Q4 2019 Earnings Call
Greetings and welcome to align technologies Q3, 2000, and <unk> earnings Conference call. At this time all participants are on the listen only mode. A question answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to turn the conference over to your host Shirley Stacy Vice President corporate and Investor Communications. Thank you you may begin.
Thank you good afternoon, everyone and thank you for joining us some Shirley Stacy Vice President of corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO and John Ricci CFO wishes third quarter 2019 financial results today via Globe Newswire, which is available on our website at investor Dot online check dot com.
Today's conference call is being audio webcast and will be archived on our website for approximately 12 months.
A telephone replay will be available today by approximately 530 PM Eastern time through 530 PM Eastern time on November six.
So access a telephone replay domestic callers should dial 87766, 06853 with conference number 13694915, followed by pound.
International callers should dial 20161 to seven for one five what the same conference number.
As a reminder, the information that the presenters discuss today will include forward looking statements, including statements about aligned future events product outlook and the expected financial results for the fourth quarter of 2019. These forward looking statements are only predictions and involve risks and uncertainties that are set forth in more detail in our most recent periodic reports filed with the securities and.
Exchange Commission.
Actual results may vary significantly and align expressly assumes no obligation to update any forward looking statements.
We have posted historical financial statements, including the corresponding reconciliations and our third quarter 2019 conference call slides on our website under quarterly results.
Please refer to these files for more detailed information without I'd like to turn the call over to align technologies, President and CEO , Joe Hogan Joe.
Thanks surely good afternoon, and thank you for joining us on our call today I'll provide some highlights for the third quarter that briefly discuss the performance of our two operating segments clear Aligners and oral scanners, John I'll provide more detail on our financial results and discuss our outlook for the fourth quarter following that ill come back and summarize a few key point and open up the call to questions.
For Q3, I'm pleased to report revenues volumes and earnings above our third quarter outlook, driven by better than expected volume across the it doesn't warrant portfolio in Asia Pacific in Latin America, reflecting record highs for both regions and improving trends in the North American Orthodontics channel.
Notwithstanding a mass summer seasonality, we saw continued adoption.
From teens, and especially young patients using a bit like first across the board Q3. In this line volumes were up 20.7% year over year, driven by the growth across the product portfolio portfolio as well as the expansion of our customer base, which increased by 5900, new Invisalign doctors for a total of 63000 active dock.
There's worldwide.
Yeah, Taro scanner and services business was up 16.5% year over year, reflecting continued growth across each region and down sequentially as expected coming off a record second quarter.
Now, let's turn to the specifics around our third quarter results, starting with the Americas region.
The Americas region typical Q3 summer seasonality for adult cases starts in North America was offset by the growth in North American team market as well the strength from Latin American Orthodontist, Q3, Invisalign case volume was up 2% sequentially and 13% year over year on tough comps.
We call in Q3, 18, we had a teen an adult promotion that drove approximately four to five points of growth in the Americas.
In Q3, we trained over 2700, new doctors in the Americas region of which nearly half or Latin American doctors.
On a sequential basis Q3, and just like volume growth reflects increased utilization for the Americas region overall.
Driven by the North American worth it was at 19.1 cases per Doctor.
Where we saw improved momentum throughout the quarter and good growth from teams in Invisalign first patients.
North American G.P. volume was seasonally lower in Q3, and we're seeing improving trends into fourth quarter.
Reflecting benefited from our investment in sales resources added at the beginning of the year, new and existing reps are continuing to ramp up and we would expect further progress over the remainder of the year.
We also have continued strength across comprehensive and non comprehensive product in Latin America led by Brazil.
Year over year Q3, Invisalign volume for the Americas region was driven by continued growth from both the worked on GP channels, including the Dsos Dsos piano remains an important channel and consistently grows faster than non DSL practices.
For International business Juicy reflects increased growth in Asia Pacific, especially from our team segment in China, partially offset by sequentially lower volume in AMEA due to the summer holidays for Invisalign practices and most European countries.
On a year over year basis, Invisalign volume increased 32.1%, reflecting strength across our product portfolio with continued expansion of our customer base.
In Q3, we changed retrained over 30, 102, Invisalign doctors internationally with 60% in the Asia Pacific region.
It may acute reinvest line volumes were down sequentially as expected, reflecting more pronounced seasonality in the first half of the quarter and strong momentum in the back half led by Iberia in the UK.
Two or three volumes were up 29% year over year with broad based growth across the invisalign product portfolio and continued momentum from baseline go treatment.
We also continue to see strong growth across our key expansion markets as well that by central and Eastern Europe , and the Middle Eastern Africa.
In Q3 as part of our corporate structure reorganization, we relocated order acquisition for ammonia from the Netherlands to Poland. The site will serve as a centralized facility for order acquisition local sales and support.
In addition, this location will also offer treatment planning to support all of the May a country markets, except for Spain, and Germany, well, we'll continue to support their local markets.
For a pack Q3, and just line volume increased 35.1% year over year led by greater China, and Japan, We continue to see strong growth from GP, Dennis which was up 53.2%.
Year over year, especially in Japan, where it adoption of Invisalign go continues to exceed expectations.
On a sequential basis Q3, invisalign volume for a pack reflects continued momentum in China, especially from team cases in growth from Taiwan and Korea.
We also saw increased adoption of this line first in Japan, and Anzi in Taiwan as well as positive results from teen edge professional marketing programs, which are helping to drive in this line growth.
During the quarter, we opened the treatment planning facility and Yokohama, Japan to better support Japanese doctors in local language and local time zones.
Hey, Pat remains a huge growth opportunity for aligned and this investment reflects our commitment providing our customers with continued support as we grow in scale our business across the region.
Teams in kids continued to make up the largest portion of the orthodontic market and represent a huge growth opportunity for invisalign treatment to replace metal braces worldwide over.
Over the past two years, we introduced two product innovations to help doctors treat more patients in this segment.
Invisalign treatment with Mandibular advancement addresses roughly 45% of team cases and is the only clear aligner to move the mandible forward, while straightening teeth at same time.
And this is my first treatment as a first clear aligner product design with features specifically for growing patience as young as seven years old in phase one addresses 20%. The orthodontic case starts each year, both products have continued to grow and help increase utilization for invisalign treatment worldwide.
In Q3 hundred 30000 teenagers and kids as young as seven years old started treatment with Invisalign clear Aligners, an increase of 31.5% year over year, reflecting continued adoption across all major regions, especially China.
Cumulatively nearly 2 million teens are younger patients have using just lying clear aligners.
In Q3, we continue to see strong dental engagement with consumers, reaching over 4.5 million unique visitors on Invisalign web sites worldwide for a total of 62 million visitors to date.
Our digital approach the Jean Marc and it continues to drive awareness and interested teenagers into invisalign practices. Other key metric show increased activity and engagement with the Invisalign brand and are included in our Q3 quarterly slides.
In addition, we launched a new advertising campaign for North America at the beginning of the quarter North American campaign was launched across all key media channels.
With a reached over 140 million consumers combining a robust paid media strategy across prime broadcast cable conducted TV channels with paid search and social media.
Well still new in the marketplace in very early in the cycle, we're seeing a positive response from doctors and consumers.
Last few weeks all K.P. isometrics has shown strong momentum with more than a 50% increase and dr. locator searches and lead scheduled from our smell costs here service.
Finally, as many of you may have seen we recently announced marketing relationships with several professional sports teams, including the San Francisco 40, Niners, the Toronto Raptors, The Carolina Hurricanes in the New England Patriots line is always looking for ways to evolve our brand marketing to be relevant to potential patients where they work doesn't play over.
Over the last few years, many sports brands have evolved their own brand programs to engage with fans in a variety of ways and through multiple touch points.
Morning with teams.
We have an omni channel approach the brand marketing and engagement gives us direct access to large loyal fan bases and helps us reach individual consumers and whole families through a variety of existing fan platforms with the right team partners. We can create awareness for the power winning smiles and as always the goal is the same for us to build awareness.
Isn't demand for Invisalign treatment and connect engage consumers within Invisalign doctor practices and their markets.
For Q3, Itero scanner and services revenue was down sequentially as expected and up 16.5% year over year, reflecting continued growth across all regions and customer channels, including large dsos.
Year to date I tell revenues are up 47.3%, reflecting continued adoption of digital dentistry.
Cumulatively over 18 million orthodontic scans and 4.3 million restored is scans have started with Itero scanners heartland dental one of our largest DSL partners recently celebrated their millionth itero scanner, highlighting how important itero invisalign workflow is to their doctor practices, which now includes no.
900 offices across the U.S. and is enabling them to add nearly 200000 digital scans per month.
You said that Taro scanners for Invisalign case submission continues to grow and remains a pilot positive catalyst for Invisalign utilization.
Q3, total Invisalign cases submitted with a digital scanner in the Americas increased from 78.7% to 71.9% in Q3 of last year International scans increased 62.5% up from 53.9% and the same quarter last year.
Within the Americas, 92.9% of cases submitted by North American Orthophos were submitted digitally.
We continue to expand the itero portfolio to address doctors needs and enable them to more easily adopt invisalign treatment in their practices.
In August we announced the commercial availability of the Itero element to scanner in China.
With the first made in China, itero element to produce than our manufacturing facility in zeal.
The launch of exemplifies Alliance continued innovation and investment to advanced digital dentistry in China.
In September we were announced a global distribution agreement for the Itero element family of inner oral scanners with Zimmer Biomet dental.
The agreement enables us to leverage Zimmer biomet dental extensive direct mobile salesforce and network of dental clinicians and laboratories to help to further drive the penetration of Itero scanners and services and the growing digital restorative market.
The collaboration also offer Zimmer biomet dental customers access to Invisalign clear aligners through the Itero platform to facilitate a comprehensive interdisciplinary treatment approach, we know that a key differentiator in the evolution to a digital practice and dental ecosystem is clinical education.
Through this collaboration the Itero scanner becomes exclusive interoil scanner use in the U.S. and your and European Zimmer Biomet Institutes, which trains thousands of doctors annually interactive learning environment. The ultimate goal of improved clinical outcomes. We also joined Zimmer at the Japan Society of oil oral implant technology.
I think in Japan.
And that the email in Portugal, where the Itero Interboro scanners were showcased.
With that I'll now turn the call over to John .
Thanks, Joe now for our Q3 financial results total revenue for the third quarter was $607.3 million up 1.1% from the prior quarter and up 20.2% from the corresponding quarter a year ago year over year revenue growth was favorable in all regions for clear Aligners Q3 revenue.
$516.3 million was up sequentially due to invisalign volume growth in most geographies and higher ASP is year over year clear aligner revenue growth of 20.9% reflect strong invisalign shipment growth across all customer channels and geographies and higher ASP.
Q3, Invisalign asps were up sequentially by approximately $30 to $1260, primarily due to price increases in all regions, partially offset by promotional discounts on a year over year basis, Q3, Invisalign Asps were up $30, primarily reflecting price increases in all regions.
Partially offset by promotional discounts and unfavorable foreign exchange.
Total Q3, Invisalign shipments of 384 point.
385.4 thousand cases were up 2.2% sequentially and up 20.7% year over year for America's Orthodontists Q3, Invisalign case volume was up 5.6% sequentially and up 16.4% year over year.
For America's GP, Dennis Invisalign case volume was down 4.1% sequentially and up 7.4% year over year for international Doctors Invisalign case volume was up 2.5% sequentially and up 32.1% year over year.
Our scanner and services revenue for the third quarter was $91.1 million down 12.4% sequentially as expected, reflecting lower volume coming off another strong Q2, partially offset by higher ASP.
Year over year scanners, and services revenue was up 16.5% driven by increased services revenue off a higher installed base and higher volume.
Moving on to gross margin third quarter overall gross margin was 72% flat sequentially and down 1.6 points year over year gross margin was impacted by approximately 0.3.
Points year over year due to unfavorable foreign exchange clear aligner gross margin for the third quarter.
[noise] was 73.5% down 0.2 points sequentially, primarily due to increase aligners per case, partially offset by higher SBS and seasonally lower doctor training.
Clear Aligner gross margin was down 1.8 points year over year, primarily due to increased aligners per case, partially offset by higher asps.
Scanner gross margin for the third quarter was 64.1% UBS your 0.5 points sequentially and up 0.2 points year over year, primarily due to higher asps and increased manufacturing efficiencies.
Q3, operating expenses were $310.4 million up sequentially, 21.3% and up 25.9% year over year.
The sequential increase reflects the benefit of $51 million related to the Straumann litigation settlement recorded in the second quarter. Additionally, the third quarter includes a $6.8 million benefit from the early termination of our Invisalign store leases. The every year increase reflects our investment in consumer advertising.
With a brand new North American campaign launched in August .
Continued it and the continued investment in R&D geographic expansion and go to market activities, partially offset by the benefit from the early termination of our Invisalign store leases.
Our third quarter operating income of $127.2 million resulted in an operating margin of 20.9% down 8.5 points sequentially and down 3.9 points year over year. The sequential decrease in operating margin is primarily attributed to the 51 million dollar benefit related to the Straumann.
Settlement recorded.
In Q2, partially offset by $6.8 million benefit related to the invisible and store lease terminations in the third quarter the year over year decrease in operating margin is primarily due to lower gross margin as described earlier and the increased investments in our geographic expansion and go to market activities, partially offset by the.
Benefit from the early termination of our Invisalign store leases in the third quarter.
Operating margin was impacted by approximately 0.6 points year over year due to the unfavorable foreign exchange interest other income and expense for the third quarter was $1.3 million down $16.1 million sequentially and flat on a year over year basis. The sequential decrease reflects the.
The $15.8 million gain related to the sale of our equity investment in Smile direct club during the second quarter.
With regards to third quarter tax provision our tax rate was 20.2%.
Third quarter diluted earnings per share was $1.28 cents down 55 cents sequentially and up four cents compared to the prior year.
Moving onto the balance sheet.
As of September Thirtyth, 2019, cash cash equivalents and marketable securities, including both short and long term investments were $782.4 million, an increase of 16.5 million from the prior quarter, which is primarily due to higher cash flow from operations, partially offset by.
By $200 million used to repurchase approximate 1.1 million shares of our stock.
Of our 782.4 million of cash cash equivalents and marketable securities $513.9 million was held in the U.S. and $268.5 million was held by international entities.
Q3 accounts receivable balance was $531.8 million up approximately 2.3% sequentially. Our overall days sales outstanding was 79 days up two days sequentially and up four days from Q3 last year.
Cash flow from operations for the third quarter was $234.5 million up $138.3 million compared to the prior year.
Capital expenditures for the third quarter were $26.6 million, primarily related to our continued investment in increasing the lighter capacity and facilities free cash flow for the third quarter defined as cash flow from operations less capital expenditures amounted to $207.9 million.
During Q3 2019, we engine into and completed an accelerated stock repurchase agreement MSR to repurchased $200 million of our common stock, which was completed in September of 2019, we received a total of approximately 1.1 million shares for an average price of one how.
Third $76.61 per share.
We have 200 million 0.5.
Dollars Greenbee remaining available for repurchase under the May 2018 repurchase program.
With that let's turn to our Q4 outlook and the factors that inform our view starting with the demand outlook [noise].
Q3 was a solid quarter and momentum has continued to build into Q4 across all regions for international we expect Q4 volumes to be up sequentially, reflecting strong uptick from Mam as doctors come back from summer summer holidays.
For the Americas, we expect Q4 volumes to be up sequentially, reflecting growth across all key country markets as well as momentum in North American Ortho and GPS along with increased media spend and the launch of our new consumer advertising campaign as Joe described earlier.
We expect to our Itero business to be up sequentially in Q4 to reflect.
End of the year capital equipment purchases and investment in growing the itero business across all regions.
With this as a backdrop, we expect the fourth quarter to shape up as follows Invisalign case volume is expected to be in the range up 400 to 407000 cases up approximately 20% 22% year over year.
We expect Q4 revenue to be in the range of $640 million to $650 million up approximately 20% to 22% year over year. Our Q4 revenue outlook assumes no SDC volume compared to the same quarter a year ago, when a lot aligner supply it to SDC contributed.
About $5.8 million to revenue.
We expect Q4 gross margin to be in the range of 71.7% to 72.4%.
Q4 gross margin.
Is up 0.4 points compared to Q3 as we expect continued improvements in our manufacturing efficiencies associated with higher volumes. We expect Q4 operating expenses to be in the range of $318 million to $323 million.
Q4 operating margin should be in a range of 22% to 22.7% our effective tax rate is expected to be approximately 24%.
Diluted shares outstanding is expected.
To be approximately 79.4 million exclusive of any share repurchases taken together, we expect our Q4 diluted earnings per share to be in the range of $1.35 to $1.42.
In addition, we expect to repurchase at least $100 million of our stock in the open market in Q4.
As we continue our operational expansion efforts, we expect capital expenditures for Q4 to be approximately $30 million to $35 million, and we expect depreciation and amortization to be $20 million to $24 million.
Before turning the call back to Joe I want to update you on our corporate entity reorganization on January one 2020, our EMEA headquarters in the Netherlands will officially move to Switzerland, Our new Swiss location will serve as the headquarters for all regional commercial and operational activities in EMEA and what we support.
It it by the existing network of local offices established across the region, our new corporate entity align technology, Switzerland Gmbh will assume all responsibility for the sale and distribution of the Invisalign system Itero intra oral scanners and associated line goods and services in EMEA.
[noise] previously provided by align technology BV.
Our local and global teams have been working diligently to ensure a very smooth transition, while supporting our dr. suppliers and employees many of whom have decided not to relocate to Switzerland, but will stay on and transitional roles as needed I want to thank all of our employees for their hard work and dedication and supporting this major company initiative.
While it is never easy to make this kind of change, especially when it impacts team members will help build the EMEA business and have contributed so much to our overall success. We're very excited about a new operations in Switzerland.
Now I'll turn the call back to Joe for closing comments.
Thanks, John and thanks for joining our call today overall Q3 was a solid quarter for us across the board with increasing momentum in APAC in North America that has carried us over into Q4.
As you can see from the high end of our guidance the implied full year growth rate for Invisalign volume is 23.5% with international growth in the mid to high Thirtys.
Overall, our business remains very healthy with numerous growth drivers in a vastly underpenetrated market.
We remain confident in both the enormous opportunity ahead to lead the evolution of digital orthodontics and comprehensive dentistry with our dr. customers and in our ability to execute our strategy to increase adoption of invisalign treatment globally without I want to thank you again for joining the call I look forward to seeing many of you at our upcoming financial conferences and meetings and.
Including the Invisalign GP summit and November in Las Vegas.
Operator.
At this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Information tailwind to get your line is in the question Q you May press star to feel like to remove your question from the Q.
Participants use and speaker equipment, they might be necessary to pick up your handset before pressing the star.
One moment, please why we pull for questions.
My first question comes from Aaron right with Credit Suisse. Please proceed with your question.
Great. Thanks, so much.
The higher Opex spend are you seeing the returns from the North America.
I guess stepped up marketing media spend as you expected and how should we be thinking about that level of spending to the fourth quarter just based on the responses that you're seeing from the marketing campaigns so far in.
And we'll be I guess contribute to the accelerating kind of volume trends in the fourth quarter as well as momentum into 2020. Thanks.
Hi, Aaron its Joe Yeah, we're seeing as you could tell from the statistics. We this recorded.
<unk> real large take up when you think about Doc locator searches, which is a primary our costs year service and what their handling over the course year service takes those customers and then direct some directly to doctors that we have a high degree of certainty that they'll actually convert them into invisalign.
As we move into the fourth quarter expected same amount of investment.
Also in the Americas too with the improvements you're seeing is also our salesforce and the additions we put together as we said at beginning of the year. It usually takes at least nine months six to nine months to seek some kind of traction and we're seeing it with the salesforce to so both the advertisements and from the North America standpoint, and the added salespeople. We think are really contributing to that momentum we just reported.
Okay, Great and our next follow up just on China and.
Particular can you speak to what you're seeing across that market just given some of the commentary you had in the previous quarter around the softness in that geography, if you could give us.
Great.
Well you have the momentum we report in China that we when we had our announcement.
Second quarter.
We continue you know throughout the quarter, So I think that 20 per 6% growth in China.
In the second quarters, removing the third quarter you know we're in the upper 30% range.
You know overall, we're just seeing a good uptake we had a good team season, there we've hired I'm, 40% more people in China also it takes them awhile to actually become a climatized be trained and have an effective in China also so we feel good about the momentum in China I think the economic situation. There with you know reporting the slowest growth as seen in 30 years.
We know we have a headwind there it could that continues it reported in the second quarter two but overall, we think we've made the right adjustments that we have the right focus right now to continue some good growth there.
Great. Thanks.
Well go next question comes from Steve Bushaw with Wolfe Research. Please proceed with your question.
Hi, good afternoon, and thanks for the time here.
I'm sure will be a lot of questions about individual on an appropriately says I want to go different direction and ask about a couple other things.
One is actually the the itero number in the quarter.
I know its normal seasonally to see things make a move like this but I wonder as you saw trends for Itero in the quarter, where there was actually a lot going on operationally given what you were doing with Zimmer, which I'm sure. It was a significant time investment for the Salesforce.
Where you had a product launch coming in a key region do you think there was any disruption in terms of the commercial effort around itero during the quarter.
Hey, Steve It's John No. There's no no disruption I mean, we are you know as you. If you look at Itero for on a year to date basis is up 47% youre going to have some timing that happens by by quarter, but we feel very good where itero is it's it's the front end of our.
Our digital ecosystem very critical to our business and.
You are going to have fluctuations by quarter, but we feel very good where I itero is so far this year.
Okay and then.
Sorry, sorry, Joe for leaving the out here, but I got a couple of for John .
One is on the transition in Europe can you speak to how much.
Duplicative costs, you might be might have been carrying between the Switzerland operations and the Netherland operations, what that well get that could mean for the tax rate over time as you change the domiciled.
The organization and then I Wonder if you could give us an update on what you think prospectively the impact of facilities manufacturing capacity capacity utilization is going to be going forward on gross margins. Thanks a bunch.
Yes, Steve in terms of of the changes that we make in making it a man it's really to simplify some of the organization that we have.
And in light of many of the that the tax changes and other structure that that we had to create so look at it from that standpoint, it simplifies things a little bit from a entity standpoint, and and gives us some flexibility to changes to our tax that to taxes that happened globally.
From a facility standpoint, where we're putting in manufacturing where where it makes sense. We've talked a lot about China manufacturing that continues to ramp up treatment planning globally be closer to our customers. That's very important to us and there's always a transition period in terms of that that productivity as it become more and more.
Productive, but we feel very good about the investments that we've made and the gross margin that that we see now and what we're forecasting.
Thanks, Steve next question please.
Our next question comes from John Kreger with William Blair. Please proceed with your question.
Thanks, very much Joe what's your sense about the underlying health of consumer spending on orthodontics at this point is it getting better or worse and I'm curious if you think the all the money going into some of that direct to consumer oriented models. Like STC is that is that proving to be a net benefit to align or a little bit of it.
From a contract as a way sort of awareness versus any competitive chefs. Thanks.
Hey, John .
First of all I think you know you picked up in your survey and other people do too and we pick it up is we see we see good.
Good consumer spending right now from an orthodontic standpoint align stands out in that spending when you look at it specifically.
As far as how that's driven obviously, we've put a lot more into consumer advertising and.
Some of the DTC competitors have done that also I do think that that raises consumer brand awareness and no question I think.
You know the consumers go to the Internet to try to answer those questions. We'll go to their doctors to try to answer those questions too. So I can't deny John I think that our advertising in some competitive advertising in that sense, probably does raise all boats to certain extent.
Great. Thanks, and then one quick follow up the utilization among your North American GPS has been kind of flat over the last couple of years. What is your thinking about the best way to drive that higher over the next year or two.
[noise] on your first of all John I think you know that you've been with us for a long time. It we add so many GPS every year you know 150000 of them, we train significant numbers of them each year and so you end up with a dilutive effect in that sense. So you know the numbers. It reported it always is around 3.4 to 3.6, you know from from quarter to quarter.
The back to your question I think the way to do this is one obviously our DSO approach is a good one because as I talked about being a force multiplier before you work with a strong dsos they have their own training for their their groups. They they help to quantify work flow and do different things that.
For years in this business I think we thought we just needed one product, but we've learned over time like a product like I go really isn't a product. It's a system you know it's a system that really works with G.P. to identify patients to qualify for this fits well with their workflow. It allows us to be confident when they're in front of patients that they can handle those cases, and we stand behind them.
So overall, it's right products right systems, working with Dsos of help us to become the drive better penetration too.
Great. Thank you John My question.
Our next question comes from Ravi Misra with Barnburner capital markets. Please proceed with your question.
Hi, Thanks for taking the question can you hear me okay.
Yes, yeah.
Hey, great. So I'm just a question on the gross margin not to pick it too much at Whiting is a pretty good quarter just quick.
Why aren't we seeing given the kind of pricing uptick that looks like it emerged in the three quarter.
Third quarter.
Why are we seeing more of a flow through on the clear aligner gross margin in the fourth quarter and maybe if you could help us think about pricing in the fourth quarter for DSP I think last quarter, you said it would be about even with the second quarter and it pretty much a lot better than that so do you feel more confident than your ability to take price here.
Thank you.
Yeah Ravi this is John .
As we as we discussed I mean, we've taken price up in the third quarter and you see that does show up in Asps were also investing a twod and our manufacturing treatment plant it'd be closer to our customers something that offsets.
And in third quarter. There was there was not much change from from Q2 Q.
Q4, we talked about.
Our guidance, which is up sequentially in in gross margin is reflection of more volume productivity that we expect it continued to see at these manufacturing sites and we'll continue to see to see that benefit.
When you look at the Asps as you mentioned like you said it at 1260 was it was a.
A good increase at $30 from from Q2, we were able to when we think about the the forecast to that it'll come down slightly the mix was really high from a comprehensive standpoint in Q3, so when we take it down to take Q4, Adobe, we think closer to $1245, which is very consistent that weve talk.
What about as as being essentially flat as as we go through this year.
Great and then if I can just maybe squeezing a follow up to the implications on team there with a comprehensive.
Just if you could confirm or maybe provide some color as that.
As you get deeper penetration at that market. It looks like you've been doing 30% growth here the last few quarters.
How how should we think about the mix shift on the pricing that that should be kind of a good guy right with the more comprehensive.
Cases thanks.
Yeah, Rob it's Joe Yeah, you're right. It's a mix shift you remember from a teen growth standpoint, and we're reporting really good you know above 30% teen growth globally, but we're still the utilization rates in that marketplace are way below what our clinical entitlement I would say today, we can handle almost all team case cases.
So with that mine, though it is a mix up it is primarily a comprehensive marketplace, it's primarily in ortho marketplace and how it works.
We feel really good about our portfolio to be able to address the team patients right now and.
Long term, we see that as a counter balance on asps, but that we all think about.
Thanks Ravi next question please.
Our next question is from Jon Block with Stifel. Please proceed with your question.
Great. Thanks, guys and good afternoon.
Joe maybe first one for you just any comments, maybe I missed it but it's sort of on comprehensive burst non comprehensive growth. This quarter and then with the GP summit approaching next mall of is there any plan to more aggressively trying to pursue called those lower acuity cases through that channel and then I've got a follow up.
Yeah, I mean, John honestly, I mean from a comprehensive standpoint, obviously, we're still 70% of our portfolio more goes that way, but with the introduction of light you know I go products like this when we made an adjustment any five this quarter you seven all these other products I mean that that part of our product.
Line has traditionally been growing faster and with a comprehensive thing is now it's a lot of small numbers versus large numbers, but we do see increased growth in that area. When we look at a GP channel. We do look at the GP channel was a way to get out patients we call kind of a sub acute kind of in the patient base to do that so I mentioned I go on that last call also is being a system that allows us to do that.
Obviously light does that also so you'll see us John increasingly focused on that channel.
I also think about working really closely with GPS on not just the product line, but the system itself with Itero. How do you have to do treatment planning quickly and to give the GPS confidence it when they adopt these cases that they'll finish and they'll finish well those are three critical variables. We know we have to hit to really drive significant growth.
Got it very helpful. I mentioned the pivot John the reward for this year is there should have a refining number is 1.5% or 2% or is it still in that range and then sort of part B that question is follows up on Ravi just to be as specific as possible. The gross margins in sort of flattish threeq to fourq.
So is it a globalizing the supply chain headwind or is it more aligners per key headwind and I'm asking that because the more line as per case that probably continues with teen et cetera, but the globalizing the supply chain that seems more of a 19 event. The mid 20 events, so any more detail.
We'll give around gross margin will be helpful. Thank you.
Yeah, John it's really both I mean, when you look at especially as we do and work with their doctors do more more complicated cases as comprehensive grows and Invisalign first and teen and so on those end up being more aligners and and end up.
Impact our gross margin the globalization that we're doing that's that's much more.
Short term as we as we as we've said get go getting close to our customers very very critical to us treatment planning manufacturing.
But as you get more and more capacity, there and scaled that you see productivity improvements.
Thanks, John .
Next question. Please our next question is from Kevin Kelly Endo with UBI. Yes. Please proceed with your question.
And when you there.
Yes, hi, sorry, I apologize.
Did you take the same price increases internationally as you did domestically the first quick one.
And then just looking at the trend quarterly trend in case growth and and overall revenue growth is seasonality shifting as international sales grow as a percentage and how should we think about that going forward.
Hey, Kevin Joe on the pricing piece, Yeah. It's about the same then there's a mix and talks on light versus comprehensive, but basically the same price increase globally across the board.
On the on the revenue growth the seasonality of it I think the biggest thing that you can think there's there's really a couple of trends in this business is one in North America, you move into the third quarter its team season, and GPS tend to decline so but the biggest mix is in Europe , where you basically go down for vacation I mean lights go out for us for a long.
Period of time, and then obviously come back in September .
And then got China on the other side to kind of compensates for that in the past. So those are the big I would say counter cyclical or cyclical movements that we have in that business.
Great. Thanks very helpful.
Thanks next question please.
Next question comes from Richard Newitter with SBB Lorraine. Please proceed with your question.
Hi, Thanks for taking my questions Ive to Joe just the first one just you last quarter, you gave a little bit of color on anecdotally, what you're seeing out in the field from Doctor directed competition and some of the discounting that might might be taking place I'm. Just curious if you could comment on the.
On a trend into the current quarter and what you're seeing there and any anything surprising you or different from what you saw last quarter on those and have a follow up.
Hi, Richard you know on the when would that comment I made last quarter, you know how to do with Dr. directly to you know de why I model and primarily North America, and some kind of young adult segments, we actually saw that stabilize and actually start to improve.
In the third quarter from an order standpoint, so actually saw good momentum into right direction there.
Okay, and I was just referred to the more traditional.
Competitors that recently started launching products, where there might be some trialing that that's what you're referring to as improving not not the DTC Oh I actually I think I'd say, both I mean, the traditional competitors that are out there you know we acknowledge the last last quarter, which we thought we had two.
But there's no fundamental change in that what we saw in the second quarter versus what we saw in the third quarter.
Okay, and then just on China, Joe I am I getting a sense that you just have improved visibility relative to kind of where youre where are you were sitting at this time last last last conference call.
Is that the right kind of directional take away from from the call as you see the trends into the fourth quarter clearly picked up in China in the third quarter and what would you say you long range plan topline you know.
Greater than 20% growth for the foreseeable future what would you say your confidence level is kinda today versus maybe three months ago, particularly now that you have more data points in hand on China, and some of those north American trends last quarter that weren't focused thanks.
Yeah. Good jockey My comments, you know kind of in this year, but I'd say, what China shaped up to be is pretty much what we called in the second quarter. We said the teams. He says we're going to come in China, we thought that would be a lift.
You know either Hardy salespeople were looking for that to take hold and be able to move the business forward and so.
Lets say, we had better visibility now I think we had the same visibility that we had you know quarter to quarter actually from an execution standpoint, I just think that's the steps that we've taken with some of the pressure on consumer demand that we reported in second quarter. The operational steps, we took in China on the ground, we're seeing a good result for it.
We feel good about it.
Thanks Rich next question please.
Our next question comes from Brandon Couillard with Jefferies. Please proceed with your question.
Thanks, Good afternoon.
Maybe just a couple of housekeeping items that Joe any update on the timing of U.S. approval for the five de scanner and then any color you can share with us as far as Mandibular uptake in the us.
You bet on the five de scanner you know the FDA is the FDA and you know we feel confident we'll we'll get through here early part of next year would be the you my best forecast in that sense I could tell you from five de standpoint, the uptick around the world has been good.
The carries detection piece, the they'd be able to see cracks or deterioration in teeth has been terrific and so it's really been a changing aspect to the clinical GP practice to be able to see carries in a way that you really can't see them without near infrared technology. So we're actually really excited about that I'm excited to get into North America.
Thanks, Brandon more next question please.
Our next question comes from Jeff Johnson with Robert W. Baird. Please proceed with your question.
Thank you good afternoon, guys Joel I want to go back to China. Just you did talk last quarter that you wouldn't lose that kind of teen tailwind as you go into the fourth quarter and next kind of normalizes Baptists, just some adult patients at all that but it sounds like you know as you've said on this call you are starting to see some good traction with some of the Salesforce adds another effort in that area.
We look at Twoq you is trying to you know that that 26% number that you brought up again this quarter from QQ is that kind of where our.
The baseline should be from here and you think the at least going forward somewhere in there or above given some of these recent efforts.
Hi, Jeff.
Obviously, we feel we think we we did well in the third quarter in China. You know some of it was obviously the teensy, but actually we had some pretty good adult growth too.
We're moving out of teams season, there as we talked about the momentum going into fourth quarter has been good there too.
As far as a baseline Jeff goes or whatever hey, China's a growth market for us we wouldn't be put manufacturing and over there we would be put in treatment planning and we wouldn't make investments, we're making unless we feel the China is going to continue to be the second largest market, the where theyre growing with so I think thats. The way you have to think about going forwards.
Yes, yes, yes.
Go ahead, Jeff Alright, Jack on what does it Jeff.
Oh, the off that branded I'd note that say anything there you are hang on what did you say.
I said certainly got a quick look tonight. Thank you for keeping the on for a follow up.
[laughter], we're trying to get done many analysts as we can go ahead.
Wisconsin lawsuit [laughter] well as in Illinois.
I won't comment on that Oh.
[laughter].
Hi, Joe.
Do you want to ask on the on that.
Channel.
In the third quarter, you know obviously, you've seen some states an act of your hurdles for some of those models and all that I'm sure too early to see anything that like that your number.
Numbers, but I'd be interested kind of what are you doing with your doctors.
Thats right to combat some of that.
Competition.
Are you having any success in kind of helping these doctors understand where they need to be price point at size or other channel support you can provide just what are you doing a really kind of that that direct to consumer angle.
[noise], Jeff I, you know I first of all when we think about.
Things, you're talking about having a doctor in the center. This thing, having an X ray that you're moving t. through bone.
People think that I think a majority of people where patients out your thing to teachers hanging from gums and it actually stand at the teacher and bone and you're actually seeing what's going on in the bones, a pretty good indicator of you know if you should go through orthodontic treatment or not but.
With that said with it with the GP as I talked about in previous all or is the I go product really is the best platform that we have right now in the sense of how to really educate doctors to go. After these patients and you know what I'm hearing more and more from GE pieces, there have a more and more of a dialogue with their patients their patients are coming in they are asking questions now.
They are saying Hey, what's just mean, what can you do for me.
You know, what's your price point for being able to straight my my 60 anterior teeth.
We are trying to give them as many tools as we possibly can as far as workflow tools, which we have with itero. When I go and then products that they can really have a lot of competence in so I would say our initial.
Sean that in the United States has been improving significantly you'll see it the GP summit, what we're rolling out and it kind of focused areas, we have around that but.
Obviously, we'll have a very strong focus in that area.
Thank you.
Yes, you will.
Our next question comes from Elizabeth Anderson with Evercore. Please proceed with your question.
Hi, Thanks, a lot of questions.
But I just wanted to know if you could comment.
Yeah.
Just picked up.
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That was.
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Hey, Elizabeth as John .
Really nothing nothing out of the ordinary when we look at the inventory, it's primarily on the on the Itero side and it really how we manufacture a much more level loading from a manufacturing standpoint, and really the rise that you saw in a third quarter is really anticipation of the volume that we expected a fourth quarter. So that's that's all that's all it is.
Okay that makes sense. Thank you very much.
Thank you next question. Please our next question comes from Matt O'brien with Piper Jaffray. Please proceed with your question.
Hi, guys. This is I drew on for Matt and congrats on the nice quarter.
Hi, good.
Consumer financing I know you've talked about a little bit in the past in your working to third party provider are you hearing any demand from customers asking for more option there and what do you have interest in expanding that program further.
Yeah drew this is John or of course, we want to do whatever we can to try to help turn those consumers into patients at a doctor. So financing is is a piece of it and we're working with.
Companies not just in the U.S., but other places as well to try to remove some of that friction give more options to those consumers understand what the monthly payments are how much down.
And so on so there's a lot more that we can do there, we're making some progress and you'll see new a new ways that it will be coming to help again, we move some of that friction from those consumers.
Okay, and thanks, and then just on the remote.
Just on the deal with them or maybe.
Thoughts on sort of why you chose them as a partner than maybe some of the geography is you'll be focusing on early on you.
Hi, Matt It's Joe on the Zimmer, we're really pleased to have them as partners and you look at the history that company from an implant standpoint. They are one of the leaders out there.
They actually needed digital front end and that's what Itero really.
Really supplied to them when you look at you know our product line in conjunction with that when you look at modern kind of treatments like that implantable.
It is there's often a lot of space creation that has to take place in a sense of.
For two years out of them out for a period of time your to your T. start to move over to feel that space and more and more dentist do not want to remove enamel to put that implant in so using aligners to be able to separate those those teeth and allow.
Allow an implant to be able to be a lot less invasive than it would be if you. If you didn't account for that spacing. So.
Overall, we're excited about it I mean, there obviously strong all over the world.
The complement us in so many places, including a China and so we're really excited about having a partnership and we think we're starting off pretty well in the sense of the training and all that we reported.
Thanks very much next question please.
Our next question comes from Stephen If acquit with Barclays Bank. Please proceed with your question.
Great. Thanks, good afternoon, everybody, so not to be China to death here, but.
And when you talked about some of the things you did to improve results over there whether it's you on the investments in the GP dentist salesforce.
Sales program centered on the Middle mind go for even the just the increase consumer marketing spend I guess I'm curious if any one of these variables you know really stood out as a driver of the improvement or was it a little bit everything and then also do you have any sort of high level.
Data points, just on cases per per Doc in China, either on an absolute basis or even sort of relative to the rest of a line overall thanks.
Hi, Steve on the variables of improvement. Unfortunately, we're a multi variable equation when you should too high and there's things are seldom binary here, but I think you've got to point to the two big ones, which would be just to increase can consumer focus and then the salesforce we put in place.
That's our GP effort, we're just really moving into that too and we're arranging that properly also but you know those efforts. We think are contributing also but I'd say, it's a mix of those three variables I cant weigh them for your really.
Okay.
What about the cases for dock in China any color on that.
No we don't want to give any color on that.
Right now is this stuff.
I'd say you have to look at it is where we're driving penetration there and we were training a lot of doctors as we ramp up in China, Okay got it okay. Thanks.
Thanks next question. Please next question comes from Nathan Rich with Goldman Sachs. Please proceed with your question.
Thanks, just just two quick ones here first on his fees I think guidance you know what puts you at something like 12 50 for the year.
Do you think you can kind of maintain that level of ASP going forward and can you kind of just talk through what kind of the key factors would be as we think about asps going forward and then just very quick follow up.
No John just wondering if there's any catch a benefit to cases in the quarter.
On a post clincheck disruption that you highlighted into Q.
Well I'll start with that one first because there was really no no catch up or no no benefit from that as we had said in the second quarter call is really de minimis. It wasn't much of an effect that hit that affected the quarter. So there really wasn't what's into an impact in the third quarter terms of ASP is there's there's going to be puts into.
Thanks, and we we've talked a number of times about what those puts and takes our as as we grow and comprehensive like we had a strong comprehensive quarter in the third quarter, Sps Sps or higher.
Growing internationally, a generally at a higher ASP, but then you also have significant growth in the <unk> in the low stage and that that can affect the mix as well. So what we've said all year and as we as we look at things we thought it'd be relatively consistent the puts and takes would kinda offset notwithstanding the.
Next changes we thought the puts and takes would offset then and and we saw that third quarter and and we are guiding that into fourth quarter.
Thanks, Nate operator, well take one more question Blake.
Absolutely. Our next question comes from Michael Ryskin with Bank of America. Please proceed with your question.
Thanks, Thanks, guys are squeezing me and I'll try to be brief.
First just one quick follow on on the ASP, obviously really nice improvement in the third quarter I was wondering if you've got any.
Relative to sharpen the numbers would maybe you got some qualitative.
Pushback or feedback from docs on price increase sort of what was the response there because this was the biggest.
Quarter over quarter move in quite some time and also maybe if you saw some divergence in results from some of your highest utilization docs are getting the advantage discount the can absorb it versus some of the lower.
Your docs that are paying more close the full price.
And there therefore, maybe weighing some of the other doctor directed options.
Hey, Michael it's Joe on the ASP piece, obviously raise price John talked about some exchange aspect and then or whatever but I think you know one thing I want you know the analysts that follow list of remember yeah like like we said before ASP will fluctuate, but sometimes our ASP is going down being our gross margins go up.
Our lower end products actually have a higher gross margin then our comprehensive product line I know its counter intuitive, but that's you know that's actually how it works.
So I mean, I think keep that in mind going forward. If you see some of that lumpiness from any ASP stamped start heading down I don't think out as a trajectory for lower gross margin. It's just those two are separate in that way and John you want to add anything on on your.
And so like we said it if you could have some offsets, but we were trying to grow from a although a from low stage. The more simple cases, all the way did a complicated cases and.
We believe in those traditional orthodontic case starts that week, we have product. They can help move team, but the market expansion in some of that market expansion is going to be at those.
Lower stage products that are at a lower ASP, but we look at that as incremental business for us.
Thanks, and on the quick follow up on the EMEA headquarters move you mentioned in your prepared remarks, you expecting some turnover on personnel.
Any expectation for.
Through option to the business in early 2020 sort of how are you bracing for that how are you preparing and not just to make sure that it's a smooth transition going into January next year.
Yes, Joe again.
Looking at what we did an amazing which was for two at us in a sense about three years ago. We began to decentralize, we had a really big headquarter staff have the Netherlands. It dictated a lot of what the regions did and had to do that because it's a relatively small business back then and we needed to keep specialization headquarters over last three years, we really do we removed that out into the countries.
Moving to France, and Spain, and Germany in different areas and so.
We really embedded in those countries. Some real talent that we I feel has good continuity will take him through now there are some you know overall headquarters talented we don't want to lose.
We're working hard to save but I don't see it being a big big disruptor for the business at all.
And this has been accepted that Mike This has been going out all year, we havent.
Complete transition plan very clear as to who's who's moving and how things are happening so that up come January one its.
Very clear so it's something that as we've we've talked about on on these calls since the beginning of the year. We've talked about this move and we feel really good about.
The plan that we have now and be able to hit the ground running than in 2020.
Thanks, Thanks, Thanks, Michael.
Yes.
Well. Thank you everyone for joining US today. This concludes our conference call. We look forward to senior at upcoming conferences and of course it the GP summit in November if you have any follow on questions. Please contact Madeline home at an Investor relations.
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