Align Technology Inc Q1 FY2020 Earnings Call

Greetings and welcome to the Align Technology First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Operator instructions were provided. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Shirley Stacy, VP of Corporate and Investor Communications. Thank you. You may begin.

Thank you. Good afternoon everyone. Thank you for joining us. Joining me today is Joe Hogan, President and CEO; and John Morici, CFO. We issued first quarter 2020 financial results today via GlobeNewswire, 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. Telephone replay will be available today by approximately 5:30 P.M. Eastern Time through 5:30 P.M. Eastern Time on May 13th. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13701221 followed by pound. International callers should dial 201-612-7415 with the same conference number. As a reminder, the information that the presenters discuss 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 set forth 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 vary significantly, and Align expressly assumes no obligation to update any forward-looking statement. We have posted historical financial statements, including the corresponding reconciliations, if applicable, and our first quarter 2020 conference and earnings release and 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's President and CEO, Joe Hogan. Joe?

Thanks Shirley. Good afternoon and thanks for joining us. I hope that you and your families are well. Given the significant disruption to our business caused by the extraordinary measures taken by governments, public and private institutions, and businesses around the world to fight the spread of COVID-19, most of the performance metrics I would normally discuss are less meaningful. Therefore, on our call today, in addition to the highlights from our Q1 results, I'll discuss the trends that we're seeing through early March prior to the escalation in the COVID-19 cases that resulted in shutdowns across Europe and North America, and compounded the initial impact from similar shutdowns in China beginning in January. I'll also talk about our view of recovery and strategy to help our doctor-customers navigate this challenging environment and ensure our business continuity. John will provide more detail on our financial performance and comment on the current trends across our business globally, including the momentum we're beginning to see in China. Following that, I'll come back and summarize a few key points and open up the call to questions. With that, let me start with a few comments on our first quarter results through early March. At that time, China was progressing in line with our original guidance for Q1, which included approximately 20,000 to 25,000 fewer cases and $30 million to $35 million less revenues for Invisalign and iTero products, and other regions were performing ahead of our Q1 outlook. However, the situation quickly changed in mid-March as most governments in EMEA and North America closed down non-essential businesses and initiated stay-at-home orders. As a result, the vast majority of Invisalign practices shut down and stopped seeing patients, and our business fell off sharply. We believe the incremental impact of COVID-19 on our Q1 results was approximately 50,000 fewer cases and approximately $85 million less revenues for Invisalign and iTero products. At the same time, while EMEA, North America and other parts of APAC fell off in mid-March, we began to see improvements in China as the country started to open up again. While it's still early in the recovery process and the situation is different in every city and for every practice, we're working closely with our doctors to support their current needs and ensure they have a game plan to resume operations in a very different environment for the foreseeable future. More on that in a few minutes. Now let's go through our first quarter results. For Q1, total revenues were $551 million, down 15.2% sequentially and unchanged year-over-year, reflecting significantly lower-than-expected sales of Invisalign clear aligners and iTero scanners due to the COVID-19 pandemic. Revenues from clear aligners were $481.6 million, and iTero scanners and services were $69.4 million. Clear aligner shipments were 359.4 thousand cases. Notwithstanding the impact of COVID-19, shipment volumes were up 2.9% year-over-year, reflecting solid growth from non-comprehensive products driven by Invisalign Go systems across all regions, as well as Invisalign Moderate. This was offset by a lower mix of comprehensive products primarily due to the shortfall in China. For the quarter, we shipped Invisalign cases to approximately 61,000 doctors, of which 4,100 were first-time customers. We also trained over 4,600 new doctors in Q1, including 2,600 international doctors. Overall for the teen market in Q1, 104,000 teens and preteens started treatment with Invisalign clear aligners, representing 29% of total cases shipped, reflecting growth from EMEA and the Americas regions and across comprehensive products. During the quarter, we reached another major milestone with our 2 millionth Invisalign teenage patient, a student and athlete who started treatment recently with Dr. Tom Hartzog, a U.S.-based orthodontist in Kentucky. Dr. Hartzog has been a terrific practicing orthodontist for about 30 years and credits Invisalign with revitalizing his practice at a time when a lot of doctors think about slowing down. He says his approach is to lead with Invisalign, and he's adopted a new digital mindset. We're excited he's going to share more about that at our upcoming Invisalign Team Forum Virtual Edition this July. The teen segment represents the largest portion of existing orthodontic case starts each year. And as we head into the summer season, the busiest time in orthodontic practice, we are working to help doctors capture as much of the teen season as possible under the circumstances. Now let's turn to specifics around our first quarter results, starting with the Americas region. For the Americas region, through early March, solid sequential growth was driven primarily by North American GP dentists and DSOs, along with continued strength in Latin American doctors. On a reported basis, Q1 Invisalign case volume was down 5.5% sequentially and up 5.2% year-over-year, reflecting significantly fewer-than-expected Invisalign case shipments in March due to the impact of COVID-19. Year-over-year growth for Q1 reflects growth from both orthodontists and GP dentist channels, which were up 5.6% and 4.6%, respectively. Latin America volume was up 83% year-over-year led by strong growth from Brazil. For our international business, through early March, with the exception of China, the EMEA and APAC regions were performing well. On a reported basis, Q1 Invisalign case volume was down 22.3% sequentially, reflecting a significant decrease in APAC, primarily China, due to the impact from COVID-19, partially offset by growth in EMEA. On a year-over-year basis, international shipments are flat, reflecting growth from EMEA, offset by a decline in APAC. For EMEA, Q1 volumes were down sequentially and up 11.1% on a year-over-year basis driven by growth in Spain, the U.K. and Germany, along with our expansion markets led by Central Eastern Europe and Benelux, including the teen segment. For APAC, Q1 was down sequentially as expected, reflecting a significant reduction in volume in China due to COVID-19. On a year-over-year basis, APAC was down 18.2% compared to the prior year, reflecting a longer duration of COVID-19 measures implemented in China, and was the only region down year-over-year. Japan, Taiwan, Korea and India saw continued year-over-year growth in Q1. And as noted earlier, we began to see signs of improvement in China in early March as the government began to relax some or all of the restrictions and business began the road to recovery. Our consumer marketing is focused on building the clear aligner category and driving demand for Invisalign treatment through a doctor's office. In Q1, we saw strong digital engagement globally, including 7.1 million unique visitors to our websites and 274,000 leads, both metrics growing by more than 40%. Consumer engagement growth for Invisalign was enabled by the launch of our new consumer campaign, Invis, strong media spend and a robust omnichannel presence. Our Invisalign concierge team is nurturing consumer leads virtually until a doctor's office is open, which is key to realizing and converting consumer interest into cases. Further, our modeling indicates that consumer marketing drove incremental growth in Q1 and reinforces our strategy to invest in brand building and maintain high visibility with consumers through the COVID-19 crisis. Other key metrics showing increased activity and engagement with the Invisalign brand are included in our Q1 slides. For iTero scanner and services business, Q1 revenues were down sequentially as expected, following a seasonally strong Q4 and consistent with trends in the capital equipment market. Q1 also reflects the impact of COVID-19 across all regions, especially North America, Australia, China, Japan and other APAC countries. On a year-over-year basis, iTero scanner revenues were down 13.1%, due to lower sales in North America and APAC regions primarily due to COVID-19 despite increased revenues in EMEA and Latin America, reflecting the addition of the Zimmer Biomet distribution agreement, the introduction of our iTero 5D going direct to Mexico and additional LATAM distributor markets. The total year-over-year decrease in scanner revenue was slightly offset by increased services revenue from a larger iTero installed base. Cumulatively, over 23 million orthodontic scans and 5.2 million restorative scans have been performed with iTero scanners. For Q1, total Invisalign cases submitted with a digital scanner in the Americas increased to 80.5% from 76.1% in Q1 last year. International scans increased to 68.7% from 59.3% in the same quarter last year. We're pleased to see that within the Americas, 93.6% of cases submitted by North American orthodontists were submitted digitally. I'm also pleased to share that we received FDA 510(k) clearance for the iTero Element 5D Imaging System. The iTero Element 5D Imaging System seamlessly combines three scanning technologies: 3D data, intraoral color photos and NIRI images. NIRI is near-infrared imaging technology, which allows you to see caries in different aspects from a dentition standpoint. It's an integrated scan, and we're excited to bring this advancement in intraoral scan technology to the United States market to help doctors provide better oral care for their patients. At this time, we're mindful of the current environment and the impact that the COVID-19 pandemic is having across the world and are focused on customer education and training regarding this new technology while so many dental practices in the U.S. are operating on a limited schedule. We remain confident that the iTero business will continue to help drive our overall long-term growth and help increase adoption of the digital platform with Invisalign treatment. To that end, during the quarter, we announced the acquisition of exocad, a global CAD/CAM software leader, and completed the transaction on April 1st. John will talk more about the acquisition in a moment, but let me say just that the rise in consumer awareness around dentistry extends beyond the benefits of straight teeth and orthodontics. There are significant opportunities for all kinds of treatments, from simple cosmetic fixes to ortho-restorative procedures that can help us accelerate growth of our digital solutions for ortho-restorative cases and really drive growth and adoption of the Invisalign iTero digital platform. I'm very excited about the addition of exocad's proven restorative experience, expertise, and functionality to our platform, and I want to welcome exocad founders Till Steinbrecher and Maik Gerth and the entire exocad team to Align. Let me now turn to some of the initiatives we've taken to support our doctors and their patients. We recognize the enormous hardship that COVID-19 has caused Invisalign practices around the world. We're working in every region to support doctors and find ways to minimize disruptions to their businesses and to strengthen the experiences their patients have with Invisalign treatment. We have learned a lot from our doctor partners and teams in the Asia-Pacific region, and we've been navigating the impact of COVID-19 for months. We're applying their experiences and insights across all regions. Many of our customers are sharing creative ideas and suggestions as we all work to manage the situation together. One of the first things we did was address clinical education, an integral part of doctor engagement. Across all three of our regions, we moved most of our education programs to online digital platforms, continuing to provide hundreds of valuable Invisalign and iTero training and education resources, many peer-to-peer for doctors and their teams in a virtual setting. We also identified opportunities to collaborate with Invisalign practices to manage ongoing cases and explore new ways for doctors to conduct consultations. Early on, many doctors began using video calls and text, and patients submitted photos through a variety of platforms to help monitor patient progress, reduce in-office appointments, and ensure continuity of patient care during treatment. It quickly became clear that doctors needed a better way to connect and monitor patients. So we accelerated the launch of new tools that were still in pilot mode. The Invisalign Virtual Appointment tool enables doctors to easily set up HIPAA-compliant video appointments to monitor existing patients and to have an initial conversation with patients interested in learning more about Invisalign clear aligner treatment. The Invisalign Virtual Care program can also use video appointments and enables doctors to monitor treatment progress and stay connected with patients through a virtual platform. Patients use the intuitive My Invisalign app to stay engaged in the treatment and convey progress photos to their doctor who reviews these photos on their Invisalign Doctor Site, communicates any needed instruction, and ensures treatment is on track. These tools are available through our Invisalign Doctor Site, IDS, and the My Invisalign app and work as part of the end-to-end digital platform for Invisalign treatment. While both tools are still in early stages of rollout, our goal is to provide doctors with a way to maintain care until patients are again able to visit the doctor's office. Feedback to-date has been relatively positive, and we believe that doctors will continue using these tools to improve patient experience and increase efficiencies well after COVID-19 restrictions have been lifted. We're also supporting doctors through financial and operating challenges and are providing additional resources, including industry experts to help navigate this ongoing crisis. This includes webcasts, e-blasts and microsites on IDS, the Invisalign Doctor Site, with advice on extending aligner wear and holding patients at specific treatment stages; options for redirecting aligner shipments and helping address customer cash flow concerns caused by the pandemic. We're creating programs with partners like LendingPoint that are part of recovery playbooks to help doctors with speed to cash that is expected to launch on May 1. Before I turn the call over to John, I'd like to spend a few minutes talking about the strength and resiliency of Align, our business model and our view of the path to recovery. There's no question that we are in uncharted territory. And while supporting our doctors in their current situation is still critical right now, planning for recovery is just as important. Overcoming challenges is not new to Align and our employees. Our response to COVID-19, and the decisions and investments we are making now to anticipate customer needs and adapt in a dynamic environment are based in part on the lessons learned throughout our history and will further our competitive advantage and position us to capitalize on the market as it returns. We serve a huge under-penetrated market, and our share of more than 300 million people who want a better smile is less than 3%. Teens are an important segment, and our share is a small fraction of the market. And yet, we know that teens remain the heart and soul of orthodontic practices and will drive their recovery. There's no single blueprint for us to follow in this recovery. Our underlying business is healthy. We have an excellent balance sheet with no debt. And over the last five years, we've grown a business that has generated 25% compounded revenue growth and consistently delivered 72% gross margins, 22% operating margins and generated cash flow from operations in excess of 22% of revenues each year. We also have operational resiliency in terms of global manufacturing that has taken us years to develop and is simply unmatched, and is a key reason why we're able to continue operations in the crisis and expect to ramp up quickly in recovery. The core components being supply chain, digital treatment planning, treat aligner fabrication, and supply chain. During normal business, we carry enough buffer stock in our warehouse to handle two disruptions to the supply chain. So if a batch goes sideways, we can handle that twice. After COVID-19 broke in China, we anticipated that we needed to mobilize existing suppliers and add three to six months of additional inventory so that we could weather the potential storm. For many of our suppliers, we have alternative redundant suppliers in case of shutdown in one geography impacts a supplier. Our Treat investments over the years in having Treat in multiple locations allow us flexibility in business continuity to respond to customer needs. Before COVID-19, we had evaluated the potential for doing treatment planning from home or remote locations and the implications to hardware needs, data security and productivity. When COVID-19 hit China, we ramped up our ability to do that and started transitioning our CAD designers to do treatment planning at home and have been successful in that transition. We are confident we could have maintained 80% of our normal output, but volumes fell off before we could fully prove that point. China hit first, so we load balanced with our other Treat locations. As this went from east to west, we didn't have significant issues in our treatment operations. This is our model, and we'll continue to strengthen it going forward. Aligner fabrication: we have aligner fabrication operations in Huang, China and Juarez, Mexico and plans for a third facility in Europe that we're looking to accelerate into 2021. Our facilities have excess capacity built in. And while we never have 100% redundancy, we do have the ability to shift production volumes based on that excess capacity. Worst-case scenario, if one of these facilities goes down, then customers wait a little longer for their aligners, but production will continue, and we believe we can recover swiftly. In short, when we have an issue in one part of the world, we have designed our operations to enable us to load balance across facilities. We've had to do this because of our rapid growth and the huge growth spurts that made it necessary to remain flexible. Additionally, the steps we've implemented during the COVID crisis like work-from-home for CAD designers gives us even more flexibility, and we'll leverage that going forward as we evaluate facilities requirements and potential cost savings. Beyond our business strength and operational resiliency, we are at the forefront of digital dentistry. This pandemic has exposed the weakness of analog approaches and strengthens and benefits the digital technology in every aspect of our life. There's been a lot of concern over the years about digital driving us apart and keeping people from interacting. People focused on their screens in social media rather than with each other, interacting with businesses online rather than in person, etc. I think what we're seeing through this terrible situation is that digital actually unites us. It keeps us connected, gives us flexibility and options. Without digital technology during this crisis, how would kids go to school? How would any of us be productive working from home? How would universities and public health experts model the curve without data mining and AI? I am proud and thankful our digital platform is enabling Invisalign patients to continue moving forward in treatment while physical practices are closed, that it can connect doctors and patients to monitor issues and track treatment, and that because of digital, we can get a replacement aligner or new retainers to a kid sheltering in place. Together with doctors, we're going to leverage that power of digital for dentistry and orthodontics more than ever. Doctors are not going back to before. We all know that digital dentistry is the future, and that is part of why Align is weathering this pandemic and why I believe we are well positioned for success going into recovery. With that, I'll now turn it over to John.

Thanks, Joe. Now for our Q1 financial results. Total revenue for the first quarter was $551 million, down 15.2% from the prior quarter and up 0.4% from the corresponding quarter a year ago. For clear aligners, Q1 revenues of $481.6 million were down 11.4% sequentially across all regions driven by Asia Pacific. Year-over-year clear aligner revenue growth of 2.6% reflects growth from EMEA and the Americas, offset by APAC. Clear aligner revenue growth was unfavorably impacted by approximately $6 million or approximately 1 point year-over-year from foreign exchange. Q1 Invisalign ASPs were up sequentially by approximately $15 to $1,255, primarily due to lower net deferrals due to a decrease in primary case shipments across all regions. On a year-over-year basis, Q1 Invisalign ASPs increased approximately $10, primarily reflecting price increases in all regions and increased additional aligner revenues, partially offset by promotional discounts and unfavorable foreign exchange. Total Q1 Invisalign shipments of 359,400 cases were down 13.1% sequentially and up 2.9% year-over-year. Our scanner and services revenue for the first quarter was $69.4 million, down 34.7% sequentially due to volume decreases in all regions. Year-over-year revenues were down 13.1%, primarily due to volume decreases in North America, partially offset by increases in EMEA and LatAm, and increases in service revenue off an increased installed base. Moving on to gross margin, first quarter overall gross margin was 71.6%, down one point sequentially and down 1.6 points year-over-year. On a non-GAAP basis, excluding stock-based compensation expense, overall gross margin was 71.8% for the first quarter, down one point sequentially and down 1.6 points year-over-year. Clear aligner gross margin for the first quarter was 73%, down 1.1 points sequentially and down 1.9 points year-over-year, primarily due to lower volumes and higher cost per case, partially offset by an increase in Invisalign ASPs. Scanner gross margin for the first quarter was 61.8%, down 3.1 points sequentially and 1.8 points year-over-year due to increased manufacturing variances, lower ASPs and partially offset by higher service revenue. Q1 operating expenses were $324.4 million, up sequentially 1.1% and up 3.2% year-over-year. The sequential increase in operating expenses reflects higher legal and outside services. Year-over-year, the increase reflects our continued investment in sales and R&D activities, including increased compensation from additional headcount and consumer marketing spend, partially offset by the $29.8 million charge related to the Invisalign store closure costs recorded in Q1 of 2019. Our first quarter operating income was $69.9 million, down 53.7% sequentially and down 20.3% year-over-year. Our first quarter operating margin was 12.7%, down 10.6 points sequentially and down 3.3 points year-over-year. The sequential decrease in operating income and operating margin are primarily attributed to lower volume, revenue, and gross margin as a result of the COVID-19 impact. Operating margin was impacted by approximately 0.8 points year-over-year from foreign exchange. On a year-over-year basis, the decrease in operating income and operating margin primarily reflects lower gross profit and higher operating expenses related to go-to-market activities, partially offset by the $29.8 million charge related to the Invisalign store closure in Q1 2019. On a non-GAAP basis, which excludes stock-based compensation, acquisition-related costs and impairment, and other costs related to Invisalign store closures in the prior year, operating margin for the first quarter was 17.1%, down 9.3 points sequentially and down 8.1 points year-over-year. Interest and other income expense net for the first quarter was an expense of $16.9 million, including a $9.2 million hedge loss related to the anticipated exocad acquisition. Excluding the hedge loss, interest and other income expense net was $7.4 million expense on a non-GAAP basis. With regards to the first quarter tax provision, our tax rate was negative 2,745%, which includes a one-time tax benefit of approximately $1.5 billion associated with the recognition of a deferred tax asset related to the intra-entity sale of certain intellectual property rights, resulting from our corporate structure reorganization completed during the quarter. This deferred tax benefit will be amortized starting in 2020 and continue into subsequent quarters and years. The period over which the tax benefit will be recognized depends on the profitability of our Swiss headquarters and is still under assessment and review with the Swiss tax authorities. Excluding the tax benefit related to our corporate structure reorganization and the related tax effects on stock-based compensation and other non-GAAP adjustments, the first quarter tax rate on a non-GAAP basis was 33.2% compared to 20.9% in the prior quarter and 22.8% in the same quarter a year ago. The non-GAAP tax rate was higher-than-forecasted due to lower-than-expected profits in regions outside the U.S. First quarter diluted earnings per share was $0.19, up $0.17 sequentially and up $0.18 compared to the prior year. On a non-GAAP basis diluted earnings per share was $0.73 for the first quarter, down $1.03 sequentially and down $0.52 year-over-year. Moving on to the balance sheet, as of March 31, 2020, cash, cash equivalents and marketable securities were $790.7 million, a decrease of approximately $77.9 million from the prior quarter, which is primarily due to the annual bonus payout and the purchase of an additional San Jose, California facility combined with slower AR collections. Of our $790.7 million of cash and cash equivalents, $119.2 million was held in the U.S. and $671.5 million was held by our international entities. Q1 accounts receivable balance was $533 million, down approximately 3.1% sequentially. Our overall days sales outstanding, DSOs, was 87 days, up 11 days sequentially and up 9 days as compared to Q1 last year. We expect DSOs to increase in Q2 as a result of anticipated lower collections. Cash flow from operations for the first quarter was $9.8 million. Capital expenditures for the first quarter were $46.1 million, primarily related to our continued investment in increasing aligner capacity and facilities. Free cash flow, defined as cash flow from operations less capital expenditures, amounted to negative $36.3 million. Under our May 2018 repurchase program, we still have $100 million available for repurchase of our common stock. On April 1, 2020, we completed the acquisition of privately held exocad Global GMBH, a global leader in the dental CAD/CAM software market for a purchase price of approximately $430 million in cash. The acquisition of exocad broadens our digital platform reach by adding technology that addresses restorative needs in an end-to-end digital workflow to facilitate ortho-restorative and comprehensive dentistry and also brings exocad's expertise in restorative dentistry, implantology, guided surgery and smile design to the Align Technology portfolio. We expect it to complement and extend our Invisalign and iTero digital solutions paving the way for new seamless cross-disciplinary dentistry in the lab and at chairside. exocad also broadens our platform reach in the digital dentistry ecosystem with close to 200 partners and more than 35,000 licenses installed worldwide. Now, let me turn to our outlook. As Joe described earlier, through early March, our business was performing well, and we believe we would have exceeded our Q1 guidance. However, things quickly changed in the latter part of March as the majority of Invisalign practices in our core markets in EMEA and the Americas regions closed their offices and stopped seeing patients, which caused Invisalign case receipts to drop rapidly and continue into April. At this time, due to the fluid market condition caused by the COVID-19 pandemic, we are not providing guidance for Q2, and we are withdrawing our prior commentary regarding our full year 2020. What I can offer is the following directional commentary. For China, which was the first major country impacted by COVID-19 and was shut down almost overnight at the end of January, as reflected in our Q1 guidance provided on the January earnings call, it has shown continued improvement beginning in early March. Our case receipts or orders in China are currently running at 80-plus percent of mid-January's level, but with a fair amount of variability week-to-week between various provinces and cities. Keep in mind that there is about a three to four week lag between case receipts and orders to case shipments. China provinces are not uniform in their recovery, but all continue to improve. Guangdong, Shanghai and Ziyang are now at or above pre-pandemic levels. Beijing and Hubei are slower in recovery consistent with later reopening and/or heavier restrictions. Early indications of patient flow are also positive, but it's too early to determine if it is pent-up demand due to the lockdown. We also heard today that China is lifting travel restrictions within the country, which should facilitate business. APAC, excluding China, is still very fluid as Japan shut down later than the rest of APAC and other countries like Taiwan and Korea are also improving. For the Americas, it's unclear how volume will evolve due to staggered lockdown and subsequent staggered re-openings by state. We would expect the situation in the U.S. to be similar to what we've seen in China with recovery starting in the states in the middle of the country working its way out to the coast, on a city-by-city basis. In LATAM, it is still fluid as it shut down later than the rest of the Americas. The EMEA market is beginning to open up, and Germany is making good strides. We are monitoring each market to see how each is responding to the various government isolation regulations; it is still fluid with a lot of variability week-to-week. For iTero, as a result of COVID-19, we did see some deferred purchase decisions at the end of the quarter, and I would expect that to continue. We finished Q1 with $791 million in cash and cash equivalents. Since then, we have closed our purchase of exocad for $431 million on April 1st. Align's priorities during the pandemic are to take care of our employees, customers and shareholders. With these priorities in mind, we are taking actions to ensure the business is well positioned to weather the pandemic. In order to maintain our financial health, we are taking the following actions: holding our current headcount level steady to support the initiatives Joe discussed while making sure we are prepared for the market recovery; controlling discretionary spending such as travel and meeting-related expenses; slowing some of our capital expenditures; and working with many vendors who have allowed us to increase payment terms, while providing extended payment terms to many of our customers. As always, we are balancing future investments to drive growth in a vastly underpenetrated market versus making the appropriate cost reductions and cash actions that have less impact to the business. With that, I'll turn it over to Joe for final comments. Joe?

Thanks John and thanks again for joining us today. Before I close, I want to take a minute to talk about some of Align's actions to support relief efforts in the communities in which we live and work. One of the things that makes Align a great place to work is the concern our employees have for the world around us and their commitment to helping others. The passion is core to our purpose of transforming smiles and changing lives. And in this time of need, how we support our employees and customers and serve our communities is more important than ever. Early on in the outbreak, we donated RMB1 million to the Chinese Red Cross to support relief efforts in some of the hardest-hit areas. More recently, we committed $1 million to the Align Foundation, Align's donor-advised fund through Fidelity Charitable. And our teams have been working together to source and supply additional personal protective equipment, or PPE, and medical supply donations for frontline health care workers in the communities we serve. Finally, thanks to the ingenuity and diligence of our manufacturing engineering team, we're able to leverage our 3D printing technology and manufacturing expertise to produce face shields and medical swabs for COVID-19 testing kits. Through our network of connections with hospitals across the globe, we are donating them to hospitals with the most critical needs. As our existing 3D printing equipment is highly customized for aligner fabrication and can't be reconfigured, we acquired some new separate 3D printers to specifically help with relief efforts. I'm extremely proud of what our employees are doing individually to make a difference and of what Align is doing as a business overall. In summary, we're all operating in a tough environment. And even as we start to see signs of recovery in some geographies, we don't know when we'll get back to normal or even near-normal operations. As always, we're committed to the safety and well-being of our employees, doctor partners, their staff and patients. That remains our top priority in the weeks and months ahead. That and working with our stakeholders and communities to get through this together. With that said, I want to make it clear that we are not resting on our laurels waiting for better days. Align Technology believes in playing offense and investing for our future. And that includes, first and foremost, protecting the jobs of our employees and keeping them ready to pivot for a fast recovery. That means no furloughs, no reduced salaries, staying focused on our long-term strategy. Employees remain our most strategic asset. Closing the exocad acquisition in early April to help expand our digital platform for ortho-restorative treatment. We are very excited about this opportunity. Adding resources to support international expansion, for example, approximately 100 new sales reps in China, improving virtual treatment options, and releasing new products and digital tools to meet our customers' needs like Invisalign Virtual Appointment and Invisalign Virtual Care to help doctors and patients connect while practices are closed and beyond. Key to expanding our digital platform in a post-COVID-19 environment is investing in marketing and media to reach consumers while they're at home during the pandemic and keep our brand top of mind, something that other companies have stopped to conserve cash. Extending our working capital to help our customers manage their cash flow and expenses. We are very aware of the near-term volume challenges of consumers sheltering in place, closed ortho and dental offices and possible delays in new treatment as consumers go back to work and evaluate their priorities. But we're still focused on investing in a vastly under-penetrated market and believe that Align is uniquely positioned for recovery and continued growth coming out of the pandemic. COVID-19 will continue to have significant implications to the world and to our industry. Our digital platform has made it possible for thousands of doctors and patients to continue Invisalign treatments throughout this global disruption, thanks to digital orthodontics and Invisalign aligners, digital treatment planning and virtual monitoring and care. I think coming out of this, more doctors than ever will have experienced the benefit of digital treatment and digital tools for their practices and many will have seen firsthand the limitations and frustrations of the traditional analog approach to patient treatment like wires and brackets. With that said, I want to thank you again for joining the call. I look forward to updating you on our progress as the year unfolds. Now I'll turn the call over to our operator for questions.

Operator instructions were provided for the question-and-answer session. Our first question comes from the line of Nathan Rich with Goldman Sachs. Please proceed with your question.

Good afternoon. Thanks for the question and hope you and the Align team are all doing well. Appreciate all the color you gave on the call. I guess, Joe, maybe starting with China, serving potentially as a guide for how the U.S. and EMEA might recover. Was there anything that you would call out in terms of either the types of cases or the channels that started to come back first in China? And as we think about, if China does serve as a guide for the U.S., does that sort of mean that we're looking at sort of like three to four months for those case receipts to get back to that 80% level that you referenced in your remarks?

First of all, China is China. China had a very rigid lockdown procedure; they were hit first. I don’t think you can directly take that vector from China and apply it to the United States or Western geographies in general. As John indicated in his remarks, recovery in China is happening city by city. Beijing and the Wuhan area and all of Hubei Province are behind in recovery relative to other regions. For the United States, New York and California will come up differently than the middle part of the nation; we are already seeing that. The segmentation in China is that it was primarily a comprehensive-product base that we have in China. We're selling some moderate products there and different things, but it's primarily coming back as comprehensive treatments. So again, I don't think that's a vector we'll use exactly when looking at other areas, because every country is being handled differently around the world.

Okay. Joe, I appreciate that. I guess just a quick follow-up. When you think about these practices opening back up, and you made some comments about how you're supporting customers, are there any changes that you're thinking about from marketing or levers that you've used in the past, maybe gearing those up as you think about helping volumes start to get back to more normalized levels?

We honestly feel that, particularly in the orthodontic community, there will be a much stronger leaning toward a digital environment because of concerns about reinfection and potential future shutdowns. As we move forward, we'll be going to our customers with programs that really help them convert more of their volume to a digital environment. We'll be very specific about it. As we move into teen season, you'll see us really focused on teens because we know orthodontists will be focused on teens as well. That's a different demographic and segments differently in terms of product lines like iGO and Invisalign First. We'll also be ready with PPE equipment and other things to prepare doctors for protecting their patients and their staff. John, did I miss anything you'd add?

Thanks, Nathan. Next question, please.

Our next question comes from the line of Brandon Couillard with Jefferies. Please proceed with your question.

Hi. Thanks. Good afternoon.

Hey, Brandon.

Joe and John, can you talk about the flexibility you have in your cost structure, how much of OpEx is discretionary or variable? It sounds like you're focused on kind of holding Align in terms of headcount and marketing. But how should we think about the leverage you have to control costs during this period right now?

Hey, Brandon, this is John. Yes, as we said, there are levers that we could pull. As we accelerate growth, there are levers we pull; similarly in this environment, there are levers around our existing OpEx. For marketing dollars, we can adjust where and how we spend. With travel restrictions and fewer conferences, a lot of other operating expenditures can be pushed out and not spent currently. We're focused on still investing for the future to be able to work with our doctors on new technologies and making sure we keep the employees and structure we have, but we will modulate as needed going forward.

Okay. Thanks. And then a follow-up for Joe. As you think about the levers you have to drive demand, would you expect to be somewhat more aggressive in terms of ASPs? And are you planning to adjust your Advantage program levels or hurdles to give that as a bit of a break given they've had their offices closed?

Brandon, we've already extended Advantage-tier considerations to our customers when they needed it. I'm not sure how much impact that will have on ASPs because we're generally holding them to where they are. Our strategy as we come out of this is how we support our customers in a digital environment. We're focused on supporting them from a PPE standpoint, helping with loans and different things for cash flow. Many will be challenged financially, and we've been offering payables relief and deferrals. Advantage is one part of a broader suite of support we are providing to customers to help their practice and growth.

Okay. Thanks.

Our next question comes from the line of Jon Block with Stifel. Please proceed with your question.

Great, thanks guys.

Hey Jon.

Joe, you mentioned protecting employees, no furloughs or salary cuts. I'm just curious about the competition. Has anything changed in the marketplace around the competitive landscape? We've heard some chatter about cutbacks. Can you elaborate on what you're hearing or seeing out there?

Jon, I won't be specific, but many competitors have had layoffs or cutbacks. We entered this crisis with a strong balance sheet, which gives us flexibility. We're a growth business and we need to position for 20% to 30% growth, making sure production capacity and employee base are ready. Our sales teams and engineering teams are critical, and we can continue launching initiatives like Invisalign Virtual Assistance. From a competitive standpoint, we're seeing varying degrees of cutbacks, but we're focused on our plan and how we can help our doctors.

The second question is on Swift. I know you kicked off a pilot recently to address the lower-acuity market. Did you get enough signal during that time to share some takeaways? Could you lean on that more in coming months, given price sensitivity and monthly-fee aspects that might resonate in an environment of job uncertainty?

Jon, when we launched Swift, the timing couldn't have been worse because COVID hit shortly after. We got a strong signal that we understand part of the demand equation. We'll look at rolling it out more broadly in the United States and in other markets. Regarding price point and ASP, we are discussing that with doctors in the Swift program. Importantly, margins on Swift are accretive to our gross margin, so it is beneficial for us. We believe it will respond well as we broaden the rollout, addressing price sensitivity and clinical simplicity with that product line.

Okay. Perfect. Thanks guys.

Our next question comes from the line of Steve Beuchaw with Wolfe Research. Please proceed with your question.

Hi Steve.

Hey there. Thanks for the time. I wanted to ask about Swift but from a different angle. With the operating environment prospectively, people will be concerned about safety. To what extent can you flex technology with Swift and tools in development to decrease face-to-face contact? How do you think about making Invisalign treatment achievable with minimal in-person interaction for those concerned even when PPE is widely used?

Steve, that's top of mind. Even before COVID, Swift was designed for minimal doctor-patient contact, typically two to three in-office interactions. Coupled with our remote monitoring capabilities, which we rolled out, doctors can monitor and manage patients remotely. Swift uses limited attachments and minimal IPR, which supports less in-person contact. We're also working on technologies like direct-printed attachments that in the near future will enable even less contact and faster productivity for doctors and patients. The right set of remote monitoring, digital planning, and precise scheduling will allow doctors to only call patients in when necessary. We feel our digital platform and pipeline position us well for this shift.

Thanks. The second question relates to practice reopening in the U.S. How do you think about the most likely path forward for practice reopening, given the regional variation and different stages?

Steve, it's not going to be uniform. Government restrictions, availability of PPE, and patient willingness will matter. We're already seeing measures like patients waiting in cars until being summoned to minimize interaction. Dentistry overall is considered a higher-risk profession for transmission, so protocols will be watched closely. Dental and orthodontic practices likely will have different protocols. We'll work closely with our doctor customers to help them through these changes and to adapt their workflows accordingly.

Thanks for the perspective.

Thank you, Steve.

Our next question comes from the line of Elizabeth Anderson with Evercore ISI. Please proceed with your question.

Hi, guys. Thanks for taking the question. I want to ask about digital access in the near term. You said you were rolling out the Virtual Appointment and Virtual Care tools rapidly. Can you speak to uptake, how training is going, or case use for ongoing patients?

Elizabeth, just to make clear, you're talking about Virtual Appointment or Virtual Care, right?

Yes, Virtual Care.

Elizabeth, we had been developing these tools for over a year, so this was not a brand-new build done overnight. We accelerated the market rollout when COVID hit. We started cautiously, limiting initial access to ensure robustness and training, beginning in the United States and then expanding globally. The IDS platform user interface is straightforward, and feedback from teams and doctors indicates the tool is simple to use. The whole idea is to provide continuity during lockdown periods and future workflows where patients may not want to come into the office. The rollout has gone really well; we are carefully expanding access so as not to burden the system and to ensure reliability.

Okay. Perfect. And any usage stats?

We have more than 2,000 doctors trained and beginning to use Virtual Care, and over 3,500 appointments have been conducted through Virtual Care to date. This is just the initial launch; we will iterate and enhance the tools over time.

Our next question comes from the line of Jeff Johnson with Baird. Please proceed with your question.

Hi Jeff.

Thank you. Hey Joe, good afternoon. Two questions. One, we saw news from a direct-to-consumer competitor on some patents and business bureau recommendations on advertising. Does that have implications for you, either with Swift, which has a monthly-fee element, or generally if they rein in their advertising?

Jeff, that model does not compete with ours. We go directly to doctors and work through a doctor base in everything we do. From what I understand, their patent matters relate to in-store scanning and file transfer models that do not involve a treating doctor in the same way. We don't see that as an issue for our business.

Thanks. Second question: What are you hearing from orthodontists about their willingness to bring staff and patients back? Are they chomping at the bit, and do they feel safe coming back?

From orthodontists' perspective, they are generally anxious to get back but cautious. They care about protecting staff and patients and will take precautions. Invisalign treatments are among the less invasive procedures in dentistry, which we'll emphasize. Orthodontists have been able to stay in contact with patients and use passive aligners to hold treatment where possible. We'll work with both orthodontists and general dentists to help them through the transition and leverage digital products like iGO for GPs to triage and refer complex cases to orthodontists.

Understood. Thank you.

Our next question comes from the line of John Kreger with William Blair. Please proceed with your question.

Hi, thanks very much. Joe, could you remind us what's the lag time between order receipt from a customer to the point where you can actually ship the aligners?

We call it CCA, and on the initial from order to the treatment-plan approval to shipment, it can be about four days to five days on specific internal steps, but the full cycle from order to shipment, including back-and-forth on the treatment plan, can be three to four weeks.

To add, getting the treatment plan exactly the way the doctor wants can take a number of iterations, and then manufacture and shipment follow. So total time can be around three to four weeks in many cases.

Okay, great. So for a region like the U.S. that got locked down in mid-March that backlog probably would have carried through to mid-April?

There will still be back-and-forth that goes on. You have patients who have not been able to come into the office to look at the final plan or to approve things, so it will vary until doctors actually approve treatment plans and manufacturing resumes at normal levels. Remember, our business is made-to-order; there's no finished goods inventory, so when things shut down it takes time to ramp back up.

Great. And anything you can give us in terms of contribution from exocad since that'll be in there for the full second quarter?

Nothing additional on that, John. We are not providing forward guidance other than what we've stated in our prepared remarks.

Thanks John, next question please.

Our next question comes from the line of Kevin Caliendo with UBS. Please proceed with your question.

Thank you. First question: you're talking about digital and analog worlds. If I think about Align a year from now, competitively not just with other manufacturers but against wires and brackets, is there a marketing pitch you can use that clear aligners are preferable because you can keep patients out of the office longer, reducing face-to-face contact? Could that be a positive for market share?

Prior to COVID-19, we had an ADAPT program to help doctors move to a high percentage of Invisalign usage. The productivity benefits of digital are that doctors don't have to see patients as often; visits can be spaced to seven or eight weeks. That becomes even more relevant when considering infection risk and concerns about COVID-19. It's not just a productivity play; it's a way to treat patients more safely for staff and patients. We'll emphasize this message as part of our marketing and doctor education efforts.

One quick follow-up: DSOs spiked. You mentioned offering payment terms and loans. Does that explain the nine-day increase in DSOs, and how should we think about the impact of improved payment terms for doctors on DSOs?

It varies by doctor. As they have working capital concerns, we help manage cash flow and payment timing, which impacts DSOs. Additionally, lower revenue impacts DSOs, causing them to increase. We're working closely with customers to help them weather the storm and be ready to ramp up with us as recovery occurs.

Great. Thanks. Stay safe everybody.

Operator, we'll take one more question, please.

Our final question comes from the line of Richard Newitter with SVB Leerink. Please proceed with your question.

Hi, guys. This is Jaime on for Rich this afternoon. Thanks for taking my questions. Just a housekeeping one. You said in the beginning of your prepared remarks the incremental impact from COVID-19 was about 50,000 fewer cases and about $85 million less revenue. I just wanted to make sure that's incremental to what you had originally contemplated in your Q1 guidance of about 20,000 to 25,000 case impact and $30 million to $35 million revenue impact?

That's correct, Jaime. Think of it as incremental to how we guided.

Got it. So the fair way to think about that in total would be about $115 million to $120 million of impact to revenue from the coronavirus in the first quarter?

That's correct.

Okay. And last one: any update on where you stand with launching the Palate Expander product?

Hi Jaime. We're still working on the Palate Expander. We have the design and are working on an effective manufacturing approach. I don't have a date to provide today, but it's high on our priority list.

Thank you.

We have reached the end of our question-and-answer session. I'd like to turn the call back over to Ms. Shirley Stacy for any closing remarks.

Well, thank you, everyone, for joining us. We look forward to speaking with you at upcoming virtual financial conferences in the future. If you have any questions, please contact Investor Relations, and hope you have a great day. Take care.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.