Yahoo Finance Align Technology, Inc. (NASDAQ:ALGN) Q1 2024 Earnings Call Transcript
Align Technology, Inc. (NASDAQ:ALGN) Q1 2024 Earnings Call Transcript April 24, 2024
Align Technology, Inc. beats earnings expectations. Reported EPS is $2.14, expectations were $1.98. Align Technology, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the Align First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Shirley Stacy with Align Technology. You may begin.
Shirley Stacy: 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. Joe?
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 from North America 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-generation 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 we received regulatory approval for the Invisalign Palatal Expander in Australia and New Zealand.
Q1 Systems and Services revenue year-over-year growth reflects non-Systems 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 non-Systems revenues and higher scanner ASPs, partially offset by lower volumes due to seasonality and 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 3x wider field of capture and a 50% smaller and 45% lighter wand, delivering faster scanning speed, higher accuracy, super visualization, and 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 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 North America ortho channel, an increase of approximately 49% year-over-year from Q1 '23. These 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 UK, and most recently in Italy, France, and Poland. We expect to continue expanding DSP into other country markets in 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 a 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 as 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 have developed in our 27-year history and is a better option for expanding a growing patient's narrow palate.
Initial response from doctors and patients for Invisalign Palatal Expander system is positive. Invisalign Palatal Expander system is not a traditional Invisalign aligner. It is a series of direct 3D printed orthodontic appliances based on proprietary and patented technology that has force systems designed for skeletal expansion. Clinical data shows 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 8.8 years. In this group, the mean expansion of 6 millimeters was achieved with minimal tipping with range between 3.4 millimeters to 10.7 millimeters, as measured using the change in intermolar width between initial and post-expansion scans, with a mean expansion efficacy of 97%.
In addition, we found that surveyed doctors agree the Invisalign Palatal Expander is less painful than traditional expanders and it facilitates better oral hygiene, compared to traditional metal expanders. Phase 1 or early interceptive treatment includes both skeletal/orthopedic and dental/orthodontic arch expansion and makes up to 20% of 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 1 patients. We expect 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 that raise awareness and drive potential patients to Invisalign practices globally. Below are several highlights from Q1 and more information is available in our Q1 '24 earnings webcast slides. In Q1 '24, we delivered 14.5 billion impressions and have 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 continued 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 also requires the right engagement through Invisalign influencers and creator-centric campaigns.
Our teen Invis 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 partnered with athletes such as Mazz Crosby, TikTok GenZ 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 America. In the EMEA region, we partnered 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 continued 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 continued 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 from the Americas and EMEA regions, and increased year-over-year, reflecting growth across international regions. Dental Service Organization, or DSOs, represents 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 our largest DSO partners, and we 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 and 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. With that, I'll now turn it over to John.
John Morici: 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 favorable impacts 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 reflect higher additional aligners and 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 reflect 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 reflect the product mix shifts to lower ASP products, unfavorable country mix shifts 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 [3-in-3] (ph) product. Invisalign comprehensive 3-in-3 product is available in North America and in certain markets in EMEA and APAC, most recently launching in French territories and in the Middle East. We are pleased with the continued adoption of the Invisalign comprehensive 3-in-3 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 additional aligners are shipped. Q1 '24 Systems and Services revenue of $180.2 million were up 3.1% sequentially, primarily due to increased non-Systems 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 non-Systems revenues, mostly related to upgrades, higher scanner volumes, and higher Services revenues from our larger base of scanner sold.
CAD/CAM and Services revenue for Q1 represents approximately 51% of our Systems and Services business. Q1 '24 Systems and Services revenues were favorably impacted by foreign exchange of approximately $1.5 million, or approximately 0.9% sequentially. On a year-over-year basis, Systems and Services revenues were unfavorably impacted by foreign exchange of approximately $0.9 million, or approximately 0.5%. Systems and Services deferred revenues on the balance sheet was down $14.3 million or 5.5% sequentially and down $25.3 million or 9.4% year-over-year, primarily due to the recognition of Services revenues, which is recognized ratably over the service period. The decline in deferred revenues both sequentially and year-over-year reflects the shorter duration of Service contracts with initial scanner purchases.
As our scanner portfolio expands and we introduce new products, we increase the opportunities for customers to upgrade and make trade-ins, in addition to other scanner leasing and rental programs. Developing new capital equipment opportunities to meet the digital transformation needs of our customers and our DSO partners is a natural progression for our equipment business with a large and growing base of scanner sold. We are pleased to be able to leverage our technological innovations and operational capabilities and efficiencies to provide different types of go-to-market models to our customers such as rentals and leasing, selling the way that our customers want to buy. 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, primarily 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, 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 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 was 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 $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 '24, we provide the following business outlook. We expect fiscal '24 total revenue to be up 6% to 8% versus 2023, which is higher than our prior outlook of up mid-single digit growth compared to 2023. The increase in our 2024 revenue outlook reflects our Q1 results, Q2 outlook, and continued execution of our growth strategies.
We anticipate that the incremental revenue reflected in our 2024 outlook will be roughly split 50-50 between our two operating segments. We expect fiscal 2024 Clear Aligner ASPs to be slightly up year-over-year. We expect fiscal 2024 GAAP operating margin and non-GAAP operating margin to be slightly above the 2023 GAAP operating margin and non-GAAP operating margin, respectively. We expect our capital -- our investments in capital expenditures for fiscal 2024 to be approximately $100 million. Capital expenditures primarily relate to building construction and improvements as well as manufacturing capacity in support of our continued expansion. With that, I'll turn it back over to Joe for final comments. Joe?
Joe Hogan: 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 and 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 chair-side 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, is less painful than traditional metal expanders, and promotes better oral hygiene. And our recent acquisition of Cubicure, a pioneer of direct 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 to continue making 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 are 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 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. Operator?
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