Q4 2019 Earnings Call

Good afternoon.

Thank you for joining us. I'm Shirley Stacy vice president of corporate Communications. Investor relations joining me for today's call is Joe Hogan president and CEO and John . Merici CFO . We issued fourth-quarter and full-year 2019 Financial results today via globenewswire, which is available on our website at investor. Today's conference call is being audio webcast and will be archived on our website for approximately a month a telephone replay will be available today by 5:30 p.m. Eastern time through 5:30 p.m. Eastern time on February 12th. Jack says the telephone replay domestic caller should dial 877-660-6853 with conference number 1 3 6 9 7-5 6-0 followed by pound International callers should dial 201-612-7415 with the same conference number as a reminder the information that the presenters discussed today will include forward-looking statements including statements about a line future events product Outlook and the expected Financial results for the first quarter, and yep.

full-year outlook for 20

20 these forward-looking statements are only predictions and involve risks and uncertainties that are set forth in more detail and 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've posted historical financial statements, including the month reconciliation and our fourth-quarter and full-year 2019 conference call slides on our website under quarterly results. Please refer to these files for more detailed information off with that. I'd like to turn the call over to align Technologies president and CEO Joe Hogan Joe. Thanks Shirley. Good afternoon. And thanks for joining us on our call today. I'll provide some highlights from the fourth quarter and full-year with them briefly discuss the performance of our two operating segments clear aligners and interoil scanners, John will provide more detail on our financial results discuss our outlook for the first quarter and Cheryl high-level thoughts.

20/20 following that on

Come back and summarize a few key points and open up the call to questions are fourth quarter was a strong finish to a great year with record revenues and volumes Q4 Invisalign shipments increased 23.9% year-over-year and March another major Milestone with our eighth Millions Invisalign patients who started treatment in December this rate of growth is really amazing to me given are seven million physically patient was just this past May seven months ago for Q4. I tarot scanner revenues increased 20.2% year-over-year with strong growth, especially from International doctors on a sequential basis. This line volumes were up 7.4% driven by strong growth in North America and Latin America with all time highs in those regions. We also saw strong growth from Invisalign go home systems across all regions reflecting continued progress with GP dentists as well as a ramp up for Invisalign moderate which launched at the beginning of June for North America.

For the quarter, we shipped Invisalign cases to approximately sixty seven thousand doctors of which seven point two thousand were first time customers. We also trained over 5,500 new doctors in queue for 6:30 for international doctors for the full year total revenues of 2.4 billion reflect record revenues up 22.4% year-over-year includes two billion and clear line of revenues and 2019 Invisalign volumes were up 24.2% year-over-year and I tarot scanner revenues are up 38.5% year-over-year during the year of one point five million people started treating with Invisalign clear aligners worldwide including 447000 teens and younger patients, which was up 34.1%

now let's turn it as

Six around or fourth quarter results starting with the Americas region for the Americas region to for Invisalign case volume was up 4.9% sequentially and up 19.3% year-over-year off on a sequential basis Q4 results reflect strong growth from North American GP Dennis as well as continued strength of Latin American doctors year-over-year growth for Q4 reflects continued application of Invisalign treatment from both orthodontist, the GP Dennis channels, which were up 20.5% and 17.3% respectively Latin America volume was up 79% year-over-year led by continued strong growth from Brazil for the full-year America's Invisalign volume was up 17.5%

For International Business was a great quarter with Invisalign case volume up 10.5% sequentially driven by strong growth and the mayor region rebounding from to 319 summer holidays and offset somewhat by slower growth in a pack specifically China on a year-over-year basis strong Invisalign volume of 30.1% reflects increased utilization and continued expansion pack our customer base and both the Maiya and asia-pacific region in Q4. We trained over 3,400 do Invisalign doctors internationally and roughly 55% in May and 45% in a package for the year. International volume was up 34% year-on-year.

And it may have Q4 was a strong quarter volumes were up 37.3% sequentially driven by growth and all core markets primarily from Spain and Italy as well as from the Teen segment, which was up 50.6% from to 3:19 on a year-over-year basis and the Invisalign volume was up 31.5% driven by growth and all core country markets including a teen segment, which is up 38.7% from the prior-year for the full year. I may have volume was up 34.2% led by Spain Italy and France as well as our key expansion Market slid by turkey the Middle East North Africa region in Russia for a Pax 2 4 was down sequentially as expected following a very strong to 3:19 season in China as well as less than expected volume from adults partially offset by strong volume growth from Japan. We believe the ongoing China trade war and economic uncertainty remained a headwind for our consumer demand, especially for consumption of luxury goods.

considered purchases

On a year-over-year basis a pack volume was up 28% driven by growth across the region that by Japan Australia New Zealand South East Asia for the year a pack volume was up 33.7%

overall for the teen Market in Q4 approximately 116000 teenagers started treatment with Invisalign clear aligners and increase of 33.1% year-over-year driven by continued strong suction across all major regions for the full year total team cases worldwide grew 34.1% to approximately 447000 teenagers or 29.3% of our total volt. I'm pleased with our progress treating teenagers and younger kids. If you continued strong adoption of Invisalign clear aligners globally for 2019 Invisalign treatment with Bandit advancement was up 85% year-over-year and Invisalign first was up 455% year-over-year for a cumulative total of 41.5 thousand cases and thirty two point four thousand cases to date respectively.

product

Knowledge and Innovation. Can you just to be a key growth driver across our region over the past year we launched several new Invisalign offerings for both comprehensive and non comprehensive treatment giving doctors more tools and choices to treat a full range of cases from adults to teen-agers and now kids as young as seven years old as well as new treatment options and Technology designed to appeal to Consumers who are considering or starting Invisalign treatment and cure. We introduced the Invisalign moderate package a 20 stage treatment option designed for consumers who's treatment goals fall between the existing Invisalign light and Invisalign comprehensive packages. And in fact be completed in the range of 5 to 12 months, we launched smile View and online tool designed to help prospective Invisalign patients visualize a new straighter smile before they offer Invisalign treatment aligns smile view visualization tools designed to drive awareness and demand for teeth straightening using Invisalign treatment by engaging consumers and allowing them to see a simulation of what their smile could look like, but you also upgrade

my Invisalign mobile app

Which previously focused on patients already in treatment, but now includes several new features to help potential patients who are sinking information about teeth straightening treatment, including an in app version of smart consumers can use the app to take a selfie and instantly visualize how their smile can transform after Invisalign treatment.

Our consumer marketing efforts are designed to build the category and drive them in for Invisalign treatment through a doctor's office. We invest over a hundred million each year in consumer marketing programs, including TV digital social media PR event marketing as well as our patient concierge program. Our goals are to make the Invisalign brand a household name worldwide and to motivate consumers to seek Invisalign treatment through a doctor's office off.

Thank you for we continue to see strong engagement with consumers and had over five point three million unique visitors on invisalign.com sites for a total of 18 million over the year-over-year other key metrics showed increased activity engagement with the Invisalign brand and are included in our queue for these lives for our tarot scanner and services business Q4 was very strong quarter with better-than-expected revenues up 6.6% sequentially and 20.2% year-over-year driven by strength from all regions to four volumes reflect continued conversation of the element to an element Flex scanners, especially for orthodontist in North America. They continue to roll out with our major DSO partners and increase sales internationally, especially in Japan.

2019

Is a great year for our tarot business with total revenues up 38.5% year-over-year. She relatively over twenty point five million Orthodontics cans and four point seven million restorative scans had been performed with I tarot scanners.

Usually I T R O scanners for Invisalign case the mission continues to grow and remains a positive Catalyst for Invisalign utilization for Q4 total of Islam cases submitted with a digital scanner in the Americas wage increase to 79.5% from 73.5% in Q4 of last year International scans increase the 64.7% up from 57.5% in the same last year. What's really exciting is to see that within the Americas ninety 3.3% of the cases submitted by North American orthodontist are submitted digitally now, we are pleased with a continuation of our business and remain confident that will continue to help Drive our overall growth and help increase the adoption of our digital platform with Invisalign treatment with that. I'll turn the call over to just

Thanks, Joe.

Now for rq-4 financial results total revenue for the fourth quarter was 649.8 million dollars up 7% from the prior quarter and up 21.7% from the month and quarter a year ago for Clear aligners Q4 revenues of 543 point six million dollars was up 5.3% sequentially which strong Invisalign volume down in North America year-over-year clear liner revenues growth of 22% reflect strong Invisalign growth volume across all regions clear aligner. Revenue growth was unfathomably impacted by approximately 1.3 points year-over-year from foreign exchange.

You for Invisalign were down sequentially by approximately $20 to $1,240 primarily due to discounts mix and unfavorable foreign exchange on a year-over-year basis for Invisalign asb's increased approximately $5 primarily reflecting price increases in all regions and increased additional aligner revenues Black Ops that buy promotional discounts and unfavorable Foreign Exchange in product mix shift total Q4 Invisalign shipments of 413.7 thousand cases were up 7.4% sequentially and up 23.9% year-over-year our scanner and services revenue for the fourth quarter was one hundred six point two million dollars up 16.6% sequentially due to volume increases in a in a manner and America's year of your revenues were up 20.2% primarily due to volume increases in a Mayo.

Feedback and the Americas as well.

With higher Services revenues from our increased installed base.

Moving on to gross margin fourth-quarter overall gross margin was 72.6% of 0.6 points sequentially and observe 0.9 points year-over-year Clearlake gross. Margin for the fourth quarter was 74.1% of 0.6 points sequentially primarily due to lower Freight and training costs and lower number of aligners Perkasie partially offset by lower Invisalign asps clear aligner gross margin was flat year-over-year primarily due to lower training costs and a slight increase in Invisalign wage offset by an increase in the liners per case scanner, gross. Margin for the fourth quarter was 64.9% of 0.8 points sequentially primarily due to miss any patience. He's partially offset by lower asps and up Five Points year-over-year primarily due to manufacturing efficiencies in higher service revenue and scanner asps.

Do you?

For operating expenses where three hundred twenty point eight million dollars up sequentially 3.4% and up 22.2% year-over-year the sequential increase in operating expenses primarily reflects our continued investment in sales and marketing and R&D activities partially offset by lower litigation expenses Additionally, the third quarter length included a 6.8 million dollar benefit from the settlement of our Invisalign store leases year-over-year the increase in operating expenses reflects higher spending, with go to market activities offset by lower legal expenses are fourth quarter operating income was 151 point two million dollars up 18.9% sequentially and up 25.5% year-over-year. Our fourth quarter operating margin was 23.3% up 2.4 points sequentially an observer points 7.0 birth.

Quite show increases in operating income and operating margin are primarily attributed to an improved gross profit and reduction in litigation expenses. Operating margin was impacted by approximately 0.6 points year-over-year from foreign exchange the third quarter operating income included a 6.8 million dollar benefit from the settlement of our Invisalign store leases wage, which increased Q3 operating margin by 1.1% on a year-over-year basis the increase in operating income in operating margin primarily reflects higher gross profit off of operating leverage partially offset by continued investment in R&D Geographic expansion and go-to-market activities with regards to fourth-quarter tax provision. Our tax was 22.2% which includes approximately 5.8 million dollars of tax benefits related to a tax audit settlement fourth quarter diluted earnings per share was dead.

$10.53

25% $0.25 sequentially and up $0.33 compared to the prior-year.

Moving on to the balance sheet as of December 31st, 2019 Cash Cash equivalents and marketable securities, including both short and long-term Investments. We're 8068 point six million dollars an increase of approximately 86.7 million dollars from the prior quarter, which is primarily due to higher cash flow from operations off of our eight hundred sixty eight point six million dollars of cash cash equivalents and marketable securities. 590.1 million dollars was held in the US and two hundred seventy eight point five million dollars was held by our International entities queue for accounts receivable balance was $553 million dollars up approximately 3.5% Sequentially our overall Day sales outstanding was 76 days down three days sequentially and up two days as compared to Q4 last year.

cash flow from operating

For the fourth quarter was 218.2 million dollars and free cash flow defined as cash flow from operations less Capital expenditures amounted to 185 point six million dollars our business continues to have a very strong cash generation Capital expenditures for the fourth quarter were forty two point five million dollars project really related to our continued investment in increasing aligner capacity and Facilities during Q4 2019. We repurchased 100.5 million dollars of our stock against our stock buyback authorization and have one hundred million dollars still available for repurchase under the May 2018 repurchase program.

Before we moved to the q1 Outlook. I would like to make a few comments on our full year 2019 results in 2019. We shipped a record one point five million Invisalign cases up 24.2% this reflects 34% volume growth from our International doctors and 17.5% volume growth from our America's doctors wage shipments of our eye Taro scanner were up 29.7% over 2018. Total revenue was a record 2.4 billion dollars up 22.4% year-over-year off with clear line of revenues of two billion dollars up 19.8% year-over-year clear liner Revenue growth was impacted by approximately 2.6 points year-over-year from foreign exchange.

mm

Nineteen I Taro scanner and services revenues were a record 38.1 million dollars Up 38.5% full year operating income of 552.5 million dollars.

Up, 16.3% versus 2018 and operating margin at 22.5% 2019 Opera and income also includes a litigation benefit of $51 billion dollars and Invisalign store close your cost of $23 million dollars for a net positive impact on operating margin of approximately 1.2% of operating margin was unfavorably impacted by approximately one point year of a year from foreign exchange free cash flow was five hundred ninety-seven point six million dollars off of 266.2 million dollars versus 2018 for the year. We repurchased over 1.8 million shares of a line stock for $400 2009 diluted earnings per share was $5.53.

before I

Comment on the demand Outlook. I wanted to take a minute to talk about the corporate structure. We are going to say Chien to relocate our European headquarters from the Netherlands to Switzerland in q1 and the implication to our gaap financials as a result of the corporate structure reorganization to relocate our European headquarters from the Netherlands Switzerland in q1 r Q1 020 Gap tax rate will reflect a significant one-time tax benefit associated with the recognition of a deferred tax asset related to The Entity sale of certain intellectual property rights. This deferred tax benefit will be amortized starting in 2020 and we'll continue in subsequent quarters and years the period over which this tax benefit will be recognized depends on the profitability of our Swiss headquarters. And therefore is uncertain at this time management ordinarily assesses the health of our business with regard to these types of one time.

and believes this reorganized

Asian will make it difficult for investors to assess our core underlying financial performance where we do report solely based on Gap. Therefore. We will supplement our Gap Information Age with non-GAAP measures going forward beginning in q1 twenty-twenty in addition to our gaap results. We will present non-GAAP measures that exclude the aforementioned tax impact took along with certain other items that may not be indicated indicative of our fundamental operating performance including discreet cash and non-cash charges in order to prevent premature investors with greater transparency into our Core Business operations. We will present Gap non-GAAP and a Reconciliation in our earnings release in college all materials with that. Let's turn to our q1 Outlook and the factors that inform our view Q4 was a strong quarter with record volumes and we expect to enter Q1 month.

with this momentum from both the Americas and they may have regions for the Americas region we expect

You want to increase sequentially with growth from North America orthodontist and dentist for international. We expect volumes to be down. Sequentially. We expect a man should be up sequentially as momentum continues from Q4. However, we expect the growth to be offset by a sequential decrease in a peg primarily due to the expected impact from the Novell virus in China. We expect our business to be down sequentially following a seasonally strong Q4 and consistent with seasonal Trends in Capital Equipment wage if you were sales in China,

Many of you have been following the news regarding the recent outbreak of the Novell coronavirus in Wuhan, the capital of The Province in China. China is one of our largest black market and represents roughly 8% of our total revenues. It is home to hundreds of employees across China. Thankfully. We are not aware of any employee or family member who contracted the Nobel coronavirus the situation situation in China is very fluid and we are closely monitoring it. We are in contact with all relevant agencies globally a Chinese government has implemented travel bans and as essentially shut down public transportation in in Wuhan it is also issue public warnings to avoid all non-essential medical and dental procedures for the time being some government-run hospitals and private clinics are following suit by instructing patience to stay home unless it's an emergency.

while we do not believe there is a

Any impact to our product safety due to the stringent health and safety procedures ingrained in our manufacturing processes. We are taking additional precautions across China to minimize the risk of spreading illness to our internal teams, including additional protections and health screening procedures as well as travel restrictions.

Given the increased uncertainty and disruption to our employees doctors practices their patients and consumers we believe it is prudent to reduce our outlook for q1 to reflect increased risk there for for q1 our Outlook reflects approximately twenty to twenty-five thousand less Invisalign cases in 30 to 35 million dollars less revenues for Invisalign and night Aero Products sold in China. In addition. We are also absorbing three to four million dollars in idle China manufacturing plant and treatment planning capacity wage results in approximately 0.5% Gross margin impact with this as a backdrop. We expect the first quarter to shape up as follows along the line case volume is expected to be in the range of 396 to 400 6,000 cases up approximately 13 to 16% year-over-year.

We expect q1 Revenue.

Is to be in the range of 615 million to $630 million dollars up by approximately 12 to 15% year-over-year our supply agreement with STC was termination December 31st, 2019. And hence our Q1 2020 Revenue Outlook does not reflect any STC volume as compared to the same quarter a year ago. When I bought an Invisalign aligners supplied to SDC contributed about five point seven million dollars to revenue on a gaap basis. We expect q1 gross margin to be in the range of 75.5% to 72% q1 gross margin is expected to be down sequentially from slightly lower asps driven by lower mix of China volume in Idaho China manufacturing and treatment training capacity in our facility engine on a non-GAAP basis. We expect q1 gross margin to be in the range of 71.7 per month.

to 72.2%

excluding stock-based compensation from gross profit

We expect q1 Gap operating expenses to be in the range of $345 million dollars to $350 billion dollars which reflects our continued investments in go-to-market activities along with our annual increase in employee compensation expenses on a gaap basis q1 operating margin is expected to be in the range of 15.4% to 16.55% on a non-GAAP basis. We expect operating margin to be in the range of 6 of 19.5% to 20.5% excluding stock-based compensation from an income on a gaap basis are effective tax rate is expected to be approximately -1 thousand four hundred percent which includes approximately 1.5 billion dollars of tax benefit associated with the recognition of a deferred tax asset related to the inter entity sale of certain intellectual property rights resulting from our corporate wage.

Sure, we are organization.

This deferred tax benefit will be amortized starting in 2020 and continued into subsequent quarters and years the period over which the tax benefit will be recognized depends on the edge of our Swiss headquarters and is therefore is uncertain at this time on a non-GAAP basis, excluding the one-time benefit from the intra entity sale of certain I. As mentioned above and the tax benefits related to stock-based compensation. We expect our tax rate for Q1 2020.

To range from approximately 22 to 23% diluted shares outstanding should be approximately 79.1 million, exclusive of any share repurchases taking together. We expect our Q1 2020 Gap diluted earnings per share to be in the range of $18.65 to $18.74. non-GAAP diluted earnings per share is expected to be in the range of $1.19 to $1.28 from excluding the one-time tax benefit wage from the inter entity sale of Ip rights as mentioned above and the stock based compensation related expenses.

in addition

As we can continue our operational expansion efforts, we expect Capital expenditures for q1 to be approximately $95 million to one hundred million dollars and we expect depreciation and amortization to be $23 billion to $25 billion dollars. Now, let me turn to a review for the full year twenty-twenty as I just described the situation in China surrounding the novel coronavirus is very fluid while our q1 Outlook includes our best view of how the coronavirus will impact our business in the first quarter. It is very difficult to predict and forecast the longer-term impact. Therefore we are providing you with our best view of twenty-twenty prior to the Nobel Corona virus outbreak so that you can I use it as a baseline from which to build your models for the Year. This means that you will need to make your own assumptions about how the coronavirus outbreak impacts our business over the remainder of 2020 month.

beyond the

Went out look in our commentary for twenty twenty below. We will not provide specific twenty twenty guidance at this time. We will continue to monitor the situation closely and update these comments when appropriate with that our outlook for 2020 notwithstanding the impact of foreign exchange rates, and the novel coronavirus is as follows. We anticipate total revenue growth for the company Invisalign and I Terrell to be at the low end of our long-term operating model Target of twenty 30% We anticipate Invisalign volume to be at the low end of a long-term growth model Target of twenty 30% on a gaap basis. We anticipate twenty-twenty operating margin to be slightly above our 2019 operating margin of 22.5% We also expect our long-term operating margin range of 25 to 30% to remain unchanged on a non-GAAP basis. We expect 20/20 off

Marjan to be approximate

3.5% higher than our gaap operating margin, excluding stock-based compensation from operating income on a gaap basis our 2020 tax provision am glued approximately 1.4 billion dollars of tax benefit in q1 associated with the recognition of a deferred tax asset related to The Entity sale of certain intellectual property rights. This deferred tax benefit will be amortized starting in 2020 and continued into subsequent quarters in years the period over which this tax benefit will be recognized depends upon profit ability of our Swiss headquarters. And therefore is uncertain at this time on a non-GAAP basis, excluding the one-time tax benefit from The Entity sale of certain IP rights as mentioned above and the tax benefits related to stock-based compensation. We expect our tax rate for 2022 range from approximately 20 to 23% with that job.

I'll turn it back over to Joe for

Well, it's Joe. Thanks, John . And thanks to those of you joining our call today. Overall. 2019 was a great year for a line and I'm very pleased with the strong performance for both are Invisalign. And I tear offices not only did we celebrate our 20 second year in business. But you also achieved several major Milestones including our eight million Invisalign patient 2.4 billion in revenue for the first time. I took off 20/20. We're very concerned for the safety and health of our employees customers doctors and their patients in China. Their well-being is our top priority and we're doing what we can to ensure that they are in good hands wage working with our local teams to donate medical supplies and provide funding to help combat the outbreak like SARS and two thousand and three the coronavirus is already having a major impact on China and Russia and other countries around the world. I saw an experienced this impact as a CEO of GE Healthcare, we expect that like SARS and MERS before it in time. The virus will be addressed the market wage.

We'll assume an equilibrium in our busy.

In China will continue to grow the timing of this is uncertain but the future growth opportunity for our business and China is certain while we are mindful of the increased uncertainty in China and its impact on our q1 a book. It's important to take a step back and remember that our business is Broad indeed. We have a strong growth in other regions and are seeing strong momentum in the Americas across the Maiya and in all other countries in a pack, especially Japan Australia, New Zealand South East Asia, Taiwan and Korea.

In closing I want to share with you a few thoughts. If you regarding the future of our industry never before have I seen an amount of change in products technology distribution channels and business models line is always believed the market opportunity for Clear aligners is significantly larger than the underlying orthodontic case starts each year. We believe that over three hundred million people want a better smile and the best way to access that that excessive potential patients is through doctors using a digital approach with I tarot scanners in the Invisalign system. Our partnership with doctors is a critical part of how we win with consumers and we will contact you insisted patients visit a doctor in person for Invisalign treatment if I could leave you with one thing is that a line is not just a provider of the best clear liner in the industry and are clear aligners not just bought a piece of plastic line is founded on digital it data artificial intelligence software algorithms digital scanning and 3D printing we are the largest mass customized.

Business the world has ever seen. Each Invisalign aligner is the output of millions of lines of code and thousands of digital and actions that allow us to ship half-a-million customize class to Medical.

Devices a day as a digital leader. We must continue to provide doctor's with the best technology and tools to help them treat any patient and 20/20. We expect to bring several new products and system services to Market, but we must provide more than just individual products in digital you pick a platform not a product you pick a company you believe in for the long term digital Dentistry is being waged by products. Like I Taro scanners and Invisalign clear aligners, and we believe our digital platform is setting the foundation for the future of Dentistry a line in our doctor partners are sitting on the edge of one of the Baptist areas of growth of Dentistry has ever seen I'm very excited about what this means for our business and continued growth prospects in 2020 and Beyond as we continue to transform smiles and change lives without a want to thank you again for joining the call. I look forward to updating you on our progress as the year unfolds. We'll see many of you at the Chicago midwinter meeting next month as well as industry and financial conferences throughout the years.

Including our analyst meeting on May 12th in New York City now, I'll turn the call over to the operator for questions.

Thank you. We will now we can talk to you a question and answer session. If you'd like to ask you a question. You may press star one on your telephone keypad, a confirmation total indicate. Your line is in the question queue. You may press star to if you would like to read your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Nathan Rich with Goldman Sachs. Please bring your question. Hi, good afternoon guys. Thanks for the question Joe. Maybe just to to start on on China, you know, the revenue had one that you got it too. I think it's kind of 60% or so of your kind of total China volume. Can you talk maybe just about what you've seen, you know, so far in January that kind of you know that you use to kind of inform your estimate of the faith in Revenue impact and you know, if if you know, we continue to see this play out. Can you kind of think about you know, help us think about how you know, we we should frame the impact going forward.

I think we framed as well as we can the first quarter. I mean not and that's what we can see right now. I think you know our responsibility when you think about it is, you know, we're we're through January right now. We can take a look at our order rates and she can responsibly make the prediction that John just did that we're good to twenty to twenty-five thousand cases that we think we're going to be pressured on and unfortunate part of this whole thing is we say, we're on the dark side of the moon right now because of the Chinese New Year and our order rates drop off to a point that you hardly see them and it's not just now it's it's been every year since and since the government there is extended the holidays for another week or so, and it could go on home really don't have you know, we just take our best guess on that twenty twenty-five thousand and you know, and I you know, we're not ready to project. I'm not ready to project anything into the second quarter in the rest of the year remember going back to SARS. I talked about, you know, as involved with that a g health care is remember it took six months from the initial infection rate all the way to not that it ended but it actually stabilized and things got back in gear again. So yep.

We know that would be more than the first quarter. It'll be.

acted but none of us are ready to give any kind of a forecasted extend it at

that's that's fair. And then maybe just a question on the America's GDP growth. There was a nice acceleration in the quarter utilization. Also take Tire. You've obviously took a lot of investment into that channel. Can you maybe just talk about some of the traction that you're seeing among the the GP base that you serve?

Yeah, there's there's Nature's multiple numbers. We pull in that sense. Right? We have more of a segmentation around GPS today from a sales standpoint. You'll see that accentuated as we go into twenty-twenty. We have a product called I go off but it just fits the workflow aspect of these extremely. Well, then you have to add to that the extra sales people we put in last year a lot of those sales people were making GP calls cuz there's just you know, I'm only so far I can go for the orthodontic community and the last part of that. We have a huge amount of increased advertising from a consumer standpoint and I read about the consumer hits, you know for for a new interest and Invisalign which are pretty outstanding when I look at it from a year-to-year basis. So it's really all those variables. We see are being put in place to help the drive that Grill. Thanks Nate next question, please.

Our next question comes in the line of Kevin Caliendo with UBS. Please proceed with your question.

You're taking my call. Just a quick one on China high. So quick one on China be how is it impacting the training of the doctor's office China, obviously, it's impacting your revenues. But is it impacting the overall expansion of your business there as well? So that as we think about the number of doctors and think about the number of dental school there that you know will be in registered Invisalign users. How how do we think about the impact this is going to have on that as well. Well, you know Kevin honest it's a good question cuz that is a factor in the equation. You have to think of so right now you can imagine when you have a contagion like this. You don't want a lot of people hanging out together and Chinese government knows that and we know it to our training facilities are in Shanghai and also join do you know there's obviously there's infection rates in those areas, but they're not like the major provinces that have been impacted so far, but my anticipation is after the holidays you would just have to watch and see dead.

Actually what's develops and it in a different provinces in China and what that means if it's not, you know a big issue in Shanghai or gender or whatever obviously will bring doctors in and train them.

But we're not in a position to even guess on that right now, but it's a great question is the key variable and you know as things develop will certainly come back up to the first quarter and let you know.

Hi. Thanks. Thanks.

And just one quick follow-up we talked about sort of expectations around margin expansion embedded in your 2020 guidance. Can you just a little bit of apples to apples on what your expectations down to sort of back into your non-GAAP gross margin or operating margin expansion? Like what sort of embedded in the non-GAAP side? Yeah. Yeah. We would expect it to be slightly up both on a on a gap and on a non-GAAP basis for operating margin as well as gross margin.

Okay, great. Thank you so much. Yeah, thanks. My next question comes from the line of John Cougar with William Blair. Please proceed with your question. Hi. Thanks very much, John Force Ones for you just to clarify the the full year 20 commentary that you gave us. Does that reflect a week or first quarter from China, but the rest is up to us or does it not reflect the the q1 had just wanted to clarify that it it's the latter. It does not reflect. Any impact from China. No, I'm from China. Okay, that's helpful. And and then Joe again juice on the the China theme if we think about over the last year the the rates of growth that you guys have experienced in that region. I've been all over the place from your perspective. What do you sort of view as sort of the New Jersey normal there in terms of you know, once we get beyond the infection outbreak is is it 20% Is it 50% yet? Do you have a updated view on it?

John I don't I mean cuz obviously we're in a storm right now and just trying to get through what that looks like as I said in my script if you think about as we came off a third quarter, we got a really good team season. We did not as much of an adult pick up in the fourth quarter as we'd hoped but you know again it was you know, double-digit growth and still robust growth but not you know, the fifty to sixty percent at least enjoyed in China for so, you know several years. So I thought I'd say, you know, John would like to give that to you. I can't reliably give it to you now, but it's it's double-digit growth. We continue to make our investments we're continued to be excited about China. It's our second biggest Market. We don't think that's going to change but we certainly got to get through this Cloud before we can give you something definitive in that sense.

Great. Thank you.

Our next question comes from the line of John block which default please proceed with your question.

All right. Thanks guys. Good afternoon. Seems like you're implying it's China's down 50% year-over-year in the first quarter in case volumes and you know that would even be considering coronavirus or not there for the entire quarter from a red rack standpoint to is that in the ballpark that we're seeing sort of that magnitude of a diesel and then maybe the follow-up that first question would be more importantly what do you think about these cases? Are they lost or they delayed are they some sort of a combination of the two?

Hey John , this is John . I think you're in the ballpark. I think when you look at what we see from from China, I mean, it's certainly last year was significant growth in in q1. And in this year obviously impacted by by the coronavirus. It's it's difficult to say from a you know, the case is lost or delayed and so under certainly for this time. They're not they're not happening. It's it's difficult for us to see afterwards after this this period of time to see whether those cases come back or not. But at least for the 4th first quarter, here's what we're assuming that that they're not going to come into the quarter.

Okay, got it, and then maybe just shift gears and you know, I I think the summation was around 75,000 at a 450,000 seen cases for the year. So this is quickly become, you know fifteen to twenty percent of your key in cases. Maybe we can just talk to that. Do you still see hyper grown now? There's two offerings into twenty-twenty and Beyond and maybe there's a an update on palatal expansion as well. Thanks guys.

Did you hear that?

Really excited about the math grows when you see that and remember math, too. It's kind of age contained, you know, it's it's a growth aspect between like, you know, ten years old and 12 and 1/2 years old that really fits but when you take math and they you and you combine that with first that is about 20 to 25% including pilot expansion of the Teen market place. So the idea that you know, that's fifteen to twenty percent of our team cases. You've talked about matches up pretty well in the sense of what we're seeing in the marketplace overall. I do think you'll continue to see this hyper growth out. There. It is a great solution and we look at teens first and how it works, you know, you don't seem but we continue to improve map all the time. We learn about Anchorage on back molars and certain kinds of teeth and whatever we program those things. We have signed releases, but you know piece-by-piece we get better at being calm moving those class two things forward. So, you know overall we're excited about it. I'm confident about the technology, you know, lastly on the palate expansion. Peace. You know, I we yep

To make this we have the right kind of software to develop.

The trick is finding something that you can actually scale from a manufacturing standpoint and get consistent properties with it. And I feel we've been closing in on that rather fast. So we'll give you more of an update as we go into the adjusters Conference in June is is I mean in May on a more specificity around that kind of a lunch date.

. Thanks for your time. Okay. All right. See you Jaan.

Our next question comes from the line of Richard new water with s v b lyric, please proceed with your question.

Hi, thanks for taking the questions for you. Just going back to your comment on your experience with SARS the last time in the impact on the business you were running there. Can you maybe just give a little bit more color? And you know, what's the definition of stabilization and and and kind of maybe if we just talk through some of the visibility may be able to come into focus and and and and what how that happened over that six-month time period they have a follow-up. Thanks. Yeah, it was just really interesting is it's a you know, when I talk about stabilization, it means infection rates is how it when you start to get to that Plateau about not an increase in infection rate, but a decrease in you'll see that that's kind of the deceleration and that indicates that it's kind of under control again what I learned in two thousand three about China is and I think in the Western World, we we missed this sometimes it's how much influence the overall government influences there. You can see they change holidays they log.

Down cities they take drastic measures to try to deal with these things to something. That's really unheard of from a Western World standpoint. And I think we kind of have to respect that.

That it's it's a society that will respond to these kind of things in a way that we're not necessarily used to which is actually good for the population because there's trying to isolate it and contain that thing because you know, that virus hasn't been Quantified yet with exactly it's infection rate. Meaning, you know, how many people are affected per person that's infected. But you know, the numbers were jumping around but this isn't the area of SARS. So I think the best proxy we can have right now, is this our side so that's a two things is one is when a plateaus when fewer people are being infected and you see that curve start coming down and then secondly is how fast is that the Chinese government will move and that's why we're staying close with what's going on in there and and just staying behind a government and trying to support their actions.

Okay, Rich. Okay, that's helpful. Oh, go ahead.

nothing

Okay, just just to follow up here on you know, appreciate the operating margin guidance, excluding the the China factors here. But let's just say there is some extended impact, um, you know, moving through the year. What's your you know, how are you thinking about your your your your approach operating margins if there were to be kind of an you know, extended shortfall and in in revenues in that region, and would you you know, would you kind of Go full blast on the spend or or off Target that you'll kind of look to on preserving leverage? Thanks.

but

John is probably too early to tell that now I mean like we'd said we're we're kind of in the dark side right now that the extended Chinese New Year. We'll see how things progress as we come out and take that assessment. I mean as as we've talked about a number of times in our business, there's a lot of different levels that we can pull or or not. On the conditions that are going on in in a particular market and we would suggest that as well with China.

Our next question comes in the line of Matthew O'Brien with Piper Sandler. Please proceed with your question.

Afternoon, thanks for taking my questions. Just a couple here and hello, you know one was after a little bit earlier just about you know, the deferral of these cases. I mean, you know, if she locking everybody down in in in China at this point, it's not like they're going to be getting brackets and wires. So, you know, I'm just trying to figure out you know, why this wouldn't come back in eventually and then if I were to come back in saying a you know Q4 time frame or or something like that, could you do upwards of fifty thousand cases in a quarter? So like all of us would come running back to you fairly quickly if they need to be all clear with signal

You know not you know.

We do fifty thousand cases. Yeah, I mean we got capacity we have both treatment capacity and we have Bluetooth capacity obviously through Mexico and Costa Rica if we were overwhelmed in China, you know what we have there too. But you know my experience in this business is the things don't happen like that that you don't get this kind of a bow wave that comes after something like this and so it's not that you lose those cases from an adult standpoint. They just get pushed out into the future, but don't come back to you all at once. It just latent demand The Only Exception I would make to that that I would guess that the Teen season cuz teens are kind of time to based on their age that you have a little more what I call bolus effects. Are you have a bow wave that you really capitalize on teens, but it wouldn't occur that way with adults.

Okay, can you give us so it's fair to assume that, you know, this is not lost. Revenue will come back at some time. Can you give us any sense for the split between the two teens versus adults over in China?

I know at this point. I'm giving you know what we're seeing over there. I can't even guess that if you're asking for historical splits, I don't think we've shared that date in the past and just build that our third quarter is always off just quarter in China and it it's a it's a biggest cuz it is Teen season. So if you take it that look historically you would see what those numbers look like under adult versus teen.

at at one quick one for John just to

I'm gross margin, you know, it's come down over the last kind of three years to the low 70s in 2019 and a lot of moving Parts here. But how do we think about that metric going forward are we kind of get close to the bottom on that metric or should we expect more kind of annual erosion of that metric?

I think you saw that are gross margin improved, you know, sixty basis points in in Q4 from Q3. And you know, we we would look into the future to expect that, you know with the the cases that we do, you know, sometimes more difficult versus even the non-comprehensive cases. We we know how to drive that gross margin and we'd expect to see improvements in 2020 Beyond.

Thank you.

Our next question comes from the line of Steve with wolf research. Please proceed with your question.

Hi. Thanks for the time here. I wanted to try to maybe put a Rosy Grill in potentially on China for just a second so we can consider the possibility that things do resolve in store if I missed this, but did you get trying to go through the fourth quarter? And then the second part of it is um, if this ends up isolated to Wuhan of the province surrounding Lujan, how does that change your view on the impact of the business?

Hey Steve, it's Joe. You know it would it would obviously change it cuz now you segment with the issue is in China, but I don't have a guess in a sense of what that would mean. I mean when you think about it, obviously Shanghai Life part of our business and you know more north of that Beijing is to be I'd say the coastal provinces or whatever. I've always been pretty big. So I think your comment would be you know, if it's if it's just isolated to a solid blue on the effect won't be as dramatic, but I can't I really can't quantify it and I find it kind of surprising that it not that the infection rates going to reject the other provinces the way it has will hon. It's just the Chinese government will take the same steps there to make sure that whatever infection that they do have in those regions don't end up being like War.

That makes sense. It makes a lot of sense and I'm sorry. Did you give it trying to go through it for for Q?

No, we didn't see if it you know it it's similar to both the voice on in Q3.

Okay, perfect. Thank you. And then John just a couple of quick ones for you. And then I'll drive back into q1 is are you willing to to give folks a sense for how much of the benefit on the margin and in 2020 there is tied to the the wind down of the Netherlands facility or or some of the legal expenditures money down. And then can you give a sense for what your assumption is for prep a year-on-year in the outlook for 2020. Really? Appreciate it. Thank you. Yeah, when you look at the some of that litigation and some of those entity restructuring programs, it was about it impacted Us in 2019 by about a point of of up Margin. So essentially that's that's a benefit for us in in 2020 and and that's part of our dog part of our expansion. But when we look at the expectations for twenty twenty and and a comparison versus 2019, we would expect margin expansion on whether yep.

Gap or or non-GAAP -based

Under the leverage and the Investments that we're making.

Our next question comes from the line up Brandon Collier with Jeffries. Please proceed with your question.

Thanks. Good afternoon.

I don't I don't have a question about China actually want to talk about the curious if you've seen, you know, any just curious to get your latest views around just the competitive environment and then the office and also noticed you put Frank Quinn in a new role in terms of head of the curious about the rationale behind that and whether that's a reflection of a bigger focus on prep the DSF Channel.

You know, that's a good question. Actually. It's a it's a good deed question. First of all, I mean you saw a growth in in in America's for the fourth quarter. It's good accelerating in a in a channel and just progress in your workload Channel you so obviously I feel good about you know talking about in the previous call or in the sense of the Investments we've made in sales people and advertising and all that we have in those different channels and you know, we look at that, you know going forward. We we feel good about that capability from a standpoint. You know, we've always stuck with what we said. I mean, we know that long, you know, we'll go after some of the same patients we do but we haven't necessarily found an impact in that sense and you see us pushing hard in a sense of our product and portfolio to go after that, you know, we talked about in a hundred million pages that we think want, you know treatment from an orthodontic standpoint North America, you know other competitors, you know, I I honestly they're out there. I I can't say that we met

Any price moves against them? We haven't necessarily felt that we have lost any significant volume in any, you know in any consistent way and so, you know, I don't have anything different to report.

From that standpoint and I did you know the previous quarters that we had. You got a discussion. I think you know when you're hearing about that to Brandon, it's what I think we've been considered.