30.1%, lower than the previous quarter due to tax return adjustments, despite a slight increase in uncertain tax position reserves.

In the third quarter, the company experienced a higher GAAP effective tax rate compared to the previous year due to a one-time tax benefit recognized last year. The non-GAAP effective tax rate was stable at 20%, aligning with long-term projections. Diluted earnings per share (EPS) came in at $1.55, reflecting a sequential rise of $0.27 but a slight year-over-year decline of $0.03, with foreign exchange factors impacting EPS by $0.03 sequentially and $0.08 annually. Non-GAAP EPS was $2.35, showing a $0.06 sequential drop but a $0.21 year-over-year increase. Cash and cash equivalents reached $1,041.9 million as of September 30, 2024, boosted by $280.5 million sequentially but down $197.1 million year-over-year, with a significant portion held internationally. The company has $500 million available for stock repurchases and plans to buy back up to $275 million starting in Q4 2024. The accounts receivable balance was $1,010.6 million, with day sales outstanding up both sequentially and annually. The quarter's cash flow from operations was $263.7 million, with capital expenditures at $29.8 million, leading to a free cash flow of $233.9 million.

The company anticipates Q4 2024 worldwide revenues between $995 million and $1,015 million, with slight increases in Clear Aligner volume and ASPs, as well as Systems and Services revenues, reflecting typical Q4 seasonality. The GAAP operating margin is expected to be slightly below 14% due to restructuring charges for severance, impacting the margin by about 3 points, while the non-GAAP operating margin is expected to rise sequentially. For fiscal 2024, capital expenditures are projected to exceed $100 million, mainly for building improvements and manufacturing expansion. The restructuring aims to align the business with the current environment, expected to enhance margins for full year 2025 as the company expands 3D printing manufacturing. Additionally, Joe Hogan highlights the success of the Systems and Services segment and upcoming releases in their digital workflow software.

The paragraph discusses the strong performance of Invisalign's Clear Aligner business in the Asia Pacific, EMEA, and Latin America regions, which balances challenging market conditions in other areas like the United States. Despite challenges such as inflation, high interest rates, and reduced patient traffic, the company aims to differentiate its products and services to drive patient engagement and practice growth for orthodontists and dentists. Align is focused on innovation in digital dentistry technology to support doctor customers, enhance patient experiences, and promote practice profitability. The company is committed to advancing scanning software and 3D printing as the next growth drivers in the orthodontic industry.

The company acknowledges the challenging economic conditions and intends to take necessary measures to navigate through them while investing in transformative areas like 3D printing. They are focused on restructuring to improve return on investment and profitability, which includes prioritizing revenue-driving activities. During a Q&A session, Brandon Vazquez from William Blair inquires about the current macroeconomic environment compared to last year. Joe Hogan responds by stating that the third quarter is traditionally difficult due to seasonal factors, and this year's performance is consistent with those typical challenges, rather than being significantly worse than the previous year.

The paragraph discusses the challenges faced by a company in the United States market, which is one of their largest and most affected markets. Joe Hogan and John Morici highlight that while globally the business showed a 2.5% increase in cases, there was a decline in the U.S. market. They attribute this primarily to external factors, such as decreased consumer confidence and economic activity in the U.S., rather than internal company issues. Looking towards 2025, there is hope that increased consumer confidence and economic improvements could benefit the company. The conversation also touches on the differences in performance between the U.S. and international markets, with an emphasis on the need for better external economic conditions in the U.S. to drive growth.

In the paragraph, Joe Hogan discusses the competitive landscape and economic challenges faced by dental and ortho channels, particularly in the U.S. He explains that there's no significant shift in competition, but external economic conditions and consumer confidence issues are affecting customer decisions to pursue dental treatments. While similar challenges are observed in Europe, they're more pronounced in the U.S. due to its uniformity. Jon Block then asks about operational margin expansion projected for 2025, mentioning the potential impact of a direct 3D printing initiative, prompting John Morici to respond.

The paragraph discusses the company's operational margin improvement through restructuring actions, while continuing investments in various initiatives like direct fab and new technologies. Jon Block asks about the impact of these strategies on the top-line growth and inquires about initiatives, mentioning that Costco's progress seems slow and referencing a new financing initiative aimed at addressing case approval issues. Joe Hogan responds by acknowledging that while the success with Costco is limited, it serves as a brand strategy to promote Invisalign treatment. He highlights that affordability is a significant concern for customers seeking orthodontic treatment, and efforts are being made, along with major Dental Service Organization (DSO) partners, to provide financing options that boost consumer confidence.

In this paragraph, John Morici discusses the company's commitment to growth and investment, especially in new technologies, with an update expected closer to 2025. Elizabeth Anderson from Evercore ISI asks about restructuring and Frank's return to the organization, seeking insights on changes he might implement and strategies to get closer to consumers. She also inquires about the positive outlook for the China market. Joe Hogan responds, emphasizing the importance of relationships in their business and noting Frank's extensive previous experience in the company.

The paragraph discusses the key qualities and contributions of an individual named Frank, highlighting his leadership skills, expertise in technology for growth, and industry knowledge. Frank is praised for implementing an effective DSO program and being a trusted figure within the business. Additionally, the text touches on the success in China, particularly in the teen market, with good product adoption. The paragraph then transitions to a conversation involving Joe Hogan and Jason Bednar, where they discuss the potential impact on margins from 3D printing initiatives, expressing concerns that these efforts might dilute gross margins by 2025 due to restructuring and related investments.

In the conversation, John Morici addresses questions about operational margin improvements despite initial high costs from direct fab printing. He explains that the restructuring efforts are expected to enhance operational margins year-over-year even with investments. Although there are higher costs initially with direct fab printing, scaling will lead to operational margin accretion. As new products are introduced and gain popularity among doctors, productivity on the gross margin side will improve, particularly due to reduced material needs. Jason Bednar inquires about the timeline for gross margin benefits from scaling 3D printing and asks for insights into the teen market, noting mixed data between clear aligner and traditional braces segments. John Morici starts to respond to the question regarding gross margin improvements.

The paragraph discusses the progress in scaling up resin production and manufacturing equipment, which is expected to fully mature in two to three years. It also highlights upcoming new products for direct fabrication that will be available to doctors next year. Joe Hogan comments on the international teen market success, especially in Asia, attributed to products like Invisalign First and the Palatal Expander. Despite a strong product portfolio for pre-teens, the U.S. market faces challenges, with orthodontic practices under pressure from decreasing teen segment close rates and financial constraints, leading them to rely more on traditional wires and brackets for profitability. The company's responsibility lies in effectively communicating the advantages of early treatment and their products to both consumers and orthodontists.

In the paragraph, a discussion takes place about the growth potential of iTero amidst various challenges. The speaker, Joe Hogan, addresses concerns about the impact of high interest rates and previously set benchmarks from the initial ortho launch on iTero sales. He highlights that despite market pressures on capital equipment sales, the newly launched Lumina platform, which is innovative and not just an upgrade of existing technology, has captured significant attention from doctors. Surprisingly strong sales during a typically slow third quarter emphasize the technology's uniqueness. Anticipation is also expressed for the upcoming release of the restorative workflow, which is expected to provide a solid foundation for future growth.

The paragraph discusses the flexibility and benefits of iTero's platform in diversifying product lines and targeting future applications. John Morici highlights the opportunities created by the new iTero products, including strong sales of the 5D model and the benefits of offering leasing and rental options to doctors in a challenging economy. This strategy helps generate recurring revenue and increases the use of Invisalign products. Joe Hogan comments on the equal pressure faced by both the orthodontist (ortho) channel and general practitioners (GPs) in the U.S. Clear Aligners market due to overall challenges in the dental industry. The conversation ends with Jeff Johnson from Baird asking a question to Joe Hogan.

In the paragraph, Joe Hogan addresses a question about the company's current strategy, noting a decrease in R&D spending, headcount reductions, and reduced capital expenditures (CapEx) compared to previous years. Despite these changes, the company remains focused on long-term growth opportunities in the global digital orthodontics market, which is still largely underpenetrated. Hogan emphasizes that current financial decisions are a response to market conditions and responsible business leadership, while investment continues in innovative technologies like 3D printing and new product phases. These efforts aim to position the company for future growth when the market rebounds.

The paragraph discusses the future of digital orthodontics, emphasizing the importance of funding and maintaining enthusiasm for growth opportunities in the market. Jeff Johnson questions Joe Hogan about growth expectations and economic conditions, particularly in the U.S., affecting these projections. They also cover specifics about average selling prices (ASPs), currency impacts, and value-added tax (VAT) anniversary, noting that ASPs are expected to remain flat to slightly down. John Morici confirms these points, acknowledging the difficulty in predicting currency normalization. Finally, Kevin Caliendo is introduced with another question.

The paragraph discusses a question about whether there's a correlation between people purchasing GLP-1 medications and those getting Invisalign treatments, suggesting that both might be comparably costly for adults. Joe Hogan responds by acknowledging that while some medical device companies speculate about such correlations, they haven't extensively quantified it. He mentions that the expense could be comparable to Invisalign treatments, but he doesn't attribute any market weakness to this factor. Instead, Hogan believes the primary issue is the current economic climate, where consumers are cautious with their spending. He notes that this dynamic might differ in other regions, like Continental Europe. Hogan emphasizes the adage that "correlation doesn't mean causation" and refrains from making a direct connection. Kevin Caliendo finds the response helpful and seeks clarification on fourth-quarter projections and year-end guidance.

The paragraph features a conversation between several people discussing the future business strategy regarding the economy's impact and new product introductions. John Morici suggests using the current year as a starting point to assess future economic conditions and adjust strategies accordingly, including the introduction of Lumina Restorative. As more information becomes available, particularly about interest rates and elections, they'll refine their plans. Michael Cherny follows up with a question about the rollout of new 3D printing and fab-related products, inquiring about the strategy, customer experience, and scalability of these new offerings in relation to their introduction to the market.

In the paragraph, Joe Hogan discusses the benefits of their product's design flexibility for the orthodontic and general dentistry markets, allowing for more tailored solutions and improved predictability in treatment outcomes. Michael Cherny asks about potential non-recurring factors affecting financial modeling, like the UK VAT impact on ASPs. John Morici responds, indicating there are no expected one-time dynamics for the next year.

The paragraph discusses efforts to collaborate with the UK government to avoid VAT on certain products, as it affects costs for doctors and patients. Following this, Erin Wright from Morgan Stanley inquires about recent business restructuring beyond an executive change, seeking details on the timeline, scope, and expected profitability improvements by 2025. John Morici responds, explaining the regular evaluation process of investment and funding strategies as part of their Annual Operating Plan (AOP). This year's restructuring is twice as large as the previous year's, involving about 700 people compared to over 300 last year, along with some restructuring charges.

In the paragraph, company representatives discuss their business strategy, focusing on driving growth through initiatives like "direct fab" and "five-minute ClinCheck." They emphasize the goal of achieving margin accretion year-over-year while funding growth initiatives. Erin Wright asks about the company's guidance for the fourth quarter, specifically if it assumes the continuation of a sluggish U.S. market or changes in other regions. John Morici confirms the guidance is based on current observations, with expectations of improvement in markets like Asia, Latin America, and the Middle East, while the U.S. market is expected to remain sluggish.

In the paragraph, Joe Hogan and John Morici discuss the company's approach to restructuring in response to current economic challenges in the United States. Unlike the COVID-19 period, when the company chose not to lay off employees and reinvested instead, they are now focusing on responsibly funding key technologies crucial for future growth in digital orthodontics. This strategic shift aims to navigate external pressures, maintain market potential, and ensure margin growth, with restructuring being an annual assessment based on the economic environment.

The paragraph is from a Q&A session where John Morici discusses the factors impacting their Average Selling Prices (ASPs). He explains that Advantage programs, which ended in June, influenced discounts in the third quarter but are not expected to continue affecting them. The mix of business, with Europe being a more significant part of their fourth-quarter sales, is favorable due to Europe's higher ASP compared to China's lower ASP. This shift should benefit them despite previous challenges. The session concludes with Shirley Stacy thanking participants and mentioning upcoming financial conferences and events.

The conference has ended and participants are now free to disconnect. Thank you for joining.

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