Greetings. Welcome to the Align First Quarter 2024 Earnings Call. Please note that this conference is being recorded.

Good afternoon, and thank you for joining us. I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO; and John Morici, CFO. We issued first quarter 2024 financial results today via Business Wire, 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. As a reminder, the information provided and discussed 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 described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission available on our website at sec.gov. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statement. We have posted historical financial statements with corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our first quarter 2024 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.

Thanks, Shirley. Good afternoon, and thanks for joining us on our call today. I'll provide an overview of our first quarter results and discuss a few highlights from our two operating segments, System Services and Clear Aligners. John will provide more detail on our Q1 financial performance and comment on our views for the second quarter and 2024 in total. Following that, I'll come back and summarize a few key points and open the call to questions. I'm pleased to report better-than-expected revenue and earnings for the first quarter and a solid start to the year. For Q1, total worldwide revenues were up 5.8% year-over-year, reflecting 3.5% growth from our Clear Aligner segment and 17.5% growth from Systems and Services. On a year-over-year basis, Q1 revenue growth was up across all regions and was driven by strong Clear Aligner volumes, primarily in the Asia Pacific region. Year-over-year growth also reflects strength in the orthodontic channel with total Invisalign case starts from teens and younger patients up 5.8% year-over-year, driven by continued momentum across all regions from Invisalign First, as well as Invisalign DSP touch-up cases. On a sequential basis, Q1 total revenues were up 4.3%, reflecting a sequential increase in Clear Aligner revenues, especially for North American orthodontists, as well as strong Systems and Services revenues, primarily driven by iTero Lumina wand upgrades in North America. During the quarter, we achieved several significant milestones. We completed the acquisition of Cubicure, a leader in direct 3D printing solutions, which is the foundation for our next generational aligner manufacturing. We successfully launched the iTero Lumina intraoral scanner, our next generation of digital scanning technology. We launched the Invisalign Palatal Expander or IPE system in the U.S. and Canada and received regulatory approval for the Invisalign Palatal Expander in Australia and New Zealand. Q1 Systems and Services revenue year-over-year growth reflects nonsystems revenues driven by iTero Lumina wand upgrades and higher scanner volumes and increased services revenue from a larger base of scanners sold. On a sequential basis, Q1 Systems and Services revenue were up 3.1%, reflecting growth from nonsystems revenues and higher scanner ASPs, partially offset by lower volumes due to seasonality from a strong fourth quarter. The iTero Lumina intraoral scanner is available now with orthodontic workflows as a new standalone scanner or as a wand upgrade to iTero Element 5D Plus. The restorative workflow is expected to be available in the fourth quarter of 2024. In the meantime, GP practices can benefit from the iTero Lumina's new multi-direct capture technology that replaces the confocal imaging technology in earlier models. The iTero Lumina intraoral scanner has a three times wider field of capture and is 50% smaller and 45% lighter, delivering faster scanning speed, higher accuracy, superb visualization, and a more comfortable scanning experience. Overall, we're really pleased with the launch of the iTero Lumina scanner. Customer feedback has been positive, and we're really excited about the feedback from doctors. So we've included some great verbatims in our webcast slides. Q1 total Clear Aligner revenues were up year-over-year, reflecting revenue growth across the regions from strong year-over-year volume growth across APAC markets, as well as the EMEA region. For the Americas region, Q1 Clear Aligner volume was consistent with the prior year. For Q1, total Clear Aligner shipments were up 2.1% sequentially, reflecting seasonality with increased volumes in the Americas regions, offset somewhat by EMEA and APAC regions. For Q1, Clear Aligner shipments include over 23,000 Invisalign Doctor subscription cases or DSP touch-up cases, primarily from the North America ortho channel, an increase of approximately 49% year-over-year from Q1 '23. The DSP touch-up cases are a component of the overall DSP program which consists of retainers and touch-up cases or aligners, and it continues to be an important offering for our customers and their patients. DSP is currently available in the United States, Canada, Iberia, Nordics, the U.K., and most recently, in Italy, France, and Poland. We expect to continue expanding DSP into other country markets and EMEA in Q2, including a 14-stage touch-up aligner offering. For non-case revenues, Q1 was up 7.5% year-over-year, primarily due to continued growth from Vivera Retainers along with Invisalign DSP retainer revenues. In the teen market, nearly 200,000 teens and younger patients started treatment with Invisalign Clear Aligners in Q1, up 5.8% year-over-year. This represents a record number of teen cases shipped compared to prior quarters, reflecting strength in APAC and EMEA. Teen starts were up sequentially 1.2%, reflecting strength in EMEA and North America, offset by seasonally fewer teen starts in China. While the teen market tends to be less susceptible to consumer demand around discretionary spending and more resilient than adult orthodontic case starts, we're pleased that in Q1, our Clear Aligner volumes for both adults and teens were up sequentially and year-over-year. We believe the Invisalign Palatal Expander system is one of the most exciting innovations we've developed in our 27-year history and is a better option for expanding a growing patient's narrow palate. Initial responses from doctors and patients for the Invisalign Palatal Expander system are positive. The Invisalign Palatal Expander system is not a traditional Invisalign aligner. It's a series of direct 3D-printed orthodontic appliances based on proprietary and patented technology that has four systems designed for skeletal expansion. Clinical data shows that the Invisalign Palatal Expander system is safe, effective, and proven to deliver skeletal expansion. Specifically, our clinical data is based on 49 patients across the United States and Canada between the ages of 6.9 and 11, with a mean age of 8.8 years. In this group, the mean expansion of 6 millimeters was achieved with minimal tipping, with ranges between 3.4 and 10.7 millimeters as measured using the change in the inter-modal width between the initial and post-expansion scans, with a mean expansion efficacy of 97%. In addition, we found that survey doctors agree the Invisalign Palatal Expander is less painful than traditional expanders and facilitates better oral hygiene compared to traditional metal expanders. Phase I or early interceptive treatment includes both skeletal, orthopedic, and dental orthodontic arch expansion and makes up to 20% of the orthodontic case starts each year. Combined with Invisalign First aligner treatment, Invisalign Palatal Expanders provide doctors with a full early interceptive treatment solution that allows doctors to treat all Phase I patients. We expect the Invisalign Palatal Expander to be available in other markets pending future applicable regulatory approvals. Today, Invisalign is the most recognized orthodontic brand globally, and Invisalign Clear Aligner treatment is faster and more effective than traditional metal braces. Yet the underlying market opportunity remains huge and untapped. We continue to invest in consumer marketing and demand creation initiatives to raise awareness and drive potential patients to Invisalign practices globally. In Q1 '24, we delivered 14.5 billion impressions and had 43 million visits to our websites globally. To increase awareness and educate young adults, parents, and teens about the benefits of the Invisalign brand, we continue to invest and create campaigns in top media platforms such as TikTok, Instagram, YouTube, Snapchat, and WeChat across markets, reaching young adults as well as teens and their parents. Our teen Invisalign is Drama Free campaign was recently recognized by the Association of National Advertisers with a silver award in the REGGIE Awards for creative and strategic excellence. In the U.S., in addition to our ongoing influencer campaigns, we partner with athletes such as Maxx Crosby, TikTok Gen Z influencer Overtime Meg and the famous fashion designer, Kristin Juszczyk to create a compelling brand activation at the Super Bowl. Our campaigns delivered more than 6.1 billion impressions and 18.1 million unique visitors to our consumer websites across the Americas. In the EMEA region, we partner with influencers to reach consumers across social media platforms, including TikTok and Meta, and launched our global consumer campaigns for teens and parents. Our campaigns delivered more than 1.6 billion media impressions and 8.9 million visitors to our website. We continue to invest in consumer advertising across the APAC region, resulting in more than 6.6 billion impressions and 16 million visitors to our websites, a 195% increase year-over-year. We expanded our reach in Japan and India via Meta and YouTube and partnered with key influencers to reach consumers across social media. We saw increased brand interest from consumers as evidenced by a 285% year-over-year increase in unique visitors to our website in India and a 129% increase in Japan. Finally, digital tools such as My Invisalign consumer and patient app continue to increase with 4 million downloads to date and over 381,000 monthly active users, a 15% year-over-year growth rate. Q1 '24 Clear Aligner volume from DSO customers increased sequentially, reflecting growth in the Americas and EMEA regions and increased year-over-year reflecting growth across international regions. Dental service organizations, or DSOs, represent a large and growing opportunity to help drive adoption of digital technology across the dental industry. We have established relationships with many DSOs globally, that recognize the benefits of digital workflows enabled by our portfolio of products and services that make up the Align digital platform, including increased practice efficiency and profitability, as well as delivering a better patient experience from shorter cycle times and proximity to their customers. Smile Docs and Heartland Dental are some of the largest DSO partners and are continuously exploring collaboration with DSOs that can further adoption of digital dentistry. Each DSO has a different strategy and business model, and our focus is on working with the encouraging DSOs aligned with our vision, strategy, and business model goals. Today, we announced an additional $75 million equity increase in Heartland, following the previous $75 million equity investment a year ago. Heartland is a multidisciplinary DSO with GP and ortho practices across the United States. Their growth strategy includes Heartland's de novo dental practices, which feature modern technology, located in areas with a strong community need for dentistry where Heartland provides practices with opportunities for mentorship, leadership training, and continuing education. In the last four years, Heartland opened 240 state-of-the-art de novo practices across the U.S. and are planning to continue investing through more de novo openings. We have a shared sense of purpose with Heartland. Their mission is to help doctors and their teams deliver the highest quality digital dental care to the communities they serve.

Thanks, Joe. Now for our Q1 financial results. Total revenues for the first quarter were $997.4 million, up 4.3% from the prior quarter and up 5.8% from the corresponding quarter a year ago. On a constant currency basis, Q1 '24 revenues were impacted by favorable foreign exchange of approximately $10 million or approximately 1% sequentially and were unfavorably impacted by approximately $4.8 million year-over-year or approximately 0.5%. For Clear Aligners, Q1 revenues of $817.3 million were up 4.5% sequentially, primarily from higher ASPs and higher volumes. On a year-over-year basis, Q1 Clear Aligner revenues were up 3.5%, primarily due to higher volumes and ASPs and increased non-case revenues. For Q1, Invisalign ASPs for comprehensive treatment were up sequentially and up year-over-year. On a sequential basis, ASPs primarily reflect higher additional aligners and price increases, and the variable impact of foreign exchange partially offset by a product mix shift to lower ASP products. On a year-over-year basis, the increase in comprehensive ASPs primarily reflects higher additional aligners, price increases, partially offset by a product mix shift to lower ASP products and higher discounts and the unfavorable impact from foreign exchange. For Q1, Invisalign ASPs for non-comprehensive treatment were down sequentially and year-over-year. On a sequential basis, the decline in ASPs reflects unfavorable country mix shift and higher discounts, partially offset by the favorable impact from foreign exchange. On a year-over-year basis, the decrease in non-comprehensive ASPs reflects the product mix shift to lower ASP products, unfavorable country mix shift, and higher discounts, partially offset by lower net revenue deferrals. As a reminder, we announced about a 5% global price increase for some Invisalign products across most markets effective January 1, 2024. This price increase did not include Invisalign Comprehensive Three and Three products. We are pleased with the continued adoption of the Invisalign Comprehensive Three and Three product and anticipate it will continue increasing, providing doctors the flexibility they want and allowing us to recognize more revenue upfront with deferred revenue being recognized over a shorter period of time compared to our traditional Invisalign Comprehensive product. Q1 '24 Clear Aligner revenues were impacted by a favorable foreign exchange of approximately $8.4 million or approximately 1% sequentially. On a year-over-year basis, Clear Aligner revenues were unfavorably impacted by foreign exchange of approximately $3.9 million or approximately 0.5%. Clear Aligner deferred revenues on the balance sheet decreased $26.7 million or 2% sequentially and increased $15.8 million or 1.2% year-over-year and will be recognized as the additional aligners are shipped. Q1 '24 Systems and Services revenue of $180.2 million were up 3.1% sequentially, primarily due to increased nonsystems revenues, mostly related to upgrades and higher ASPs, partially offset by lower volumes. Q1 '24 Systems and Services revenue were up 17.5% year-over-year primarily due to increased nonsystems revenues, mostly related to upgrades, higher scanner volumes, and higher services revenues from our larger base of scanners sold. CAD/CAM and Services revenue for Q1 represents approximately 51% of our Systems and Services business. In the first quarter of 2024, our Systems and Services revenues were positively affected by foreign exchange adjustments amounting to about $1.5 million, or roughly 0.9% sequentially. However, on a year-over-year basis, these revenues experienced a negative impact of around $0.9 million, equating to approximately 0.5%. The deferred revenues for Systems and Services on our balance sheet declined by $14.3 million, or 5.5% sequentially, and decreased by $25.3 million, or 9.4% year-over-year. This decrease is largely attributed to the recognition of service revenues, which are accounted for over the service period. The drop in deferred revenues, both sequentially and year-over-year, reflects the shorter duration of service contracts accompanying initial scanner purchases. As our scanner portfolio grows and we roll out new products, we are creating more opportunities for customers to upgrade and trade in their equipment, alongside various leasing and rental options for scanners. Expanding new capital equipment opportunities to address the digital transformation needs of our customers and our distribution partners aligns with the natural evolution of our equipment business, given the substantial and expanding base of scanners sold. We are excited to utilize our technological advancements and operational efficiencies to offer diverse go-to-market models, such as rental and leasing options, tailored to how our customers prefer to purchase. Moving on to gross margin. First quarter overall gross margin was 70%, approximately flat sequentially and year-over-year. Overall gross margin was favorably impacted by foreign exchange by approximately 0.3 points sequentially and unfavorably impacted by approximately 0.1 points on a year-over-year basis. Clear Aligner gross margin for the first quarter was 70.9%, down 0.3 points sequentially due to higher manufacturing spend, partially offset by higher ASP. Clear Aligner gross margin for the first quarter was down 0.8 points year-over-year, primarily due to higher manufacturing spend, partially offset by favorable ASP. Systems and Services gross margin for the first quarter was 65.9%, up 1.1 points sequentially due to higher ASP partially offset by manufacturing variances. Systems and Services gross margin for the first quarter was up 4.3 points year-over-year, primarily due to higher ASP, lower service, and manufacturing costs. Q1 operating expenses were $543.7 million, up 9.2% sequentially and 3.1% year-over-year. On a sequential basis, operating expenses were up by $45.7 million from higher incentive compensation and consumer marketing spend, partially offset by restructuring and other charges not recurring in Q1. Year-over-year, operating expenses increased by $16.5 million, primarily due to our continued investments in sales and R&D activities and higher incentive compensation. On a non-GAAP basis, excluding stock-based compensation, amortization of acquired intangibles related to certain acquisitions and restructuring and other charges, operating expenses were $506.1 million, up 13.3% sequentially and up 3.2% year-over-year. Our first quarter operating income of $154.1 million resulted in an operating margin of 15.5% down 2.5 points sequentially and up 1.3 points year-over-year. The sequential decrease in operating margin is primarily attributed to investments in our go-to-market teams and higher incentive compensation. The year-over-year increase in operating margin is primarily attributed to operating leverage and proactively managing our costs, partially offset by unfavorable impact from foreign exchange of approximately 0.7 points. On a non-GAAP basis, which excludes stock-based compensation, amortization of intangibles related to certain acquisitions and restructuring and other charges, the operating margin for the first quarter was 19.8%, down 4 points sequentially and up 1.3 points year-over-year. Interest and other income expense net for the first quarter was an income of $4.3 million, compared to an income of $1.3 million in Q4 of '23 and an income of $1.1 million in Q1 of '23, primarily driven by a gain on our equity investments and net interest income and offset by unfavorable foreign exchange. The GAAP effective tax rate in the first quarter was 33.7% compared to 28.3% in the fourth quarter and 34.8% in the first quarter of the prior year. The first quarter GAAP effective tax rate was higher than the fourth quarter effective tax rate, primarily due to discrete tax benefits recognized in Q4 of '23, partially offset by increased earnings in low tax jurisdictions in Q1 of '24. Our non-GAAP effective tax rate in the first quarter was 20%, which reflects our long-term projected tax rate. First quarter net income per diluted share was $1.39, down sequentially $0.24 and up $0.26, compared to the prior year. Our EPS was not impacted on a sequential basis from foreign exchange. Our EPS was unfavorably impacted by $0.09 on a year-over-year basis due to foreign exchange. On a non-GAAP basis, net income per diluted share was $2.14 for the first quarter, down $0.28 sequentially and up $0.32 year-over-year. Moving on to the balance sheet. As of March 31, 2024, cash, cash equivalents, and short-term and long-term marketable securities were $902.5 million, down sequentially $78.2 million and down $18.9 million year-over-year. Of our $902.5 million balance, $217.5 million was held in the U.S. and $685 million was held by our international entities. In January 2024, we received approximately 37,000 shares of our common stock upon final settlement of the $250 million accelerated share repurchase from Q4 of '23. In total, we repurchased approximately 1.1 million shares at an average price per share of $230.13 under the Q4 ASR contract. We have $650 million available for the repurchase of our common stock under our January 2023 repurchase program. During Q2 '24, we expect to repurchase up to $150 million of our common stock through either a combination of open market repurchase or an accelerated stock repurchase agreement. Q1 accounts receivable balance was $950.7 million, up sequentially. Our overall days sales outstanding were 86 days, up approximately 1 day sequentially and up approximately 3 days as compared to Q1 last year. Cash flow from operations for the first quarter was $28.7 million. Capital expenditures for the first quarter were $9.4 million, primarily related to our continued investments to increase aligner manufacturing capacity and facilities. Free cash flow, defined as cash flow from operations less capital expenditures, amounted to $19.3 million. We're continuing to use our healthy balance sheet to drive growth and profitability. During the quarter, we continued to make disciplined investments in our strategic growth drivers. We completed the acquisition of Cubicure, which will enable us to scale our 3D printing operations to eventually direct print millions of custom appliances per day, and we exited the quarter with a healthy cash flow position and no long-term debt, maintaining a strong position to support our additional $75 million investment in our DSO partner Heartland Dental and our $150 million stock buyback. Now turning to our outlook. Assuming no circumstances occur beyond our control, we provide the following framework for Q2 and fiscal 2024. For Q2 '24, we provide the following business outlook. For Q2 '24, we expect worldwide revenues to be in the range of $1.030 billion to $1.050 billion. We expect Clear Aligner volume to be up sequentially and Clear Aligner ASP to be down slightly sequentially, primarily as a result of unfavorable foreign exchange. We expect Systems and Services revenue to be up sequentially as we continue to ramp iTero Lumina in Q2 2024. We expect Q2 '24 GAAP operating margin and non-GAAP operating margin to be slightly above Q1 '24 GAAP and non-GAAP operating margins, respectively. For fiscal 2024, we provide the following business outlook. We expect total revenue for fiscal 2024 to increase by 6% to 8% compared to 2023, which is an improvement from our previous forecast of mid-single-digit growth. This revised revenue outlook reflects our first-quarter results, second-quarter expectations, and ongoing execution of our growth strategies. We anticipate that the additional revenue in our 2024 outlook will be approximately evenly distributed between our two operating segments. We expect the average selling prices for Clear Aligners in fiscal 2024 to be slightly higher year-over-year. Additionally, we foresee our GAAP and non-GAAP operating margins for fiscal 2024 to be slightly above the margins for 2023. Our capital investments for fiscal 2024 are projected to be around $100 million, primarily focused on building construction, improvements, and manufacturing capacity to support our continued expansion.

Thanks, John. In summary, Q1 was a good start for the year. While I'm pleased with our results, I'm even more excited about Align's innovation in 2024 on our next wave of growth drivers that we believe will continue to revolutionize the orthodontic and dental industry in scanning software and direct 3D printing. Our focused execution of our product roadmap and innovation pipeline has resulted in the largest introduction of new products and technologies in our history, further advancing our software scanning and 3D printing capabilities. We're excited about the potential for these strategic investments to enable a new phase of growth to transform the orthodontic industry again. The iTero Lumina intraoral scanner has the potential to set a new standard of care for dental practices by simplifying the scanning of complex oral regions while offering superior chairside visualization and a more comfortable experience for patients, especially kids. The Invisalign Palatal Expander increases the clinical applicability of the Invisalign system to nearly 100% of orthodontic case starts. It is a revolutionary removable 3D-printed appliance that is clinically proven to be safe and effective. It is less painful than traditional metal expanders and promotes better oral hygiene. Our recent acquisition of Cubicure, a pioneer of 3D printing solutions for polymer additive manufacturing, brings a talented team and unique cutting-edge technology into Align to help us scale our 3D printing operations, providing ultimate design freedom and highly customized outcomes from a customer and patient standpoint, as well as operational benefits to the business. We see incredible opportunities in this business and continue to make the Invisalign system the standard of care in orthodontics. By continually innovating and developing digital technologies and services that enable more doctors to easily diagnose and treat patients with crooked teeth and help them retain their healthy beautiful smiles, we're increasing access to care for millions of people, who might not otherwise receive orthodontic treatment. With that, I thank you for your time today. We look forward to sharing our continued progress in leading the digital transformation of the orthodontic and restorative dental industry. I'll now turn the call over to the operator for your questions.

Our first question comes from Elizabeth Anderson with Evercore ISI.

I was wondering if you could talk about how you're seeing the overall demand environment? I guess, I'm particularly curious about the U.S., sort of how you're seeing it from like a consumer demand perspective, especially and any comments you could make on the SmileDirect impact on volumes in the quarter? And then secondarily, if you could comment a little bit more on the broader demand environment in China, that would be super helpful.

Elizabeth, I'll begin and let John chime in if needed. First, we currently view the business as stable. The conditions we mentioned after the fourth quarter remain consistent, and we observe this stability across the globe. Our recent communications show positive indicators from both adults and teens, contributing to the stability we've noted. Looking globally, this stability is evident in Asia, various parts of Europe, and the United States and Americas as well. We find it challenging to highlight any specific region that is significantly decreasing or increasing; overall, they seem to be moving in a similar pattern during the first quarter. John, do you have anything to add?

No, I agree. We're driving the growth strategies. As we've stated, we've observed stability in the environment and we're executing accordingly.

And Elizabeth, last thing on your SmileDirectClub comment, them not being advertising like they were before or whatever, we can't attribute any part of the demand equation up or down as part of that. And obviously, that was more pronounced in the United States than it was anywhere else in the world, but I can't attribute any change in the marketplace because of them not advertising at this point in time.

Our next question comes from Brandon Vazquez with William Blair.

I wanted to focus for a second on the teen side, you have the Palatal Expander out there now getting great reviews, and it seems like it closes, if I'm understanding the numbers correctly, maybe 20% of that market that you haven't been able to hit before. This is such a big opportunity. I'm curious if you can just reflect on like how does commercialization within teens look in the next couple of years now that you have kind of a broader and more fuller portfolio here compared to the prior couple of years? And what does that mean for growth rates within that teen section and adoption within teens that are underpenetrated relative to teens as we look forward the next couple of years?

That's a good question, Ben. As we mentioned, it's 20%. We consider the young students before their teen years as tweens. With Invisalign First and now with IPE, we can address the 20% in Phase I. Some tweens only need dental expansion, while others require more extensive procedures to widen the palate. We believe that IPE and Invisalign First are unique products tailored for this demographic. We think this might make doctors who were previously hesitant about Phase I treatments more comfortable, as the approach now has a significantly lesser impact on patients compared to using traditional wires and brackets or high-risk expanders. However, like any innovation in the orthodontic field, it will take time to be accepted. The good news is that IPE has a relatively short treatment time, around 30 to 35 days, which allows for effective feedback. Currently, we are approved in the United States, Canada, and recently in Australia and New Zealand. Our expansion is somewhat limited by global regulatory processes, but we anticipate providing more details about this brand as we progress. As I mentioned earlier, we are genuinely excited about this technology. Additionally, the new Lumina scanner has a wide scanning capability that effectively captures the palate needed for Invisalign First. These technologies integrate very well, and we look forward to sharing more updates soon.

Next question comes from Jon Block with Stifel.

Hoping to ask two, maybe just the first one, throughout the quarter, there was sort of like an obsession or a big focus from investors on month-to-month trends. There was talk about February strength, March weakness. I don't think if anyone really knew if it was the consumer or the calendar or both. So maybe you guys can talk a little bit about how it played out for you guys, elaborate on February and March? And as much as you can, just touch on April here for the first 2 to 3 weeks. And then I'll ask my follow-up.

Yes, Jon, this is John. As we discuss the quarter, we are very pleased with our Q1 results. We saw stability, as Joe mentioned, which continued from the end of the previous year into the quarter. It was more about overall stability than month-to-month fluctuations. We successfully executed our strategies throughout the quarter with our products.

Okay. I'll switch topics now. John, I'll stay with you. I think the wording is slightly above the 2023 operational margin, which remains at 21.4%. Even with the increased revenues, the midpoint has moved from about 5% to 7%. Can you explain where that additional spending is directed? Will we see returns from that this year, or will it provide some advantages heading into 2025? Additionally, the new higher guidance suggests a 6% year-over-year growth in the latter part of this year, which is quite similar to the first half, but the comparisons will become tougher. Therefore, we need to see an acceleration in the numbers. What gives us confidence in that? Is it simply the increasing contributions from new products like Lumina and IPE?

I think that latter point is how I would look at it, Jon. We're making investments. We make investments throughout the year. We get the shorter longer-term investments that we make different returns on whether they're short or long-term. But what we see is a stable environment, continued investments in go-to-market activities, we have new products coming. So that helps us accelerate with things that we'll have on the iTero side, as well as IPE and others that Joe talked about, where we really get the approval later in the year. So it's about a stable environment, making investments into that environment and then executing on our growth strategies, and that should give us the benefits that you described in the second half.

Our next question comes from Jeff Johnson with Baird.

John, maybe following up on Jon's question there and just a little finer point on the guidance itself. You've taken that guidance from mid-single digits to 6 to 8 scanner and CAD/CAM services came in obviously strongly in the double digits, upper teens. Should we think about kind of that double digits, maybe not in the upper teens, but double digits is kind of where the scanner and services continue this year? And your Clear Aligner revenue guidance kind of still in the mid-single digits. I think last quarter, we were talking about both those segments being mid-single-digit growers. It seems like to me now, maybe the raise here is being driven more by the scanner and CAD/CAM services. And as Joe calls the market stable, then maybe the Clear Aligner revenue still kind of expected to be in that mid-ish single digits. Is that a fair kind of way to look at guidance?

That's a fair way to look at it, Jeff. I mean, you would see, given the new products that we have with Lumina and iTero, we'll see a little bit faster growth. We're very pleased with what we saw in the first quarter. Typically in the first quarter, you don't have a sequential gain in revenue from the fourth quarter being an equipment business. So we're very pleased with what we saw there. But then we also look at the Clear Aligner business, and we expect to be able to grow and continue to grow there, both in terms of the investments that we're making in a relatively stable environment and some of the new products that should help supplement that growth.

Yes, that's helpful. I have another follow-up question. I believe this has been asked before, possibly during an Analyst Day, but I don’t remember if a clear answer was provided. It's something I've been asked frequently lately, specifically about the percentage of your patient base in orthodontic cases that receive financing through third-party patient financing companies. We've noticed that in areas like full arch implants and certain aesthetic procedures outside of dental, lending standards have tightened, with FICO scores now needing to be between 500 and 700 to qualify for financing, particularly in this environment of higher capital costs. Can you share what percentage of cases get financed? Also, have the lending standards changed recently, putting additional pressure on patients?

What we see varies by country. In the U.S., about one-third of the cases we encounter involve some form of external financing. Many patients or parents pay in advance, which is beneficial for doctors. A lot of doctors, particularly in orthopedics, offer some type of internal financing where payments are made over time. This practice continues, especially in challenging market conditions. We are implementing measures to assist doctors by providing more flexible payment options, which they can extend to their patients. Additionally, we collaborate with DSO partners to help them work with external financing companies to secure better rates, making it easier for patients to undergo treatment. We fully understand the situation and know that we can offer support. Our financial resources allow us to assist our customers, and this is an ongoing focus for us. Yes, Jeff, in terms of any change to note over just the past few months even in those lending standards getting tougher? Or do you feel like that's stable as well as just kind of the overall environment as you've described that way? I look at that as more stable. I think there was a lot of things. If you go back to last year, people were really getting a bit of sticker shock in terms of the higher interest rates when they came to try to go into treatment. I think people are past that. I think when I see this or what I hear from doctors or see from our customers that it's a little bit more stable. There's not a big change.

Our next question comes from Michael Cherny with Leerink Partners.

Can you hear me okay?

Yes, we can hear you fine.

Okay. So just relative to the spend, I want to dive in a little bit more, if possible. You talked about the investment growth. Can you delineate relative to that investment, how you're thinking about the growth into, call it, your core markets or some of the new product launches? And especially with regards to the ramp on the printing side, how much incremental printing spend, so to speak, is coming now versus where you think it's going to grow, what the run rate should be on ramping that over time?

Yes. I think we have a core business that we're running. And obviously, there's a certain amount of investment that you have to be able to grow around sales, sales, and marketing and the go-to-market activities that we have. There's also R&D spending that we've had throughout the time. And now, as that R&D in the case of acquiring Cubicure and now turning this into more of a platform to be able to build our 3D printing. There's a certain amount of spend that we have. How that lays out, it varies over time that we'll have. But rest assured, we know how to scale products. We know how to scale 3D printing. We'll make the right investments to be able to start scaling up that direct fab printing while making sure that the core business has the right investments for growth, and we'll balance that as we go forward.

Our next question comes from Jason Bednar with Piper Sandler.

First I want to build on some of the macro questions that have been asked. I don't want to belabor the point, but other consumer discretionary companies called out a downtick in March. It doesn't sound like you saw any of that, but just wanted to confirm that's the case with respect to Invisalign demand. And maybe speak to your confidence to drive Clear Aligner volumes going forward, now that comps turn a little bit tougher. How much do you think you might need to fund that growth with investments to drive more traffic into the office?

Jason, on the first part, we talk about the stable environment that we've seen. That stability of it. We read and I read, what's going on there with the consumer investment, some concerns, particularly in the luxury goods or what's going on out there. But honestly, I think often what we see and analysts who follow us here just really pick up the U.S. data. And what we see is differences all around the world, and that's what's great about having an international business. You have some counter-cycling in the sense of the demand patterns and what goes on out there. But I would say there's nothing that we would highlight right now. I would say that we think something has changed in what we saw in the second half of 2023 to what we saw in the first quarter of this year. John, you?

In terms of investments, we are making the necessary investments to go to market, manufacture, and support our ongoing expansion as we continue to grow. We plan to maintain these investments. As we mentioned, this includes our expectations for sequential improvement in operating margin in the second quarter and year-over-year margin improvement for the entire year. We are ensuring that our investments are made with the right level of profitability to continue growing in our market and to expand our opportunities, while also being mindful of the margins necessary to deliver for the company.

Thank you, Joe and John, for the insights. I have a follow-up question related to the younger market, specifically the Phase I opportunity. It seems there's been a considerable focus on product development and marketing aimed at this demographic. IPE aligns with that, along with your new marketing strategies. Additionally, there appear to be advantages for younger patients with Lumina. I'm curious if you could clarify how the Invisalign business is performing among younger patients compared to the overall teen market. What is your penetration in this segment versus the broader teen category, and what kind of significant growth do you anticipate from this segment in the near to intermediate future?

Jason, just I'll back up on your question just to give you a kind of a conceptual view. When you think of Phase I, it's actually been controversial in the orthodontic market for years, some orthodontists don't want to do Phase I because, as I mentioned before, the kind of devices that have been used have been kind of difficult from a consumer standpoint. And so those wait for all permanent dentition and move on to there. We feel confident that within this Invisalign First now for dental expansion and then for palate expansion or a morphological change, IPE will do that. And we think a little track more orthodontists to begin Phase I treatment, but this is an industry that takes a while for things to bake in and for them to gain confidence, and I understand it because you're working with kids' teeth and mouths and their dentition. But we actually think that a significant amount of growth could come from this area, but we think it will take time, but it's been a great focus for us. And it's going to be interesting to watch how orthodontists in the future actually focus on Phase I, Phase II because these kinds of devices make it simpler for them and for patients in the future. So right now, I can just kind of give you the ground rules on that, that we've changed those roles. In a sense, but I can't project exactly where it's going. I would say we are currently in the middle of that story. Invisalign First is sometimes used on more permanent teeth as well. It's challenging to separate our cases of Invisalign First based on the age of the patients. However, as we gather more data and make progress with IPE and provide more specifics on this, we will share our findings with you and others.

The only thing you should know is that if you've been following us for a while, our average age of teen patients is getting younger. I think we are now at 14 years old compared to over 15 before. This indicates our ability to attract younger patients with First.

Our next question comes from Nathan Rich with Goldman Sachs.

Great. I wanted to go back to the guidance. I know it's kind of been touched on a few different times. But I wanted to ask on the Clear Aligner revenue outlook. It looks like you're raising the outlook for the full year by about 1%. I guess could you maybe just touch on what changed specifically with respect to that outlook? It sounds like maybe it's expectations around IPE and DSP versus market improvement. But I'd be curious, any color you could share there? And maybe anything on teen versus adult within the updated guidance would be great.

Yes, I'll start, Nate. Overall, we have raised our year-over-year growth expectation from mid-single digits, around 5%, to a midpoint of 7%, which is an increase of 2 percentage points. This change reflects several factors, including the ongoing stability we are experiencing. We noticed this trend heading into the fourth quarter and continuing into the current quarter, which is a positive sign. Additionally, our execution on our core business has been strong, aided by various innovations and promotions as we advance further into the teen season, complemented by the new products we've introduced. We have confidence in Lumina and the iTero launch, which can drive expansion, along with other new offerings like IPE. These efforts not only support unit sales but also enhance growth in the teen market, including additional products like Invisalign First. Overall, the combination of our stable environment, effective strategy execution, and new products has prompted us to adjust our total year outlook.

Okay. That's helpful. And then, John, maybe just sticking with you. The 2Q operating margin, I know up slightly sequentially, but down year-over-year. And I think historically, it's been a little bit variable, but you've seen more of a step-up in the second quarter than I think what the guidance implies. Anything to call out with respect to FX? Or I think you mentioned some manufacturing cost spend, but just anything there that we should keep in mind as it regards the margin cadence?

We are indeed observing a stronger dollar, which is something we discussed in relation to our guidance. We expect this trend to continue as we move from the first quarter into the second quarter, and our guidance takes that into account. Additionally, we are making ongoing investments to attract more submitters and doctors into our ecosystem, ultimately leading to increased utilization. This includes both our core business strategies for growth and the introduction of new products, which come with certain operational expenditures. We are being very cautious about our growth strategies and their impact on our operating margins. We have achieved sequential improvement in our operating margin from the first quarter to the second quarter, and we anticipate an increase in our margins on a year-over-year basis as well.

Our next question comes from Erin Wright with Morgan Stanley.

Great. I'll ask my two upfront here, but follow up on the guidance, and I don't want to belabor this too much, but do you think you have better visibility now just on the underlying demand trends globally? Or would you say that there's still an element or a healthy element of macro uncertainty that's still embedded in your guidance and some conservatism there? And then second would be on Lumina and the launch. And just can you talk about where you're seeing the most success with the launch in the target markets and promotions that where you're focused in terms of expanding share and upgrades as well?

Erin, this is John. I want to discuss our visibility and guidance. What we are experiencing now and what we aim for in our operational environment is increased stability, which we currently have. The markets are functioning, and while inflation and interest rates are higher overall, businesses are adapting to this environment. This stability is reflected in indicators like the Michigan index and others that illustrate our confidence. Considering this stability, along with our investments, marketing strategies, new products, and initiatives, we feel assured about the guidance we provided for Q2 and its implications for the entire year.

And Erin, regarding the Lumina technology, Joe here. As I mentioned at the end of my script, we're truly excited about this technology. We've been developing it for six years. It represents a completely new platform, distinct from the old confocal imaging technology. There is no other scanner in the world like it, given our unique design. It will take time for the market to adapt, as we need to implement it on a case-by-case basis, clinician by clinician. We have received very positive feedback from the orthodontic community, and the general dentistry community has shown interest as well, even though we are not fully ready with the restorative capabilities, which we plan to introduce in the fourth quarter of this year. The speed and simplicity of the scanning process, along with the exceptional dimensional tolerances used for both comprehensive and orthodontic cases, are truly unmatched. We are optimistic about this technology as we have only launched it approximately two months ago, and we anticipate a successful year ahead. More importantly, we aim for it to set a new standard for scanners in the industry moving forward.

Our next question comes from Michael Ryskin with Bank of America.

Congrats on the quarter. I want to follow up on something, I think, Joe, you touched on in the prepared remarks. If I caught it correctly, you kind of pointed to a little bit of strength in U.S. ortho or Americas ortho in the quarter stood out for us. It seems like it's one of the stronger results in a number of quarters. Just wondering if you could expand on that a little bit. Is it the Lumina launch? Is the fact that you're moving into younger teens and younger kids, which obviously is going to be a little bit more ortho-focused? Just any structural change you're seeing there with that group of dentists? Or am I just reading too much?

Michael, I appreciate your question. We have observed more stability in that market this year compared to last year. We've consistently recognized that the teen segment is stronger than the adult segment, but the adult segment also performed well for us this quarter. However, I am cautious about making predictions for this market moving forward because, as indicated by various surveys, it can fluctuate significantly from month to month. It's important to note that we are not only focused on the U.S. market; the global market has also been favorable for us. We will approach this situation month by month, but we are confident enough to say that it is stable. We have products, such as Lumina and IPE, that provide us with a solid footing from an orthodontic perspective, which we are excited about. Nonetheless, I don’t believe there is a fundamental change from what we observed last year to this year in orthodontics. It is simply more stable, and I would describe it as having more continuity.

Okay. And if I could squeeze in a follow-up if there's time. Again, also impressed by the DSP touch-up progress. You called it out in the deck. You got some additional launches later this year. You got the 14-stage touch-up aligner offering you're talking about. Any way you can start framing in terms of would you incorporate that into guidance at some point in terms of where you think that can go in terms of volumes and revenues or any update longer term, how you see DSP and touch-up evolving over time?

Yes, Mike, I'll address that. The Direct Supply Program is very popular because it meets the needs of doctors. They prefer to purchase products as they want rather than creating or handling everything themselves; they can use our aligners as part of the program to manage touch-up cases. We find this beneficial as it adds incremental business for us. Additionally, they can utilize our aligners for retention, which also contributes incremental volume. As we roll this out, as we mentioned a few years back, it started in the U.S. and North America and is now expanding into Europe. It continues to perform as expected. Doctors begin using it more frequently as it integrates into their workflow, and we see positive volume from it. With the success of such programs, we will keep expanding them.

Operator, we can take one more question.

And our last question comes from Kevin Caliendo with UBS.

I have two questions. The first one is about Heartland. Can you discuss the operational benefits of the Heartland investment? Also, my understanding is that Heartland is quite a profitable business, and with two separate investments, how do you view their profits or the accounting related to that currently? Secondly, regarding the guidance, I think we understand it, but was it in any way influenced by the trends you observed in April? If you could elaborate on that, it would be appreciated.

I can start with the guidance part of that, Kevin. Look, we use a lot of factors to look at where our guidance is. So we're using data from Q1 and the most recent information. But it goes back to the stability that we've seen. You can see it in a lot of the surveys and other things that a lot of people do, but what we see is that stability coupled with what we’re trying to do to go to market to drive the initiatives we have and the new products that we have. So that's a key part of what we factor in into our guidance. No change from what we normally do. This is how we've come together in terms of a guidance standpoint. In terms of Heartland, we look at Heartland as this is a great investment from investing in a company that shares a digital orthodontic mindset that we have, to be able to do things in a similar mindset, to be able to expand like they're expanding, to be able to get into markets that in some cases, we don't have much market share with or a big presence there. And they share that same mindset, that expansion. They've been around for many years as well. With this investment, it's less than 5%. There's no consolidation or anything else that's required. And we'll evaluate going forward on whether there's any mark-to-market that we have to do going forward. But it's a continuation of that investment in the expansion that they're doing, and we're pleased with the results that we've seen over the last year.

That actually concludes, sorry, go ahead, operator.

And we have reached the end of our question-and-answer session. I will now turn the call back over to Shirley Stacy for closing remarks.

Thank you so much, and thank you, everyone, for joining us today. We look forward to speaking to you at upcoming financial conferences and industry meetings, including the American Association of Orthodontics meeting in New Orleans, May 4 and 5. If you have any questions, please give us a call. Thank you.

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