Q2 2024 Align Technology Inc Earnings Call

Participants

Shirley Stacy; VP of Corporate Communications & IR; Align Technology Inc

Joseph Hogan; President, Chief Executive Officer, Director; Align Technology Inc

John Morici; Chief Financial Officer, Vice President - Global Finance; Align Technology Inc

Michael Cherny Cherny; Analyst; Leerink Partners LLC

Elizabeth Anderson; Analyst; Evercore ISI Institutional Equities

Jonathan Block; Analyst; Stifel, Nicolaus & Company

Jeffrey Johnson; Analyst; Robert W. Baird & Co.

Brandon Vazquez; Analyst; William Blair & Company LLC

Jason Bednar; Analyst; Piper Sandler & Co.

Michael Ryskin; Analyst; BofA Securities

Erin Wright; Analyst; Morgan Stanley

Presentation

Operator

Welcome to the Align Technology, second quarter 2024 earnings call. (operator instructions) Please note this conference is being recorded. I would now like to turn the conference over to your host, Shirley Stacy with the Align Technologies. 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 second 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 and at 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 with corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our second quarter 2024 conference call slides 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?

Joseph Hogan

Thanks, Shirley. Good afternoon and thanks for joining us on our call today. I'll provide an overview of our second quarter results and discuss a few highlights from our two operating segments systems and services and clear aligners.
John will provide more detail on our Q2 financial performance and comment on our views for our third quarter and for 2024, In total. Following that, I'll come back and summarize a few key points and open the call to questions.
Overall, I'm pleased to report solid second quarter results. Total Q2 '24 revenues of $1,028.5 million were up 3.1% sequentially and 2.6% year over year. Reflecting growth in both Clear aligner volumes and imaging systems and CAD/CAM services revenues.
Q2 '24, total revenues were unfavorably impacted by foreign exchange of approximately $11.6 million or 1.1% sequentially and unfavorably impacted by approximately $18.1 million or 1.7% year over year. For clear aligners, Q2 '24 volumes increased 6.2% sequentially and 3.2% year over year, driven by growth from adult patients and strong teen case starts across two regions, led by strength in Asia Pacific, EEMA and Latin America.
Our Q2 results also reflect a record number of doctors submitting cases and record doctors shipped to for the quarter. Q2 '24, Clear Aligner ASP's were down sequentially and lower than anticipated in our second quarter outlook due in part to greater impact of unfavorable foreign exchange across multiple currencies, especially the Japanese yen, euro and Brazilian real.
As well as discounts and product mix shift to lower ASP products. As a result, total Q2 revenues were slightly below expected range for our Q2 quarterly revenues. Notwithstanding these factors, non-GAAP operating margin for the second quarter was 22.3%, up 2.5 points sequentially and up one point year over year.
For Imaging Systems and CAD/CAM services, Q2 '24 revenues increased 9.2% sequentially and 16.1% year over year, reflecting continued adoption of our next-generation iTero Lumina scanner, which made up the majority of our equipment sales, iTero Lumina and wand upgrades, iTero element scanner trade-ins as well as increased iTero's scanner leases.
For Q2 '24 adult patient kits starts were up 5% sequentially and 1% year over year, reflecting our highest number of adult shipments in eight quarters, driven by strength in the GP channel, led by North America and A-Pac dentist.
And teen and growing kids segment over 216,000 teens and younger patients starting treatment with Invisalign clear aligners during the second quarter, an increase of 8.8% sequentially and up 8% year over year, reflecting growth across regions, especially from Invisalign first, in the EMEA and APAC regions.
In Q2, the number of doctors submitting teen or younger patient case starts was up 8% year over year, led by continued strength from doctors treating young kids, also known as growing patients. The response from doctors and their patients in Invisalign Palatal Expander system continues to be positive.
We believe that Invisalign palate expander system is a better option for expanding and growing patients narrow palate compared to traditional appliances used today, in this line Palatal Expander system is currently available in the US, Canada, Australia and New Zealand, we expect it to be available in other markets pending future applicable regulatory approvals.
Non-cash revenues include our Vivera retainers, which include retention aligners ordered through our doctor subscription program or DSP, as well as clinical training and education, accessories and e-commerce. Due to non-cash revenues were up 3.5% sequentially and up 5.1% year over year, primarily due to continued growth in retainers and DSP.
For Q2. Total clear aligner shipments include approximately 25,000, Invisalign DSP touch-up cases are record high quarter of 37% year over year. DSP continues to drive growth and is currently available in North America and certain EMEA countries. During the quarter, we extended DSP into more countries in Europe and we anticipate expanding into additional markets going forward.
DSP is also now available in 14 states touch-up aligner offering across all markets where it's available. As a result, touch-up cases increased significantly in Q2. Due to '24 clear aligner volume and DSO customers increased sequentially year over year, reflecting growth across all regions.
DSOs represent a large and growing opportunity to help drive adoption of digital technology across the dental industry. We have well-established relationships in many DSOs globally that recognize the benefits of digital workflows enabled by our portfolio of products and services that make up the digital platform, including increased practice efficiency and profitability as well as delivering a better patient experience from shorter cycle times and customer proximity.
[Stylebox] and Heartland Dental are two of our largest DSO partners. We are continuously exploring collaboration with DSOs that can further the adoption of digital dentistry. Each DSO has a different strategy and business model, and our focus is working and encouraging DSOs align with our vision, strategy and business model goals.
Today in this line is the most recognized orthodontic brand grew globally in Invisalign clear aligner treatment is faster and more effective than traditional metal braces, get 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. In Q2, we had more than 17 billion impressions and 50 million visitors to our websites globally. Below our additional highlights from Q2 and more information is available in our Q2 '24 earnings webcast slides.
To increase awareness and educate young adults, parents and teens about the benefits of Invisalign brand. We continue to invest and create campaigns in social media platforms such as TikTok, Instagram, YouTube, Snapchat, We chat, Dion across the markets.
Reaching young adults as well as teens and their parents also requires the right engagement to Invisalign influencers and creator centric campaign. In Americas, our influencers and social media campaigns featured Olympic athletes such as Rebecca, Andras from Brazil, [untreated cross] from Canada, Jordan Childs from the United States and Paralympic athletes, Lizzie Smith from the United States.
To bolster teen demand, we launched new activations with teen high school sports social media platform overtime, including several programs focused on showcasing elite high school athletes across boys, footballs grows basketball grow soccer, we highlighted why they chose to transform their smile with Invisalign aligners and showcase their results.
In EMEA region, we partnered with influencers to reach consumers across social media platforms, including TikTok in meta and launched our global consumer campaigns for teens and parents. In APAC, we continue to invest in consumer advertising across the region and expanded our reach in Japan and India, the eMeta and YouTube and partner with key social media influencers.
Finally, adoption of my Invisalign consumer patient app continued to increase with over 4 million downloads to date and over 384,000 monthly active users, an 8% year-over-year increase. Uses of our other digital tools also continued increased ClinCheck live update was used by almost 50,000 doctors on more than 692,000 cases reducing time spent and modifying treatment plans by an average of 16.3%, Invisalign practice app is increasing and adoption with 85,000 doctors who actively are using the app and 5.9 million photographs were uploaded in Q2 via the Invisalign practices.
Year-over-year growth in Q2 systems and services revenue were up 16.1% reflects higher scanner ASPs and non-systems revenues driven by iTero Lumina wand upgrades, increased service revenues and a larger base of scanners sold.
On a sequential basis, Q2 systems and services revenues were up 9.2%, reflecting higher scanner volumes, higher scanner ASPs and higher non-systems revenues driven by iTero Lumina wand upgrades, that iTero Lumina new multi direct capture technology replaces the confocal imaging technology in earlier models, and that's a three x wider field of capture and a 50% smaller and 45% lighter, one, delivering faster scanning speed, higher accuracy, superior visualization in a more comfortable scanning experience.
Lumina's currently available with orthodontic workflows as a new standalone scanner, where as a wand upgrade from iTero Element 5D plus scanner. During the second quarter, we had a record number of competitive trade-ins, demonstrating the continued success of the iTero Lumina scanner in the marketplace.
We're also seeing a halo effect with Invisalign scans. We're pleased to see more doctors coming into the digital ecosystem with an increase in first-time Invisalign case submitters as well as return of lapse submitters.
Overall, Q2, we're very pleased with the continued uptake of iTero Lumina scanner with Ortho workflow and response from customers. We're looking forward to a limited market release for the Restore of software Lumina in Q4, followed by full commercialization in Q1 '25.
Today, we introduced iTero design suite, offering doctors and intuitive way to facilitate designs for 3D printing of models by byte splints and restore restorations and practice. This software innovation is designed to help doctors increase their practice efficiencies and elevate patient experiences by shortening the time to treatment through an intuitive way to design for in practice 3D printing.
The Align Digital platform provides an innovative portfolio of customer-focused technologies that enable seamless end-to-end workflows for dental professionals. iTero design suite is now available through an early access program. Doctors using an iTero scanner can submit their interest via their scanner or my iTero portal. Software is expected to be available later this year in selected markets.
With that, I'll turn it over to John.

John Morici

Thanks, Joe. Now for our Q2 financial results. Total revenues for the second quarter were $1,28.5 million, up 3.1% from the prior quarter and up 2.6% from the corresponding quarter a year ago. On a constant currency basis, Q2 '24 revenues were impacted by unfavorable foreign exchange of approximately $11.6 million or approximately 1.1% sequentially and were unfavorably impacted by approximately $18.1 million year over year or approximately 1.7%.
For clear aligners. Q2 revenues of $831.7 million were up 1.8% sequentially, primarily from higher volumes, partially offset by lower ASPs. On a year-over-year basis, Q2 Clear Aligner revenues were flat, primarily due to higher discounts, a product mix shift to lower ASP products and the unfavorable impact from foreign exchange, offset by lower net revenue deferrals, higher volumes and price increases.
Q2 '24 clear aligner revenues were unfavorably impacted by foreign exchange of approximately $9.5 million or approximately 1.1% sequentially. On a year-over-year basis, Clear Aligner revenues were unfavorably impacted by foreign exchange of approximately $14.7 million or approximately 1.7%.
For Q2, Invisalign ASPs for comprehensive treatment were down sequentially and year over year. On a sequential basis, the decline in ASP primarily reflects higher discounts, a product mix shift to lower ASP products and the unfavorable impact of foreign exchange.
On a year-over-year basis. The decline in comprehensive ASPs primarily reflects higher discounts, a product mix shift to lower ASP products and the unfavorable impact from foreign exchange, mostly offset by lower net revenue deferrals and price increases. For Q2, Invisalign ASPs for noncomprehensive treatment were down sequentially and year over year.
On a sequential basis, the decline in ASPs reflects the unfavorable impact from foreign exchange, higher net revenue deferrals a product mix shift to lower ASP products, partially offset by price increases. On a year-over-year basis, the decrease in noncomprehensive ASPs reflects higher discounts, a product mix shift to lower ASP products, the unfavorable impact of foreign exchange and the unfavorable impact of a price adjustment in the UK to make the recently mandatory application of VAT to our liners cost neutral to customers.
Our Invisalign comprehensive three and three product is available in North America, EMEA and in certain markets across APAC. We are pleased with the continued adoption of the Invisalign comprehensive Three and Three product and anticipate adoption will continue to increased, comprehensive Three and Three provides doctors the flexibility they want while allowing us to recognize more revenue upfront with deferred revenue being recognized over a shorter period compared to our traditional Invisalign comprehensive product and benefiting us with a more favorable gross margin.
Clear Aligner, deferred revenues on the balance sheet decreased $7.8 million or 0.6% sequentially and decreased $5.2 million or 0.4% year over year, and both will be recognized as the additional aligners are shipped.
Q2 '24 systems and services revenues of $196.8 million were up 9.2% sequentially, primarily due to higher volumes, higher ASPs and non systems revenues mostly related to upgrades. Q2 '24 systems and services revenues were up 16.1% year over year, primarily due to higher ASPs, increased non system revenues, mostly related to upgrades in our leasing rental programs and higher service revenues.
We are pleased to be able to leverage our operational and financial capabilities to provide different types of go-to-market models for our customers, such as leasing and rental options. In the end, we are focused on selling the way where customers want to buy.
Q2 '24 systems and services revenues were unfavorably impacted by foreign exchange of approximately $2.1 million or approximately 1% sequentially, on a year-over-year basis, systems and services revenues were unfavorably impacted by foreign exchange change of approximately $3.4 million or approximately 1.7%.
Systems and services, deferred revenues on the balance sheet was down $20.4 million or 8.3% sequentially and down $43.4 million or 16.2% year over year, primarily due to the recognition of services revenues which are recognized ratably over the service period.
The decline in deferred revenues both sequentially and year over year primarily reflects the shorter duration of service contracts applicable to initial scanner purchases, as our scanner portfolio expands, and we introduce new products where an increase in the opportunities for customers to upgrade and make trades in addition to our scanning 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 scanners sold.
The structural programs we have implemented across both of our operating segments benefit our customers by providing them with more options to choose what they need, in some cases at a reduced price that may impact our ASPs, but the cost of service for us is lower and the benefit is then reflected in our gross margins.
Moving to gross margin, second quarter overall gross margin was 70.3%, up 0.3 points sequentially and down 0.9 points year over year. Overall, gross margin was unfavorably impacted by foreign exchange by approximately 0.3 points sequentially and unfavorably impacted by approximately 0.5 points on a year-over-year basis.
Clear aligner gross margin for the second quarter was 70.8%, down 0.1 points sequentially due primarily to lower ASPs, partially offset by lower additional aligners and leverage manufacturing spend.
Clear aligner gross margin for the second quarter was down 1.7 points year over year due primarily two lower ASPs and higher manufacturing spend as we continue to ramp up Poland manufacturing facility and the impact of unfavorable foreign exchange.
Systems and services, gross margin for the second quarter was a record 68.2%, up 2.3 points sequentially, primarily due to higher ASPs and manufacturing efficiencies. Systems and services, gross margin for the second quarter was up three points year over year, for the reasons stated above.
Q2, operating expenses were $575.6 million, up 5.9% sequentially and 6.3% year over year. On a sequential basis, operating expenses were up by $31.9 million, due primarily to about $31 million in legal settlements year over year. Operating expenses increased by $33.9 million, primarily due to legal settlements and higher employee compensation, partially offset by lower outside services, advertising and marketing expenses.
On a non-GAAP basis, excluding stock-based compensation, amortization of acquired intangibles related to certain acquisitions, restructuring, legal settlements and other charges operating expenses were $499.5 million, down 1.3% sequentially, and down 1.1% year over year.
Our second quarter operating income of $147 million resulted in an operating margin of 14.3%, down 1.2 points sequentially and down 2.9% year over year. Operating margin was unfavorably impacted from foreign exchange of approximately 0.6 points sequentially and unfavorable impacted by 1.2 points year over year.
On a non-GAAP basis, which excludes stock-based compensation, amortization of intangibles related to certain acquisitions, restructuring, legal settlements and other charges, operating margin for the second quarter was 22.3%, up 2.5 points sequentially and up one point year over year.
Interest and other income expense net for the second quarter was an expense of $3.2 million, primarily due to unfavorable foreign exchange compared to an income of $4.3 million in Q1 of '24 and an expense of $0.3 million in Q2 of '23. Recall that Q1 '24 included a nonrecurring gain on our equity investments.
The GAAP effective tax rate in the second quarter was 32.9% compared to 33.7% in the first quarter and 34.8% in the second quarter of the prior year. The second quarter GAAP effective tax rate was lower than the first quarter effective tax rate, primarily due to discrete tax expenses recognized in Q1 of '24 that did not reoccur in Q2 of '24, and that benefit was partially offset by an increase in nondeductible expenses.
Our non-GAAP effective tax rate in the second quarter was 20%, which reflects our long-term projected tax rate. Second quarter net income per diluted share was $1.28, down sequentially $0.11 and down $0.18 compared to the prior year.
Our EPS was unfavorably impacted by $0.11 on a sequential basis and $0.17 on a year-over-year basis due to foreign exchange.
On a non-GAAP basis, net income per diluted share was $2.41 for the second quarter, up $0.27 sequentially and up $0.19 year over year.
Moving on to the balance sheet. As of June 30, 2024 cash, cash equivalents and short and long-term marketable securities were $782.1 million, down sequentially $120.4 million and down $251.7 million year over year of our $782.1 million balance, $140 million was held in the US and $642.1 million was held by our international entities.
During Q2 '24, we repurchased approximately 0.6 million shares of our common stock at an average price of $250.73 through $150 million of open market repurchases, as of June 30, 2024 $500 million remains available for repurchases of our common stock under the January 2023 repurchase program.
During the quarter, we completed a $75 million equity investment in Heartland Dental, a multidisciplinary DSO with GP and ortho practices across the United States. Q2 accounts receivable balance was $1,020.1 million up sequentially.
Our overall days sales outstanding was 89 days, up approximately three days sequentially and up approximately eight days as compared to Q2 last year. Cash flow from operations for the second quarter was $159.8 million. Capital expenditures for the second quarter were $53.5 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 $106.4 million.
Now, turning to our outlook. Assuming no circumstances occur beyond our control, we provide the following business outlook for Q3 and fiscal 2024. For Q3 2024, we expect our Q3 worldwide revenues to be in a range of $980 million to $1 billion.
We expect Clear Aligner volume to be down sequentially as a result of Q3 seasonality and clear aligner ASPs to be down sequentially, primarily due to foreign exchange and product mix. We also expect systems and services revenues to be down sequentially because of Q3 seasonality. We expect our Q3 2024 GAAP operating margin to be below Q3 2023 GAAP operating margin and Q3 2024 non-GAAP operating margin to be flat to Q3 2023, non-gaap operating margin.
For fiscal 2024, we expect fiscal 2024 total revenue growth to be up 4% to 6% year over year due in part to lower Clear Aligner ASPs year over year from continued unfavorable foreign exchange and product mix. In addition, our revised revenue outlook reflects our anticipated commercial launch of iTero Lumina with restore to capabilities to occur in Q1 of 2025, instead of 2024 as previously anticipated.
We expect fiscal 2024 GAAP operating margin to be slightly below 2023 GAAP operating margin and 2024 non-GAAP operating margin to be above 2023 non-GAAP operating margin. We expect investments in capital expenditures for fiscal '24 -- 2024 to be approximately $100 million. Capital expenditures, primarily relate to building construction improvements as well as manufacturing capacity in support of continued expansion.
With that, I'll turn it back over to Joe for final comments, Joe.

Joseph Hogan

Thanks, John. In summary, I'm pleased with our overall performance for Q2 and the growth we delivered across the business for Clear Aligner volumes as well as strong revenues from scanners and services. Notwithstanding the impact of unfavorable foreign exchange on our revenues, we believe the end markets are stable overall, we're committed to supporting our Doctor customers and the future of digital innovation.
Our purpose is to transform smiles and change lives with the goal of being the standard of care in orthodontics with Invisalign clear aligner treatment clinically, we believe that we can treat the vast majority of orthodontic cases today from the simplest to the most complex clinical efficacy is no longer question.
We now focus on the treatment experience for patients and on efficiency and growth for our doctor customers. The orthodontic case start market is vastly underpenetrated, and there are millions of consumers who would benefit from digital orthodontics.
We continue to evolve to better meet the needs of doctors, potential patients who increasingly see consumers seek convenient, elevated digital experiences. Our digital platform and integrated technologies, software and services has helped improve orthodontic treatment for millions by delivering seamless workflows and dental practices on mobile devices and through remote monitoring and are designed to help doctors and patients realize the benefits of a truly seamless end to end digital workflows and patient experiences.
But the journey from analog to digital has proven difficult for practices. The orthodontic practice of the future requires full digital transformation to truly realize the promise of digital and there is no other medtech company in the world that can help practices meet this challenge.
With that, I thank you for your time today, and we look forward to sharing our continued progress as we move the industry forward through digital orthodontics.
Now I'll turn the call over to the operator for your questions. Operator?

Question and Answer Session

Operator

(operator instructions)
Michael Cherny, Leerink Partners.

Michael Cherny Cherny

Maybe if I can just dive in a little bit on the guidance change and some of the moving pieces and in particular, I wanted to get a sense from you what you view as within your control versus outside. Obviously, FX is something that management can control, but you think about the guidance in particular on the AFD side, how you think about the flow through of what is within your control on mix?
Is there something you could do and promotion is there anything else that can come from a pricing competition that we should be worried about? Just want to dive a little bit more into that number, given that it seems to be the biggest fulcrum point relative to the guidance change?

John Morici

Yeah, it's a good question, Michael. This is John. Look, when we looked at the total year when based on what we're seeing now we see the unfavorable foreign exchange impact we saw in Q2, and we continue to see and project that that will continue for the rest of this year.
So that's in our outlook just over a point of our reduction in our total year is related to foreign exchange. The mix effect that you talked about. That's really the way our customers want to buy. In some cases, they're buying lower-priced products as part of our portfolio.
We see that as incremental and cases like Doctor subscription program, they're just at a lower ASP. But what we end up seeing then is a better gross margin. Our cost to serve in many cases is lower than that, but it really is a reflection of what the doctors want to do with it cases that they buy.

Michael Cherny Cherny

Okay. Thank you.

Operator

Elizabeth Anderson, Evercore ISI.

Elizabeth Anderson

Hi, guys, thanks so much for that question. I was wondering if you had I'm just regarding the guidance, if you had any insights that you could share on whether any of the iTero restorative scanner revenue was originally contemplated in the 2024 guidance? And now with the pushout on the launch, if that was sort of an impact on the on the guidance as well.
And then as a follow-up, if you could talk a little bit more about the acceleration in the teen revenue or accelerate in the teen cases, which accelerated off a tougher comp, that would be helpful to also get some additional perspective there? Thanks.

John Morici

Hi, Elisabeth. Yeah, yes, you're right. The Lumina restorative that we expected to launch in the fourth quarter now the full launch into next year, that revenue was expected for this year. So that's part of the reason for taking down our overall guidance in addition to the FX, as I said on the previous question.
And then your question on teen, look, we're pleased with our teen growth. We saw good over 8% growth on a quarter-over-quarter basis, 8% growth on a year-over-year basis. We saw good adoption in many places around the world and it's a further reflection of the various products that we have, the adoption that doctors have have a lot of new doctors coming into the ecosystem to get trained that actually become customers of ours. So we're pleased with the progress that we're seeing within team.

Elizabeth Anderson

Great. And any chance you want to quantify that? iTero restorative contribution changer or no?

Joseph Hogan

Yeah, would not get it that given it directly, but it is less than a [up] percent slightly than a up percentage of the total.

Elizabeth Anderson

That's helpful. Thank you.

Operator

Jon Block, Stifel.

Jonathan Block

Hey, Joe. Good afternoon. Where to start. Everyone was nervous about cases and then, you come in and you be cases handling and obviously the focus is going to be on the ASP. So John, maybe let me know if I have these numbers right, but it looks like the aligner ASP was down roughly 4% Q-over-Q.
The FX hit was about 1%. So can you talk in detail as much as possible the other 3% decline in the ASP, Q over Q if I've got that right. It seems like a big deviation from where your head was at three months ago. How much of it was mix versus discounts and if it was a lot of mix, one mix become so pronounced over the past three months and maybe we could start there, please?

John Morici

Yeah, John, when you look at mix that we have, we see doctors utilizing DSP more and more as a record amount of DSP that we had in the quarter that had a lower ASP. We saw a lot of GP growth, which we talked about adult cases being up and the best best volumes that we've seen in several quarters and many times that's lower stage products that we end up seeing come through.
And so when we see the, the ASP, it's just a reflection of the different products that are being sold and those doctors are taking those up at that. But you also know and we've talked about where margins in many cases are better at those lower stage products and we end up seeing this as a benefit to be able to see it show up in gross margins and also op margins.

Jonathan Block

Okay. So I guess maybe just as a follow-up to that, are you saying that discounts were more aggressive, call it in Q2 '24 than maybe what we've seen historically? And just to tack on to that follow-up, you brought down the midpoint of the rev guide from about 7% to 5%.
You said FX was 1%. You said the GP restored a portion Lumina was slightly less than 1% I mean, you sort of implying that clear aligner revenue by and large for 2024 is somewhat unchanged or maybe down a smidge? And then I'll ask my quick follow-up. Thanks.

John Morici

Yes, clear aligner revenue down a little bit for the total year, because of the ASPs that we spoke about, not necessarily due to the volume changes like you said, we are pleased with the Q2 volume that we have, but that's how we look at the change here, mostly the effects for the total year as we've described and then some mix, but then the rest of it due to iTero changes from this year to next year.

Jonathan Block

Okay. Last question for me. I guess online, just trying to if I've got this right. It looks like the revenue comes down a little bit at the midpoint, but I believe the non-GAAP EBIT margins came up slightly. I think before it was like flat to slightly up and now you're saying slightly up. So maybe just talk through the dynamics where you're able to arguably increase the non-GAAP EBIT margin assumption for '24 even off the more modest revenue base? And thanks for the time, guys.

John Morici

Yeah, no, it's a good question. And so as we looked at and as we talk about some of the I know ASP, gets a focus. But really when you look at the margin that we get on all of these products, as we go to some of the lower stage products we end up with a better margin.
Our cost to serve is lower, which shows up in gross margin and flows its way to op margin. I think the rest of it, as you saw with this quarter from an OpEx standpoint and how we think about the levers that we could pull are not pull. We're very mindful of that in this environment and want to be able to deliver as much volume and as much topline as we can, but be very mindful of the operating profit that we need to deliver.

Operator

Jeff Johnson, Baird.

Jeffrey Johnson

Good afternoon, guys. I wanted to start maybe on your doctor shift to number in the quarter, you shipped a little over a 86,000 docs this quarter. I think for three straight years, you've kind of been in that 80,000 to 85,000 range. So maybe not a big breakout, but at least some of these underlying numbers on utilization, these doctors ship to and that are starting to perk up a little bit.
So I guess what I'm trying to understand on that doctor shift two number. Are you starting to see some benefits of some of the investments John's been talking about the last couple of quarters and getting that doctor prescribing base to expand. Is it expanding that base? Is it slowing the outflow that base as we know you've had some competitive losses here over the last couple of years. Just maybe help us understand the inflow and the outflow rates and what's moving between those two pieces. Thanks.

Joseph Hogan

First of all, we're pleased with that. It's good to see utilization go up. It's also great to see the doctors go up to. Obviously, there's a strong concerted effort. We talk about that underserved marketplace out there and we know there's still a lot of doctors to train and there's still a doctor to do a lot more cases so it's a big focus for the business.
When you when you ask that question, are we losing fewer gaining few. There's always a mix and a change in those kinds of things, Jeff. But overall, you can see here that we're gaining something that we don't lose some docs sometimes, but we often bring it back to, the whole story with what we've been through as competitors have entered the marketplaces, sometimes we'll lose some doctors they often come back in.
One of the things about in our business to sometimes it takes 18 months for doctors to figure out if those competitive cases are actually going to work. And obviously, I think we're making good progress in the sense of convincing doctors to move ahead with us. And this growth in doctors in utilization occurred across the globe, which is great. It wasn't like it just came out of one region.

Jeffrey Johnson

Yeah, understood. All right. And then maybe just to follow-up on the manufacturing side. We saw the news maybe a couple of months ago memories, new role leading direct fab is going to stay in that role, it sounds like through 2026 when you're going to ride off into the sunset.
So does that tell us anything about time lines on direct fab? I mean, memory just doesn't seem like the kind of guy that would want to walk away in the middle of something. So is that kind of drawing a line in the sand that by 2026, you should be up and running fairly well, fairly, maybe not efficiently, but fairly completely and getting that direct fab plans all put together and rolling out some of that 3D-printed stuff in a bigger way?

Joseph Hogan

Hey, Jeff's it's a good question. We have a lot of faith in Emory has been here for so long and is the only guidance ever scaled, you know, aligners to the point, you know the gas. And so it's really fun to have him in this role because it gives us great feedback and a sense of where we are.
Here's Jeff the best I can say we've talked about with analysts is we're looking at two to three years on this scale and don't think of it as a linear line. This is one where you have to do a lot of equipment work at first to get the efficiencies that have this equipment work 24/7.
And then secondly, this is a brand new resin has never been sourced before. And so finding the source of the resin and making sure you have the reactor capacity, all those things take time. So I look at over the next year, we do a lot of that groundwork. And then you'll start to see products and different things that overall from that. So that it's best to fix in your mind, it's a two to three year kind of a roll-up.

Jeffrey Johnson

Understand it. Okay. Thank you.

Operator

Brandon Vazquez, William Blair.

Brandon Vazquez

I'll ask two upfront because it's kind of guidance related one a little near term, which is basically I think if you do the sequentials and the implied numbers on the guidance that you've given us, there's maybe like a high single digits revenue increase going into Q4.
I think correct me if I'm wrong, but that's kind of like pre-COVID levels of seasonality back when the business was a little more normal. So the question near term being given the uncertainty in the market, what kind of gives you the confidence that you guys can kind of return to normal seasonality within this year?
And then the follow-up to that on kind of a long-term guidance question is like like if we look, let's call it three years out, what's kind of the growth expectations of this business or the growth algorithm. Any color you can give us around that, assuming that it seems like we're stuck in somewhat of a uncertain end market stable, but not exactly where you want it. So we talk about the opportunity to accelerate if even possible in an end market like this over the cover of three-plus years? Thank you.

John Morici

Yeah, Brendan, this is John. I can take the question kind of on the remaining part of this year and so on.
So we've guided to what we what we can see based on how the quarter played out. We actually saw in the second quarter. I mean, I'm not saying it's a return to normal seasonality, but is much more seasonal in the second quarter in terms of how our volume progressed and how it changed quarter over quarter to more more normal seasonality.
And so our reflection of what we tried to do for the rest of this year based on what we see in terms of volume take out FX and some of that noise that gets caught into into Q2. But from a underlying volume standpoint, we saw and more normal seasonality and as we play out the rest of this year, we expect that to continue with teen season that comes in that we're in now that checking out China in the third quarter is a strong quarter for them because of teen season.
Europe, not so much. We expect that to now play out more normally as it as it moves from Q3 to Q4. When you think of the total and looking out into three years. And so look, we're in an underpenetrated market and we've talked a lot about that. We think we have the products and the go-to-market capability to really move this market forward. And it's up to us to be able to help drive this market forward.
And when we look out and we look out in our long-term model, we believe in the opportunity revenue growth is 20% plus and OP margin 25% plus and that's how we are positioning things for growth for whether it's direct fab and the growth opportunities that we have there and the efficiencies that we can drive as well as the know the standard production that we have now, that's how we're building from an investment standpoint.
We're mindful of changes that can happen short term and economy and and so on. And that's why we give you kind of the guidance that we have at least now in short term, but then longer term, we believe in our model, and that's how we're investing in the future.

Operator

Jason Bednar, Piper Sandler.

Jason Bednar

Good afternoon, everyone. Just wanted to touch one near-term item with third quarter guidance. It's something that's been discussed already, but clearly a little bit lower than where you're probably modeling things out internally three to six months ago?
I guess I'm just reminded of maybe where we were a year ago, in the third quarter, you had higher expectations than where you're at where you ended up finishing? So I guess I'm curious maybe how much of that experience from last year informs your view on volumes and product mix versus, say, the trends and macro data points that you've seen develop the last few months?
And then maybe include here, if you could just how you're seeing that teen season develop since we are think of that right now?

John Morici

Yeah, Jason, I can take that on the Q3 some of those specifics. Certainly, we look at last year, we look at the year 2022, you get into those COVID years, the tough to call it, and then you have to jump before COVID. So now you're talking almost five years ago.
So you look at what you see at the time, knowing that most recently you have as we have Europe has a summer kind of shutdown comes back into September. We want to be able to see in September that they do come back. US is as in teen season at trying to get into teen season as well, and we want to see how that plays out.
So we call based on based on what we expect both from a volume standpoint and we are really trying to give the foreign exchange that we see that started the started the quarter in July where that FX is and not make an assumption as to whether things are getting better or worse. We want to put that out there and really tried to give you more of the underlying performance for the business.
(inaudible) Joe, you want to talk about too?

Joseph Hogan

Yeah on the teen side, Jason, I said in my script and we were pleased with the growth was over 8%, which is great to see. A lot of that was supported by Asia and also Europe, and you've really got to get and as team numbers.
Again, IPE is part of that. it's we look at that is obviously pretty and we're watching the ramp-up of that and the acceptance in the marketplace. So I hope I'm answering your question, but overall, we feel good about the teen now, is a big teen season in China in the third quarter. We're watching it closely. We expect to be able to perform on that side too. So I'm optimistic as it stands.

Jason Bednar

Okay, great. And then just for my follow-up, I'm going to pass you in here. Maybe bigger picture. If we step back and look at some of the recent developments, there's a lot of initiatives, different initiatives, marketing programs, menu expansion, customer incentives, so on and so forth.
Those all help contribute to expanding that utilization line, improving doctor productivity. You've got the Costco relationship that's been discussed. We uncovered, but looks to be one of the larger changes to your advantage program in at least a few years.
I'm curious how you have us think about these in the broader context of your commercial efforts, would you consider things like the Costco and advantage changes either or both more impactful than what you typically do have you seen any change maybe in fact, behavior just in response to these advantage changes?
And then what's the right way to think about each of these influencing that ASP line that's now come into focus more significantly with today's results? Thank you.

John Morici

Yes, it's a good question, Jason. I look at it just to answer a couple of different ways because I think one is like on the advantage you brought up. That's really a reflection of trying to put some structure, a little added structure to our advantage program where many of our promotions we're trying to get to and in the end for any advantage program is trying to get new doctors in give them a progression of how they can get discounts as they do more and more cases drive utilization.
So that's good for new doctors, that's good for existing doctors. So the advantage changes really we're trying to put more structure into that into the second half and then carried forward because they really hadn't been refreshed like like what we've done now.
But it's all about driving utilization, getting doctors to do more and more cases. Programs like we're testing or piloting with Costco is really just trying to drive more conversion, find ways where those consumers or those potential patients are out there. They're shopping around. They're looking at you see the economy see inflation. You see other things. We know those potential patients are out there.
We just have to find ways to better connect them with a great product that we have with our customers with our doctors and Costco's, an example of that that we'll test and we'll see, but it's really that specifically is designed around conversion drive as much conversion as we can.

Jason Bednar

Thank you.

Operator

Michael Ryskin, Bank of America.

Michael Ryskin

Thanks for taking the question, guys. Joe, I want to follow up on a point that you touched on a couple of times already in terms of the ASPs, as you talked about, part of it is the mix shift and a lot of it is how your customers want to buy, whether that's different products within the portfolio, weather or DSP, things like that.
But what I want to get at is. Are you concerned by that trend itself at all is that customers want the lower products. I guess what gives you the option to still meet them in there, and that's still drive the volume. But is that something you expected the shift down, as you say, the market is still very unpenetrated. It's a big untapped market.
So you think that and you wouldn't be seeing the demand elasticity type of price that you are. So is this temporary because of the current macro environment and consumer sensitivity or does it say something deeper that the rest of the market that's out there really doesn't exist at that 1,300 plus ASP, maybe it's lower and lower and lower?

Joseph Hogan

Hey, Michael, it's Joe. Look, I think the ASP pieces to explain as much as we can as we're always there and at the margin side and make sure that our margins are good. We find out that all over the world. I mean, over here in India, they ask for different product and they asked the United States at different areas and some people want a five-by-five someone one, three by three.
All these things are different products for different kinds of applications and GPs and orthos with different times to. So what we're seeing and there's varying ASP.s on it, but we always have high. You see our margins have actually moved up on that.
So you're seeing not necessarily the market just driving price down. You're just seeing us having a variation of options that customers are doctors one around the world and making sure that we supply those well. One, we talked about 25,000 cases came through DSP. Remember those are cases that doctors used to mold these things in their offices in order to address those, right. And now they're buying three or four of ours now.
Yeah, we get great margins on that product line. But overall, it's a lower ASP in that sense as part of the DSP program. So what you're seeing is just us responding to a market that's a good market out there with varying degrees of price and value. And you'll see us continue to do that in order to grow the marketplace.

Michael Ryskin

Okay. And then much quicker follow-up, hopefully I'm sorry if I missed it, but did you call out why the Lumina restored it was pushed out the one to 25? Was this commercial decision oe something on the development side?

Joseph Hogan

Yeah. Michael. This is like five areas of restored is you have to be very good at as you go through this intuitive reviews we made extremely good progress on most of them, but we just we wanted to take a little extra time to make sure we get this right.
And we want to make sure that we run it through our doctors. We're actually going to use it that the luminaries out there that help to promote the product and make sure that they're comfortable with the too. So we just feel it's diligent and responsible to make sure that we take a few more months here launch in the first quarter. So we have the world's best product.

Michael Ryskin

Okay. Thanks. Make sense.

Operator

Erin Wright, Morgan Stanley.

Erin Wright

Thank for taking my question. So did you see any recent changes, for instance, in the adult case volume dynamics throughout the quarter? And just what are you seeing so far in the third quarter in terms of adult cases, I guess Has anything changed in terms of your view on the macro environment for the remainder of the year?
And I hate to belabor this, but also for the Americas, too, but on and on the macro question, but what are you generally expecting stability in your guidance? Are you anticipating a range of outcomes from a consumer and macro environment standpoint for the remainder of the year?

John Morici

Erin, I mean, we had that in our script and we've talked about it is we were expecting stability. I mean, obviously not stability in exchange rates, right? We can't we're not that smart will be working somewhere else if we knew exchange out well. But as far as the market overall, and I want to go about it. We still feel we're dealing in a stable environment.
The last thing I'll say about this is the very global business. You saw that Japanese yen, Brazilian real, the business has grown substantially that way. And there's certain amount of stability that we have that plays across geographies too.
And that adult piece, we felt we saw growth. We saw our highest quarter in many quarters as we're pleased with it. I think it's a reflection of our GP business grow and GPs growing with DSOs and so on being able to do to get some of that volume through.
Like Joe said, it's more of a stability that we're seeing, but we're pleased with that adult growth and some of that contributes to some of that lower ASP product scrape, if that's how doctors want to buy to be able to treat those adults. We're happy to sell to them. And as Joe said, it's a better margin for us.

Erin Wright

You mentioned China to and the teen market there. But just generally speaking, can you give us an update on kind of China, the underlying demand trends and market dynamics there.

Joseph Hogan

It's Joe. Again here. China have performed the way we want to China to perform just as we predicted. Overall, I mean, the market is challenging to Tier three and four cities are actually challenged more than the private and one and twos. But overall, there's no surprise you have a good team there. Junos a great leader for us there. And we like the results and we're looking forward to a good team quarter there, which third quarter is always the biggest quarter for China.

Erin Wright

Okay. Thank you.

Operator

Thank you. This does conclude the question and answer session of today's program. I would like to hand the program back to Shirley Stacy for any closing comments.

Shirley Stacy

Thank you, operator. And thank you, everyone, for joining us on the call today. We look forward to speaking to you at upcoming financial conferences and industry events. If you have any questions, please follow up with our Investor Relations team. Have a great day.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.