Align Technology Inc Q3 FY2021 Earnings Call

Greetings and welcome to Align Technology's Third Quarter 2021 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. Operator instructions. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Shirley Stacy, Vice President of Corporate Communications. Thank you, you may begin.

Good afternoon, and thank you for joining us. Joining me today for our conference call is Joseph Hogan, President and CEO, and John Morici, CFO. We issued third quarter 2021 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 1 month. A telephone replay will be available today by approximately 5:30 PM Eastern Time through 5:30 PM Eastern Time on November 10th. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13723267 followed by the necessary instructions. International callers should dial 201-612-7415 with the same conference number. As a reminder, the information provided and discussed today will include forward-looking statements, including statements that align future events and product outlook. These forward-looking statements are only predictions and involve risks and uncertainties described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission available on our website and sec.gov. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statements. We have posted historical financial statements, including the corresponding reconciliations of our GAAP and non-GAAP reconciliations if applicable. And our third quarter 2021 conference call slides are on our website under Quarterly Results. Please refer to these files for more detailed information. With that, I'd like to turn the call over to Align Technology's President and CEO, Joe Hogan. Joe.

Thanks, Shirley. Good afternoon and thanks for joining us. On our call today, I'll provide some highlights in the third quarter, then briefly discuss the performance of our two operating segments, Systems and Services, and Clear Aligners. John will provide more detail on our financial results and discuss our outlook. Following that, I'll come back and summarize a few key points and open the call to questions. I am pleased to report strong third quarter results with revenue growth of 38.4% year-over-year on top of a record third quarter last year, driven by the strength across all regions, customer channels, and products. For Q3 we shipped to a record 85,500 doctors in the quarter and reached 11.6 million Invisalign patients cumulatively. On a sequential basis, Q3 results reflect continued adoption of iTero scanners and increased utilization of Invisalign Clear Aligners in the Americas and APAC regions, as well as the growth in the teen segment, especially in the North America orthodontics channel. Our third quarter revenues reflect a growing confidence of doctors and patients with Invisalign treatment, iTero scanners, and Exocad software, as more doctors discover the benefits of digital treatment and transform their practices with the Align Digital Platform. For Q3, Systems and Services revenues were up 57.3% year-over-year, with strong revenue growth across all regions, and up 5% sequentially, primarily in North America. Q3 results reflect the continued adoption of iTero Element 5D Plus Series, our next-generation scanners and imaging system, which launched earlier this year and features innovative technology like Near Infrared technology we call NIRI, which aids in the detection and monitoring of interproximal caries lesions or cavities above the gingiva without harmful radiation. For Q3, Clear Aligner revenues were up 34.9% year-over-year, with strong revenue growth across all regions and across the portfolio, including comprehensive and non-comprehensive products, as well as Invisalign moderate and Invisalign Go. On a sequential basis, Q3 Clear Aligners revenues were down very slightly from record Q2 reflecting more pronounced summer seasonality than last year, especially in EMEA, where practices and patients appear to have taken extended holidays and where offices were impacted due to the resurgence of COVID-19 cases and restrictions especially in some markets in Asia-Pacific. In the teen segment, Q3 '21 Invisalign Clear Aligner volumes for teens were strong, up 13.8% sequentially and 26.6% year-over-year to a record 206,000 teens, representing approximately one-third of total cases shipped, with strong shipment growth from North American orthodontists and a record quarter for teens in APAC. Our third quarter revenues also include non-case revenue for clinical training and education, and doctor-prescribed retainer products. Retention is a critical part of creating and maintaining a beautiful new smile. Retainers prevent teeth from gradually shifting back to their initial positions after treatment ends. Studies show that without retention, even perfectly aligned teeth can gradually revert to their pre-treatment state. The dentition continues to change as patients age, often requiring limited treatment, also known as touch-up treatment, if not properly retained. Our retention products are designed to maintain teeth that have been aligned by Invisalign Aligners, braces, or other aligners. These retainer products can accommodate lingual bars, wires, also known as a permanent retainer, missing teeth that require an artificial tooth, and bite ramps, also known as turbos or blocks. While our retainer business continues to deliver solid revenue growth, our share of the retention market is significantly under-penetrated, even more so than in our share of the orthodontic case starts. We've been developing a robust retainer strategy, including a separate marketing team focused solely on driving adoption and increasing market share in the United States. Our objective is to build brand awareness for Vivera retainers, and drive engagement with doctors through clinical education and sales initiatives, while connecting consumers to doctors through demand creation programs and our concierge service. We've also recently implemented social media campaigns featuring the benefits of Vivera from the makers of Invisalign Clear Aligners. We believe that incremental investments will provide increased value for Invisalign practices, and drive growth consistent with our long-term financial model target. Additionally, we successfully rolled out a limited pilot program to selected Invisalign Providers in the United States and Canada that offers a monthly targeted subscription program to address the unmet patient demand for retention or touch-up cases. Our goal is to encourage experienced high-volume Invisalign practices, who regularly treat patients with our comprehensive products to offer premium retention or entry-level products for the long-term health of their patients and to grow their businesses. Practices in this pilot program can purchase a monthly subscription at a fixed price, based on their monthly needs for retention or limited treatment. The program allows doctors the flexibility to order both touch-up or retention Aligners within their subscription tier. The program is designed for a segment of experienced Invisalign doctors, who are regularly using our retainers or low stage Aligners. The positive feedback from our doctors has been encouraging. For example, the doctors at an unnamed location told us the program is very straightforward and easy to understand, and they've been hoping Align would do something like this. Doctor Jonathan Nicozisis at Princeton Orthodontics called the program a home run. He went on to predict it should replace the idea that doctors invest in 3D printing and the additional complications and expenses it requires, particularly because he believes his treatment outcomes are always better with Align. Q3 non-case revenues also included accessories and consumables such as aligner cases called Clam Shells, cleaning crystals, and other oral health products that are available on our e-commerce channels in the U.S. only, including the Invisalign accessories store, Walmart, and Amazon. In Q3, we announced an exclusive supply distribution agreement with Ultradent Products, Incorporated, a leading developer and manufacturer of high-tech dental materials, devices and instruments worldwide. The Invisalign Professional whitening program powered by OpEx essence is optimized for Invisalign aligners and Vivera Retainers and is available only through Invisalign trained doctors. Also in Q3, we launched the Invisalign whitening pen through e-commerce channels in the U.S. only. The whitening pen is an over-the-counter retail product for consumers seeking quick tooth whitening at a lower price and is not intended to be used with aligners. The whitening pen complements the other accessory products that Align already markets to consumers through its existing e-commerce channels and is a key addition to our consumable product portfolio.

Thanks, Joe. Now for our Q3 financial results. Total revenues for the third quarter were $1.016 billion, up 0.5% from the prior quarter and up 38.4% from the corresponding quarter a year ago. For Clear Aligners, Q3 revenues of $837.6 million were down 0.4% sequentially, and up 34.9% year-over-year, reflecting Invisalign volume growth across all geographies. In Q3, we shipped 655,100 Invisalign cases, a decrease of 1.6% sequentially, with an increase of 32.1% year-over-year. In addition, we shipped to a record 85,500 Invisalign doctors worldwide, of which approximately 7,200 were first-time customers. Q3 Clear Aligner revenues reflect strong growth across the Invisalign portfolio, led by comprehensive products. Q3 comprehensive volume increased 1.3% sequentially and 30.3% year-over-year. And Q3 non-comprehensive volume decreased 8.1% sequentially and increased 36.8% year-over-year. Q3 adult patients decreased 7.3% sequentially and increased 34.7% year-over-year. In Q3, teens or younger patients increased 13.8% sequentially and 26.6% year-over-year. Clear Aligner revenues were unfavorably impacted by foreign exchange of approximately $1.5 million or approximately 0.2 points sequentially. On a year-over-year basis, Clear Aligner revenues were favorably impacted by foreign exchange of approximately $16.1 million or approximately 2.6 points. For Q3, Invisalign comprehensive average selling prices increased sequentially and year-over-year. On a sequential basis, Invisalign comprehensive average selling prices reflect higher additional aligners. On a year-over-year basis, comprehensive average selling prices reflect favorable foreign exchange, partially offset by the increase in net revenue deferrals for new Invisalign cases versus additional aligner shipments. Q3 Invisalign non-comprehensive average selling prices increased sequentially and year-over-year. On a sequential basis, Invisalign non-comprehensive average selling prices reflect higher additional aligners, partially offset by higher discounts. On a year-over-year basis, Invisalign non-comprehensive average selling prices were favorably impacted by foreign exchange, higher additional aligners, and lower discounts. Clear Aligner deferred revenues on the balance sheet increased by $84 million or 9.3% sequentially, and $347.3 million or 53.9% year-over-year, and will be recognized as the additional Aligners are shipped. Our Systems and Services revenues for the third quarter were a record $178.3 million, up 5% sequentially and up 57.3% year-over-year. This marks the fifth quarter in a row of sequential revenue increase. The increase sequentially can be attributed to increased scanner shipments, and increased services revenues from our larger installed base. The increase year-over-year can be attributed to increased scanner shipments, increased service revenues from our larger installed base, as well as higher average selling prices from a favorable mix shift towards higher-price iTero 5D scanners and imaging systems. Our systems and services deferred revenue on the balance sheet was up $27.2 million or 17% sequentially, and up $100.1 million or 115.2% year-over-year, primarily due to the increase in scanner sales and deferral of services revenue, which we recognized ratably over the service period.

Now let's turn to the specifics around our third quarter results, starting with the Americas. With Americas, Q3 results reflected strong performance, including record revenues for Latin America, as well as summer seasonality for adult case starts in North America that primarily impacted general practitioner practices, and strong orthodontic performance, especially in the teen market, that included increased utilization from the orthodontic channel. Invisalign case volume was up 0.7% sequentially, and up 36.4% year-over-year, reflecting growth across the region, especially in Latin America. DSO utilization continued to be a strong growth driver as well, led by Heartland and Smile Docs. For our international business, Q3 Invisalign case volume was up 27% year-over-year on top of record growth in the same quarter last year. On a sequential basis, international shipments were down 4.3%, primarily as a result of greater seasonality in COVID-related shutdowns in APAC markets. For EMEA, Q3 Invisalign case volumes were up 49.6% year-over-year, with broad-based growth across all markets led by the U.K. and Iberia, along with continued growth in our expansion markets in Central and Eastern Europe and the Benelux. For Q3 year-over-year Invisalign volume in EMEA was driven by increased submissions from both orthodontics and GP practices and increased utilization primarily from orthodontists. On a sequential basis, EMEA was down 60.5% following a record Q2, primarily as a result of the extended seasonality we had anticipated, primarily from summer holidays and vacations across the region. For APAC, Q3 volumes were up 4.2% compared to a record Q3 last year in APAC. On a year-over-year basis, growth was uneven in the market as APAC, the first region to emerge from the depths of the COVID lockdown in 2020. Additionally, we saw COVID resurgences and lockdowns sporadically impact various APAC countries in Q3. On a sequential basis, Q3 Invisalign volumes were up 21.2%, reflecting growth across the region led by a record quarter in China, especially from teen cases, as well as strong growth in Japan and the A&G segment. In Q3, growth from both channels was strong with orthodontic growth driven by increased Invisalign utilization and general dental channel growth driven by increased Invisalign submissions. APAC teen shipments reached an all-time high in Q3. At the recent 10th China Finance Summit Awards, Align was recognized as the 2021 Most Innovative Enterprise for its advancements and outstanding contributions in the field of Digital Orthodontics. This award builds on our prior recognition of Align's leadership in the digital orthodontics industry and its efforts to promote the modernization of orthodontics. Our consumer marketing focuses on educating consumers about the Invisalign system, to drive demand to Invisalign doctors' offices, ultimately capitalizing on the massive market opportunity to transform 500 million smiles. In Q3, we expanded the next-generation of the "Invis Is" media campaign across EMEA, APAC, and Brazil to increase awareness with adult, mom, and teen consumers. Globally, we delivered 6.45 billion impressions, growing 42% year-over-year, resulting in a 70% year-over-year increase in unique visitors to our websites. In the U.S., we connected with teens on Snapchat, YouTube, and Twitch, with our "Invis is Not Your Parents Braces" campaigns. These campaigns continue to feature some of the largest teen influencers from our Invisalign SmileSquad, like Charlie D'Amelio, Marci Martin, Michael Leon Collins, and Devin Key. These influencers share their personal experience with Invisalign treatment, including why they chose Invisalign treatment to shape their smiles. As part of our focus on teens, with our Invisalign teens makers program, we hold a recognition event hosted by Marcel Martin with teens across the country to celebrate and recognize 100 teens across the country who drove positive change within their communities. To continue growing for our young adult businesses, we expanded the "Invis is a Powerful Thing" campaign, which highlights how powerful the smile transformation with Invisalign treatment can be for their self-confidence. In the U.S., we expanded our Invisalign Smile Squad to include young adult influencers such as Cody Rigsby, Lana Candor, and Emily Hampshire, who helped to deliver over 405 million impressions. Additionally, our influencer partnerships with TikTok creators helped increase traffic to our sites, with a 127% increase in click-through rates. In Brazil, we launched the "Invis is a Powerful Thing" campaign, and teamed up with a mega influencer to increase website traffic by 30%. In the EMEA region, we expanded into new media channels such as TikTok and Snapchat across the U.K., Germany, and France to drive engagement. These efforts led to more than a 153% increase in unique visitors. We also started consumer advertising in Russia, which resulted in more than a 1000% increase in unique visitors to our website. In Q3, we continued to expand our consumer advertising across the APAC region, experiencing a 132% increase in unique visitors to our websites. In Australia, we expanded our media mix to include partners such as TikTok and Snapchat, which resulted in 250% growth year-over-year in unique visitors to our website. In Japan, we continue to see a strong response from consumers to our campaigns, resulting in more than an 800% increase year-over-year in unique visitors to our website. Adoption of our consumer patient app, My Invisalign, continued to increase in Q3 with 1.2 million downloads to date. Usage of our digital tools also continued to increase. For example, our Invisalign virtual appointment tool was used over 15,000 times and our insurance verification feature was used 14,000 times in Q3. Furthermore, we received more than 1.5 million patient photos in our Virtual Care feature to date globally, which continues to provide us with rich data to leverage our AI capabilities and improve our services for doctors used to enhance their patients' care.

For our systems and services business, Q3 revenues grew 57.3% year-over-year, reflecting strong scanner shipments and services, and were up 5% sequentially. This is the fifth consecutive quarter of sequential revenue growth for our systems and services business. The iTero Element 5D Plus Imaging system continued gaining traction across all regions, with the most recent launch in Japan in Q3. The iTero Element 5D Plus Imaging System will be available in China in Q4 of this year. Additionally, the iTero Element Plus Series was launched in Korea in Q3. The series expands the portfolio of iTero Element Scanners and Imaging Systems to include new solutions that serve the needs of a broader range of doctors and patients in the dental market. Moreover, I'm proud to say that in a recent clinical study, the iTero Element 5D Intraoral Scanner was found to be more sensitive than bitewing radiology in detecting early enamel lesions, providing further evidence of the benefits of the iTero 5D Scanner in detection and monitoring of interproximal caries lesions or cavities above the gingiva, without exposing patients to harmful ionizing radiation. This is great news for our iTero business, as the study further supports the diagnostic ability of Near-Infrared imaging technology offered by the iTero 5D Scanner for early proximal caries detection. The findings also underscore the valuable role that NIRI technology can have in dental health assessment and early detection of cavities, which is important for overall oral healthcare treatment options and a comfortable, safe experience for a broad population of patients.

A strong indicator of the digital acceleration within dental offices is the number of intraoral digital scans used for Invisalign case submissions. Total worldwide intraoral digital scans used to start an Invisalign case in Q3 increased 84.2% from 78.3% in Q3 last year. International intraoral digital scanners for Invisalign case submissions increased 79.3%, up from 72.1% in the same last year. For the Americas, 88% of cases were submitted using an intraoral digital scan compared to 83.2% a year ago. Cumulatively, over 44.9 million orthodontic scans and 9.3 million restorative scans have been performed with iTero scanners. Our Q3 systems and services revenues also include Exocad CAD CAM products and services. Exocad's expertise in restorative dentistry, implantology, guidance surgery, and smile design extends our digital dental solutions and broadens Align's digital platform towards fully integrated interdisciplinary workflows. We remained excited about our continued integration progress and product plans with Exocad. During the quarter, Exocad launched chair-side CAD 3.0 Galloway, the next generation of Exocad, easy-to-use CAD software for single-visit dentistry. The software has improved automation for fast crown design enabling users to integrate open hardware and materials of choice. Exocad chair-side CAD received the 2021 Seller Best-of-Class Technology award for the third consecutive year. Also during the quarter, Exocad had its largest ever presence at IDS, the International Dental Show, where they showcased their seamless digital workflows and the simplicity of the use of Exocad Galway software release. Exocad was the only company at IDS to showcase live patient treatment with a smile creator experience station, featuring iTero scans, instant smile makeovers, and production of clip-on smiles.

With that, I will now turn it over to John. Thanks, Joe. Now for our Q3 financial results. Total revenues for the third quarter were $1.016 billion, up 0.5% from the prior quarter and up 38.4% from the corresponding quarter a year ago. For Clear Aligners, Q3 revenues of $837.6 million were down 0.4% sequentially, and up 34.9% year-over-year, reflecting Invisalign volume growth across all geographies.

Summary, Q3 was a strong quarter and we're pleased with our performance across the business. Align is uniquely positioned. We have a clinical capability and product portfolio supported by doctor and patient workflows only accessible through the proprietary Align Digital Platform, to address the broadest range of orthodontic cases with the Invisalign system through a network of trained Invisalign doctors who have the expertise to reach more than the 500 million potential global patients. As we develop our annual plan for 2022 over the next few months, it's important that we continue to expand our commercial manufacturing, R&D clinical treatment planning and manufacturing operations, and continue to leverage our global quality and regulatory muscles in existing and emerging markets. Which millions of consumers who want to transform their smile with the most advanced Clear Aligner systems in the world. Through advertising, PR, digital, social media, and influencer marketing to drive demand and conversion through Invisalign trained doctors. Increased ortho adoption and teen utilization of Invisalign treatment, and train and educate GP dentists on how the iTero Element family of intraoral scanners and imaging systems propel today's dental practice into the future by enhancing patient experience and elevating clinical precision, and in the benefits of digital dentistry with the Invisalign system, trusted by more than 11 million people worldwide to improve their smiles. Remain focused on strategic execution, accountability, agility, customer service excellence, and continuing to make investments to grow our business. This is a multi-variable equation that we continue to talk about, and that in combination we remain uniquely able to offer.

Thank you, Operator. And thank you everyone for joining us today. This concludes our conference call. We look forward to speaking to you again on Friday at the Align 2021 Investor Day, in conjunction with our GP Growth Summit here in Las Vegas. If you have any future questions, please contact Investor Relations. And thank you for your time and have a great day.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.