Q3 2021 Align Technology Inc Earnings Call
Greetings and welcome to align technology's third quarter 2021 earnings conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Much require operator assistance during the conference. Please press star zero on your telephone keypad.
Mind you This conference is being recorded.
I would now like to turn the conference over to your host Shirley Stacy Vice President of corporate Communications. Thank you you may begin.
Good afternoon, and thank you for joining us.
Turning me today for our conference call is Joe Hogan, President and CEO and John Morici CFO, we issued third quarter 2021 financial results today via Globe Newswire switch is available on our website at investors out of line check Dot Com Today's conference call is being audio webcast and will be archived on our website for approximately one month, a telephone replay will be up.
<unk> today by approximately 530 P M. Eastern time through 530 P. M. Eastern time on November 10th to access the telephone replay domestic callers should dial 870 76606853 with conference number 137 to three to six seven followed by pound.
International callers should dial 20161 to 7415 with the same conference number.
As a reminder, the information provided and discussed today will include forward looking statements, including statements about aligns future events and product outlook.
These forward looking statements are only predictions and involve risks and uncertainties that are described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission and 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 corresponding reconciliations on our GAAP of our GAAP and non-GAAP reconciliation, if applicable and our third quarter 2021 conference call slides on our website under quarterly results. Please refer to these files for more detailed information with that I'd like to turn the call over to align technology's President and CEO.
Joe Hogan Joe.
Thanks, Shirley good afternoon, and thanks for joining us on our call today I'll provide some highlights from the third quarter, then briefly discuss the performance of our two operating segments system services and clear liners, John will provide more detail on our financial results and discuss our outlook following that I'll come back and summarize a few key points and open the call to questions.
I'm pleased to report strong third quarter results with revenue growth of 38, 4% year over year on top of a record third quarter last year, driven by the strength across all regions customer channels and products for Q3, we shipped to a record 85 5000 doctors in the quarter and reached $11 6 million.
Invisalign patients cumulatively.
On a sequential basis Q3 results reflect continued adoption of Vitaros scanners and increase utilization of Invisalign clear liners in the Americas and APAC regions as well as the growth in teen segment, especially in the North American Orthodontics channel.
Our third quarter revenues reflect a growing confidence of doctors and patients with invisalign treatment Vitaros scanners, and extra cat software as more doctors discover the benefits of digital treatment and transform their practices with the online digital platform.
Q3 systems and services revenues were up 57, 3% year over year with strong revenue growth across all regions and up 5% sequentially, primarily in North America Q3 results reflect the continued adoption of <unk> element Fived E plus series, our next generation scanners and imaging system.
Which launched earlier this year and future innovative technology like near infrared technology, we call Neary, which agent detection and monitoring of <unk> mental caries lesions or cavities above the gingiva without harmful radiation.
For Q3 clear Aligner revenues were up 34, 9% year over year with strong revenue growth across all regions and across the portfolio, including comprehensive and non comprehensive products as well as invisalign moderate and Invisalign go.
On a sequential basis Q3 clear aligner revenues were down very slightly from record Q2, reflecting more pronounced summer seasonality than last year, especially in EMEA, where practices and patients appear to have taken extended holidays, and where offices were impacted due to a resurgence of COVID-19 cases and restrictions.
Especially in some markets in Asia Pacific.
And the teen segment Q3, 'twenty, one invisalign clear aligner volumes for teens were strong up 13, 8% sequentially and 26, 6% year over year to a record 206000 teens, representing approximately one third of total cases shipped with strong shipment growth from North American orthodontist, and a record quarter.
<unk> for <unk> in APAC.
Our third quarter revenues also include noncash revenue for clinical training and education and Doctor prescribed retainer products.
Retention is a critical part of creating and maintaining a beautiful new smile retainers prevent teeth from gradually shifting back to their initial positions after treatment and.
Studies show that without retention, even perfectly align teeth congratulate revert to their pre treatment state and that dentition continues to change as patients age often requiring limited treatment also known as touch up treatment if not properly retained.
Our retention products are designed to maintain teeth that had been aligned by Invisalign aligner braces are other aligner. These retainer products can accommodate lingual bars wires also known as a permanent retainer missing teeth that require an artificial tooth and fight ramps also known as turbos or blocks.
While a retainer business continues to deliver solid revenue growth our share of retention market is significantly under penetrated even.
Even more so than in our share of the orthodontic case starts we've been developing a robust retainer strategy, including a separate marketing team focused solely on driving adoption and increasing market share in the United States.
Our objective is to build brand awareness for the Werra retainers and drive engagement with doctors through clinical education and sales initiatives, while connecting consumers to doctors through demand creation programs and our concierge service.
We've also recently implemented social media campaigns, featuring the benefits of ore from the makers of Invisalign clear liners, we believe that incremental investments will provide increased value for invisalign practices and drive growth consistent with our long term financial model targets.
In addition, we successfully rolled out a limited pilot program to participating invisalign providers in the United States and Canada that offers a monthly targeted subscription program to address the unmet patient demand for retention or touch up cases.
Our goal is to encourage experienced high volume invisalign practices, who regularly treat patients with our comprehensive products to offer premium retention our entry level products for the long term health of their patients and to grow their businesses.
This is in this pilot program can purchase a monthly subscription at a fixed price based on their monthly needs for retention or limited treatment. The program allows doctors the flexibility to order both touch up our retention of liners with their tiered subscription. The program is designed for a segment of experienced Invisalign doctors, who are not regularly using <unk>.
Our retainers or low stage of liners.
The positive feedback from our doctors had been encouraging for instance, the doctors at Bray and Tarbey told US. The program is very straightforward and easy to understand and they've been hoping aligned with do something like this Dr. Jonathan <unk> at Princeton Orthodontics called the program a homerun we went on to print he went on to predict it should replace the idea.
Doctors invested three D printing and the additional complications and expenses it requires including the need for a full time employee and additional overhead costs, particularly because he believes his treatment outcomes are always better with a line.
Q3, non case revenues also included accessories and consumables, such as aligner cases called clam shells cleaning crystals and other oral health products that are available on our e-commerce channels in the U S only including the Invisalign accessory store Walmart and Amazon.
In Q3, we announced an exclusive supply and distribution agreement with alternative products incorporated a leading developer and manufacturer of high tech dental materials devices and instruments worldwide.
The Invisalign professional whitening program powered by Opel lessons is optimized for Invisalign aligner in Bavaria, retainers and is available only through Invisalign trained doctors.
Also in Q3, we launched Invisalign whitening pen through an e-commerce channels in the U S only.
The whitening pen is an over the counter retail product for consumers seeking quick tooth whitening at a lower price and is not intended to be used with the liners, but whitening pen complements the other accessory products that align already marks to consumers through its existing E. Commerce channels and is a key addition to our consumable product portfolio now lets.
Turn to the specifics around our third quarter results starting with the Americas.
For the Americas Q3 results reflected strong performance, including record revenues for Latin America, as well as summer seasonality for adult case starts in North America that primarily impacted GP practices strong ortho performance, especially in the teen market that included increased utilization from the orthodontic channel.
Invisalign case volume was up 7% sequentially and up 36, 4% year over year.
<unk> growth across the region expressly in Latam.
DSO utilization continued to be a strong growth driver as well led by Heartland and smell docs.
For our international business Q3, Invisalign case volume was up 27% year over year on top of record growth in the same quarter last year on a sequential basis international shipments were down sequentially four 3%, primarily as a result of greater seasonality and COVID-19 related shutdowns and APAC markets.
<unk>.
For EMEA Q3, Invisalign case volumes were up 49, 6% year over year with.
With broad based growth across all markets led by the U K in Iberia, along with continued growth in our expansion markets in central and Eastern Europe in the Benelux.
For Q3 year over year Invisalign volume in EMEA was driven by increased submitters from both orthodontists and GPS and increased utilization primarily for more of those on a sequential basis EMEA was down sequentially 16, 5%. Following a record Q2, primarily as a result of the extended seasonality we had anticipated primarily.
From summer holidays, and vacations across the region.
For APAC Q3 volumes were up four 2% compared to a record Q3 last year in APAC.
On a year over year basis growth was uneven the market as APAC. The first region to emerge from the depths of the Covid Lockdown in 2020.
Additionally, we saw Covid resurgence is in lockdown sporadically impact various APAC countries in Q3.
On a sequential basis Q3, invisalign volumes were up 21, 2% reflecting growth across the region led by a record quarter in China, especially from teen cases, as well as strong growth in Japan, and ANZ and.
In Q3 growth from both channels was strong with ortho growth driven by increased invisalign utilization and GP growth.
<unk> growth driven by increased Invisalign submitters APAC.
APAC teen shipments reached an all time high in Q3 at the recent 10th China Finance Summit Awards align was recognized as the 2021, most innovative enterprise for its advancements and outstanding contributions in the field of digital Orthodontics. This award builds on our prior recognition of alliance leadership in the digital orthodontics.
<unk> and its efforts to promote the modernization of orthodontics.
Our consumer marketing focuses on educating consumers about the invisalign system to drive demand to Invisalign doctors offices, ultimately capitalizing on the massive market opportunity to transform 500 million smiles.
In Q3, we expanded our next generation of the Invis is media campaign across EMEA, APAC, and Brazil to increase awareness with adult mum and teen consumers globally.
Globally, we delivered $6 45 billion impressions growing 42% year over year, resulting in a 70% year over year increase in unique visitors to our websites.
In the U S. We connected with teens on Snapchat, Youtube and Twitch with our envisaged is not your parents braces campaign. This camp. These campaigns continue to feature some of the largest teen influencers from our Invisalign Smile squad like Charlie Damelio.
Martin, Michael Leon Collins, and Devin key.
These influencers share their personal experience with invisalign treatment, including why they chose invisalign treatment to shape their smiles as part of our focus on teens with our Invisalign change makers program. We hold a recognition event hosted by Marcel Martin with teams across the country to celebrate and recognize 100 teams across the country.
Who drove positive change within their communities.
To continue growing for our young adult businesses, we expanded the envisaged the powerful thing campaign, which highlights how powerful the smile transformation information with Invisalign treatment can be for their self confidence in.
In the U S. We expanded our Invisalign smile squad to include young adult Influencers, such as Cody Rigsby, <unk> and Emily Hampshire will help to deliver over 405 million impressions.
Additionally, our influencer partnerships with Tictoc creators helped increased traffic to our sites with 127% increase in click through rates and.
In Brazil, we launched the envisaged the powerful thing campaign and teamed up with Mega Influencer type <unk> to increased website traffic by 30%.
And the amazing May a region, we expanded into new media channels, such as <unk> and Snapchat across the UK, Germany, and France to drive engagement. These efforts led to more than 153% increase in unique visitors. We also started consumer advertising in Russia, which resulted in a more of a thousand increase in unique visitors.
Through our web site.
In Q3, we continue to expand our consumer advertising across the APAC region experienced a 132% increase in unique visitors to our web sites in Australia, we expanded our media mix to include partners such as Tictoc in Snapchat, which resulted in a 250% 250% growth year over year and unique.
Visitors to our website.
In Japan, we continue to see a strong response from consumers to our envisages campaign, resulting more than 800% increase year over year and unique visitors to our website.
Adoption of our consumer and patient App My Invisalign continue to increase in Q3 with $1 2 million downloads to date.
Usage of our four digital tools also continued to increase for example, our Invisalign virtual appointment tool was used over 15000 times and our insurance verification feature was used 14000 times in Q3.
Furthermore, we received more than $1 5 million patient photos and our virtual care feature to date globally, which continues to provide us with rich data to leverage our AI capabilities and improve our services for doctors that is used to enhance their patient's care.
For our systems and services business Q3 revenues grew 57, 3% year over year, reflecting strong scanner shipments and services was up 5% sequentially.
This is the fifth consecutive quarter of sequential revenue growth for our systems and services business.
<unk> element Fived D plus imaging system continue gaining traction across all regions with the most recent launch in Japan in Q3.
The <unk> element Fived plus imaging system will be available in China in Q4 of this year. Additionally, the <unk> element plus series was launched in Korea in Q3.
The series expands the portfolio of <unk> element scanners and imaging systems to include new solutions that serve the needs of a broader range of doctors and patients in the dental market.
Moreover, I am proud to say that in a recent clinical study the <unk> element fived inner oral scanner was found to be more sensitive than bitewing radiology.
And detecting early enamel lesions, providing further evidence of the benefits of Vitaros, <unk> scanner and detection and monitoring and then an approximate <unk> caries lesions or cavities above the gingiva without exposing patients to harmful ionizing radiation.
This is great news for our <unk> business as the study further supports the diagnostic validity of near infrared imaging technology offered by the <unk> scanner for early proximal caries detection.
The findings also underscore the valuable role that Nero technology can have in dental health assessment and early detection of cavities, which is important to the overall oral health care treatment options and are comfortable safe experience for a broad population of patients.
A strong indicator of the digital acceleration with dental offices as a number of inner world digital scans use for Invisalign case submissions.
Total worldwide inner oil digital scans used to starting to Invisalign case in Q3 increased 84, 2% from 78, 3% in Q3 last year.
International Intermodal digital scanners for Invisalign case submissions increased 79, 3% up from 72, 1% in the same last year.
For the Americas, 88% of cases were submitted using an inner world digital scan compared to 83, 2% a year ago cumulatively over $44 9 million orthodontic scans.
And $9 3 million restorative scans have been performed with <unk> scanners.
Our Q3 systems and services revenues also includes XO CAD cadcam products and services <unk> expertise expertise in restorative dentistry implantology guided surgery and Smile design.
Extends our digital our digital dental solutions and broadens aligned digital platform towards fully integrated into disciplinary and workflows. We remained excited about our continued integration progress and product plans with XO cat.
During the quarter actual cat bonds chair side CAD three <unk> Galloway.
The next generation of <unk> easy to use CAD software for single visit Dentistry. The software is improved automation for fast Crown design enables users to integrate open hardware and materials of choice XO.
<unk> Chair side Cat received 2021 <unk> <unk>.
Best of Class Technology Award for the third third consecutive year.
Also during the quarter <unk> had its largest ever presence at Ids.
The international Dental dental show, where they showcased their seamless digital workflows and the simplicity of the use of extra cab Galloway software release extra catalyst was the only company at Ids to showcase live patient treatment with a smile creator experience station featuring <unk> scans instant smell makeovers and <unk>.
<unk> of coupon smile.
With that I'll now turn it over to John.
Thanks, Joe now for our Q3 financial results total revenues for the third quarter were 1.0, $1 6 billion.
Up to <unk>, 5% from the prior quarter and up 38, 4% from the corresponding quarter a year ago for.
For clear liners Q3 revenues of $837 6 million were down <unk>, 4% sequentially and up 34, 9% year over year, reflecting invisalign volume growth across all geographies in Q3, we shipped $655 1000 in <unk>.
<unk> cases, a decrease of one 6% sequentially with an increase of 32, 1% year over year. In addition, we shipped to a record 85 5000, Invisalign doctors worldwide of which approximately 7200 were first time customers.
Q3 clear aligner revenues reflect strong growth across the Invisalign portfolio led by comprehensive products Q3 comprehensive volume increased one 3% sequentially and 33% year over year and Q3, non comprehensive volume decreased eight 1% sequentially and <unk>.
<unk> 36, 8% year over year.
Q3, adult patients decreased seven 3% sequentially and increased 34, 7% year over year.
In Q3 teams or younger patient increased 13, 8% sequentially and 26, 6% year over year.
Clear Aligner revenues were unfavorably impacted by foreign exchange of approximately $1 5 million or approximately 0.2 points sequentially on a year over year basis clear aligner revenues were favorably impacted by foreign exchange of approximately $16 1 million or approximately.
Two six points.
For Q3, Invisalign comprehensive asps increased sequentially and year over year on a sequential basis Invisalign comprehensive asps reflect higher additional liners on.
On a year over year basis comprehensive asps reflect favorable foreign exchange, partially offset by the increase in net revenue deferrals for new Invisalign cases versus additional aligner shipments Q.
Q3, Invisalign non comprehensive asps increased sequentially and year over year and sequential basis Invisalign non comprehensive asps reflect higher additional aligner, partially offset by higher discounts on.
On a year over year basis, Invisalign non comprehensive asps were favorably impacted by foreign exchange higher additional liners.
And lower discounts.
Clear aligner deferred revenues on the balance sheet increased $84 million or nine 3% sequentially and $347 3 million or 53, 9% year over year and will be recognized as the additional liners are shipped.
Our systems and services revenues for the third quarter were a record $178 $3 million up 5% sequentially and up 57, 3% year over year. This marks the fifth quarter in a row of sequential revenue increase.
The increase sequentially can be attributed to increased scanner shipments and increased services revenues from our larger installed base.
The increase year over year can be attributed to increased scanner shipments increased service revenues from our larger installed base as well as higher asps from a favorable mix shift towards higher priced <unk> <unk> scanners and imaging systems, our systems and services deferred revenue on our balance sheet was up.
$27 2 million or 17% sequentially and up $100 $1 million or 115, 2% year over year, primarily due to the increase in scanner sales and deferral of services revenue, which we recognized ratably over the service period.
Moving on to gross margin third quarter overall gross margin was 74, 3% down 0.7 points sequentially and up one six points year over year on a non-GAAP basis, excluding stock based compensation and amortization of intangibles related to our 2020 <unk>.
Acquisition overall gross margin was 74, 7% for the third quarter down <unk> seven points sequentially and up one four points year over year.
Overall gross margin was favorably impacted by approximately <unk> five points on a year over year basis, due to foreign exchange and relatively unchanged sequentially.
Clear Aligner gross margin for the third quarter was 76, 2% down <unk> seven points sequentially due to higher manufacturing costs and higher additional liners, partially offset by higher asps.
And lower freight.
Clear Aligner gross margin was up one five points year over year due to improved manufacturing efficiencies from higher production volume, partially offset by higher asp's.
Systems and services gross margin for the third quarter was 65, 6% down <unk> three points sequentially, primarily due to lower asps.
And higher manufacturing variances, partially offset by higher service revenue.
Systems and services gross margin was up three six points year over year due to higher asps from product mix shift to <unk> and <unk> plus series and service revenues, partially offset by higher freight costs.
Q3, operating expenses were $494 million up sequentially, <unk>, 9% and up 38, 4% year over year.
On a sequential basis operating expenses were up slightly by $4 $4 million year.
Year over year operating expenses increased by $137 million, reflecting increased head count and our continued investment in marketing sales and R&D activities and events investments commensurate with business growth.
On a non-GAAP basis, excluding stock based compensation and amortization of intangibles and acquisition costs related to our 2020 <unk> acquisition operating expenses were $466 1 million up sequentially, 1% and up 43% year over year due to the.
Our reasons described earlier.
Our third quarter operating income of $261 $1 million resulted in an operating margin of 25, 7% down <unk> nine points from the prior quarter and up one six points year over year.
The sequential decrease in operating margin was attributable primarily.
Two lower gross margin.
The year over year increase in operating margin was primarily attributed to higher gross margin and operating leverage as well as the favorable impact from foreign exchange by approximately 0.7 points, partially offset by continued investments as mentioned earlier.
On a non-GAAP basis, which excludes stock based compensation and amortization of intangibles and acquisition related costs. The operating margin for the third quarter was 28, 8% down <unk> nine points sequentially and up 0.8 points year over year.
Interest and other income and expense net for the third quarter was a gain of <unk> $8 million up.
Up sequentially by <unk>, 9 million and down year over year by $6 6 million.
On a year over year basis interest and other income and expense decreased primarily due to net foreign exchange losses in the three months ended September 32021, as compared to net foreign exchange gains in the same period in 2020.
<unk> was partially offset by an unrealized gain on an investment held in a private company recognized in the three months ended September 32021.
The GAAP effective tax rate for the third quarter was 39% compared to 25, 7% in the second quarter and 24, 5% in the third quarter of the prior year.
On a non-GAAP or.
Our non-GAAP effective tax rate was 22, 2%.
In the third quarter compared to 19, 5% in the second quarter and 16, 6% in the third quarter of the prior year.
The third quarter, GAAP and non-GAAP effective tax rates were higher than the second quarter, primarily due to a foreign income being taxed at different rates and tax true ups.
Our GAAP and non-GAAP third quarter effective tax rates were higher than the third quarter of the prior year, primarily due to lower tax benefits from foreign income tax at lower rates and a tax benefit recognized last year, resulting from an income tax audit settlement.
Third quarter net income per diluted share was $2 28.
Down sequentially 23 cents and up 52 compared to the prior year on a non-GAAP basis net income per diluted share was $2 87 for.
For the third quarter down, 17% sequentially and up 62.
Year over year.
Moving onto the balance sheet as of September 32.
2021, cash and cash equivalents were $1 2 billion.
Up sequentially, $151 $5 million and up $622 $3 million year over year of our $1 2 billion of cash and cash equivalents 607, 5 billion was held in the U S and $633 million was held by our international.
Entities Q.
Three accounts receivable balance was $855 million up approximately five 8% sequentially. Our overall days sales outstanding was 75 days up approximately three days sequentially and down approximately two days as compared to Q3 last year.
Cash flow from operations for the third quarter was $355 million capital expenditures for the third quarter were $124 $3 million as we continue to invest in increasing the liner capacity and facilities.
Free cash flow defined as cash flow from operations less capital expenditures amounted to $237 million. We also have $300 million available under our untapped revolving line of credit.
Under our $1 billion repurchase program announced in May of 2021, we have $825 million remaining available for repurchase of our common stock.
Now, let me turn to our outlook and the factors that inform our view for the remainder of the year. We are very pleased with our Q3 results and strong year over year growth, which reflects continued customer adoption of the <unk> scanners and increased invisalign utilization across customer channels, including teens.
<unk> and young patients over the last 18 months or investment decisions have helped drive and capture demand across all regions and customer channels. We continued spending in many areas and have seen good return on our investments and strong revenue growth.
Consumer interest in improving smiles is is high and doctor acceptance.
The aligned digital platform is helping drive growth across all regions and market segments.
As anticipated in our Q3 outlook, we experienced more pronounced summer seasonality more noticeably in September and continued into October as practices took more extended vacations and patient traffic flow was sporadically interrupted by regional COVID-19 resurgence restrictions and other lockdowns, we anticipate these <unk>.
<unk> and the general macroeconomic uncertainties to continue into Q4.
Taking this all into account as we look at the remainder of 2021, we expect revenues for the year to be in the range of $3 9 billion to $3 95 billion.
At at the high end of our original guidance range. We also expect our outlook and revenue growth for the second half of 2021 to be in the high end of our long term operating model of 20% to 30%.
On a GAAP basis, we anticipate our 2021 operating margin to be around 25%.
On a non-GAAP basis, we expect 2021 operating margin to be approximately three points higher than our GAAP operating margin after excluding stock based compensation and intangible amortization from our 2020 exit that acquisition.
We remain confident in the huge market opportunities for our business, our industry leadership and our ability to execute we will continue to invest in sales marketing innovation and manufacturing capacity to drive our growth and accelerate adoption and a huge underpenetrated market.
In addition, during Q4 2021, we expect to repurchase up to $100 million of our common stock through either a combination of open market repurchases or an accelerated stock repurchase agreement for.
For 2021, we expect our investments in capital expenditures to be above $400 million.
Capital expenditures, primarily relate to building construction improvements as well as additional manufacturing capacity to support our international expansion. This includes our planned investment in our new World.
New facility in <unk> Poland.
First in the EMEA region with that I'll turn it back over to Joe for final comments, Joe. Thanks, John summary, Q3 was a strong quarter and we're pleased with our performance across the business.
Align is uniquely positioned we have the clinical capability and product portfolio supported by a doctor and patient workflows only accessible through the proprietary aligned digital platform to address the broadest range of orthodontic cases with Invisalign system through a network of trained Invisalign doctors, who have the expertise to <unk>.
More than the 500 million potential global patients.
As we develop our annual plan for 2022 over the next few months. It is important that we continue to expand our commercial manufacturing R&D clinical treatment planning and manufacturing operations and continue to leverage our global quality and regulatory muscles and existing and emerging markets.
Millions of consumers, who want to transform their smile with the most advanced clear aligner systems in the world.
Through advertising PR digital social media and Influencer marketing to drive demand and conversion through Invisalign trained doctors increased.
Increased ortho adoption and team utilization of Invisalign treatment and train and educate GP dentist on how the <unk> element family of inner oral scanners in imaging systems propel today's dental practice into the future by enhancing patient experience and elevating clinical precision and then the benefits of digital dentistry.
<unk> with the Invisalign system trusted by more than 11 million people worldwide to improve their smiles.
We remain focused on strategic execution accountability agility customer service excellence and continuing to make investments to grow our business. This is a multi variable equation that we continue to talk about and that in combination we remain uniquely able to offer.
As we continue to stay the course with our strategic initiatives. We also continued to navigate the COVID-19 environment and the challenges and uncertainty that go with it.
The pandemic our top priority has been consistent.
The health and safety of our employees and their families doctors and their staff and that has not changed the situation with Covid remains very fluid and with the rise of the Delta variant many cities states and countries have issued or plan to issue new guidance, including mask requirements regular testing capacity limits and vaccination mandates operating in this evolving.
Environment is challenging for everyone. We're staying as close as we can to the situation.
The shift from traditional analog wires and brackets to a fully end to end digital platform is not easy it cannot be done without very complex and industry, leading technology and talented passionate people, but the digital transformation in orthodontics is inevitable.
Our technology is prevalent touching every aspect of what we do for manufacturing excellence, where.
<unk> currently produce over 750000 unique aligner is a day to expanding our geographic footprint to over 100 markets to building a network of over 210000 trained invisalign doctors and providing the technology to our doctors and a complete digital system the align digital platform.
As the inventor of the leading clear aligner system, we've been investing in this therapy for over 24 years to get it to where it is today and yet the majority of the market opportunity remains largely untapped with over 500 million potential cases starts globally.
Our line is in a rare positioned to address this market with the aligned digital platform powered by two decades of research and development manufacturing excellence clinical data based on more than 11 million patients with AI machine learning and digital tools to help our doctors efficiently communicate with their patients show and explain any issues and.
<unk> potential treatment options and together with doctors, we're going to unleash the power of digital for dentistry and orthodontics more than ever.
Thank you for your time today I look forward to speaking with you on Friday at our Investor Day, we will share more detail details on your line digital platform and our vision and strategy to make clear aligner treatment available to everyone through doctors now I will turn the call over to our operator for your questions operator.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue.
We ask that you please limit to one question and one follow up.
You also May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Nathan Rich with Goldman Sachs. Please proceed with your question.
Hi, good afternoon.
Hey, Joe.
Joe and John you highlighted the seasonal softness in September and that extended into October I Wonder if you could maybe just provide a little bit more detail on what you've seen in October so far and maybe how that compared to September and then as we've seen the latest Covid case might subside in recent weeks have you seen there.
Patient traffic flow that you mentioned.
That started to pick up.
Covid cases have ticked down.
Yes, Hi, Nate this is John.
We said.
The extended seasonality continued into September and October and and then some of the Covid uncertainty still remains in some places more back to normal than others, and but that uncertainty remains taken all of that together.
Our forecast reflects that so the total year remaining for total year reflects everything that we've seen to this date.
Okay.
That's fair I guess.
Joe maybe a follow up I mean, you've continued to have confidence in that 20% to 30% long term range.
Maybe we'll hear more on Friday at the analyst day, but given the initial view on growth for next year and do you feel like once this period of more pronounced seasonality is behind you.
Get back to like a more normalized kind of trajectory for the business as we head into next year. Thanks for the questions.
Well I mean Nathan.
We are growing at a pretty good pace right now right. So it's actually above our long term growth model, which is 20%, 30% and as we move into 2022 will retain that.
2020% revenue growth target.
We're happy to discuss it more in detail on Friday.
Thanks next question please.
Our next question is from Jon Block with Stifel. Please proceed with your question.
Thanks, guys good afternoon.
John I, just wanted follow Nathan sort of path, but let me take a different approach the new Rev range that you gave for this year.
Clearly brought it up a little bit it seems to imply a bit over $1 billion for the fourth quarter, if I assume a scanner up sequentially from the $1 78.
And $55 million ish give or take a non case revenue. It looks like case volume is expected to be flat to maybe even down low to mid single digits sequentially. So a couple of things there is that the right way to think about things specific to case volumes and if so.
I know you touched on this a little bit, but why sort of a different trend line versus prior.
Prior to Covid, if you would where that was more up mid single digit plus.
Yes, John I think when you look at prior years.
With with Covid not into mix things things, where maybe more seasonal and you could see some of that the standard patterns from let's say a Q3 to Q4, given COVID-19 and given some of the uncertainties that you have in certain economies and how they are responding and opening up.
Okay got it Joe just a follow up we keep on hearing about the iOS changed from Avalon privacy.
You guys have such a broad reach in terms of marketing, but I am curious if youre seeing any impact because it impacting leads.
Yes, or no and if so could that actually continue into 2022, we'd love your feedback there. Thanks.
I mean, yes, John it's a good question I mean, we've seen an impact on it. The thing is there's a lot of other media you can you can pivot to in order to find those patients. So you haven't seen it and have we had to do a certain amount of pivot to do that yes, but you went out as.
As far as our marketing efforts I wouldn't discount them in any way in the sense of that change being material in some sense in the near future.
Fair enough. So you bought it.
Did you.
Yes.
Our next question comes from John Kreger with William Blair. Please proceed with your question.
Hey, guys. Thanks.
I'm curious now that you've exited another kind of typical teen season, what sort of penetration do you think an invisalign has a total teen starts at this point.
Well I mean globally, Hey, Jon it's Joe globally assess at 5% when you look at and we'll show you on Friday exactly what we think that is in the United States I think our current number is.
Mid teens.
Yeah, John I think that too we have so far to go right. This is a superior treatment like I said in our script.
We can do 90% of the orthodontic cases are out there. It's just us continuing to work really closely with orthodontist and advertise to consumers to explain the benefits of digital orthodontics and move this forward, but like I said this is inevitable digital's better we know it's better we've made it better it's more comprehensive than it was before it's faster less invasive I could go on all day.
And that's what drives this company that's our purpose, we know will hit it.
Theres just a lot of work to get from here to there.
Thanks, and that was Joe that was my follow up as you talk to your kind of power users or maybe people that are just getting started you've made the product already made the software better. What do you think is the key point of friction at this point to sort of.
Get that adoption rate up.
Where I think most of us on this call sort of assume that can get to longer term.
John I think it's the classic early adopter syndrome, the doctors, who use our product almost exclusively a 100% can't imagine not using our product line right, but they're they're they're.
There are early adopters in the classical sense.
There's two things there is one there is a clinical confidence people.
People that are out there that we have to convince.
It's much easier than it is today than it was five years ago given products like first given product like Mandibular advancement those kind of things that extended and then the predictability of our of our products secondly, its the business equation inside the orthodontic practices that they're convinced they can actually keep up the margins and the growth capability. They have for their practices and we understand that.
And that's why we have programs like adapt that we've put together John.
The orthodontists to want to engage with US we can show them how to really operate in the digital environment and actually exceed from a margin standpoint, a growth standpoint.
Sounds good. Thank you yeah. Thanks John.
Our next question comes from Jason Bednar with Piper Sandler. Please proceed with your question.
Yeah.
Hey, Thanks for taking the questions and congrats on another record quarter here a couple of questions from my side.
One Big picture first for you Joe is one of the key drivers of growth for the past year has been really the adult category outpacing that of teens really seemed like heading into this quarter. It could be the proof point quarter on whether that growth would flip back the team, but adult was again stronger than teens here. So it seems like some good staying power so I guess Joe.
How do you think about how these two segments play out from here, both obviously have a ton of growth potential, but as the business for aligned shifted to where we should be thinking about adult growth outpacing that of teams as we look forward to the coming quarters and years.
Yes, Jason Thats, a good question, but I think it's and you'll hear a lot about this Friday is the demand equation on this business is incredible right. It's a 500 million patients we talk about that.
Primarily be servicing.
The general Dentistry area, and then the over $20 million that's on the orthodontic side.
You look at that you just it's a wide open marketplace. So.
Adults have done well teams will do well I just think you have to have them. Both go up and remember their dealer from different basis in the sense of.
Traditionally 75% of our cases have been adults and 25% <unk>. So there is kind of a law of large number on the adult side, but the growth potential is amazing and we're just going to go after both ends of that equation as aggressively as we can.
Got it Okay. That's helpful look forward to mourn Friday then.
And then maybe just more of a real time look and also following up on <unk>.
<unk> question, there to start out but asked a different way maybe wondering if you could talk about how utilization trends have gone here month to month on a regional basis.
<unk> October and then.
Based on the treatment plan submissions other measures of your final.
The utilization look like as we shift from October to November.
Yes, Jason this is John.
Seen some improvements in utilization and it's a reflection of kind of coming out of that seasonality piece of what we've talked about and.
Navigating through Covid.
But we've been happy with the utilization that we've seen as of late.
Alright, thanks, so much.
Thanks, Jason.
Our next question comes from Elizabeth Anderson with Evercore. Please proceed with your question.
Thanks, So much for the question I had a question on the gross margin line I think you guys talked about how you're seeing maybe slightly higher manufacturing costs and clear liners.
And then lower freight and higher freight Nightcap, then it's either.
Higher freight cost there. So I was just wondering as we think about some of the global supply chain issues that we've been reading about and hearing about from other companies. If you could just elaborate a little bit on what you're seeing in both of those areas. Thanks.
Hi, Elizabeth This is John I can I can take that I think when you look at our overall gross margin broadly impacted.
We talked about additional liners as we now have ramped up and we've seen those cases from the last several quarters.
Doctors make refinements and get patients in to make refinements to to the care, we see an improvement there in ASP, but theres some offset in gross margin, but broadly when we look at some of the inflationary pressures and so on we have long long term contracts, we have got a.
Hi chain, where we're driving a lot of productivity and efficiencies through so we feel we're pretty well balanced as we see some of these inflationary.
It's not that it's not a challenge it's not that it's not a challenge out there for everybody, but we feel that between the contracts, we have and the efficiencies we can drive we balance it.
That's really helpful and maybe I saw that.
In your outlook, you, obviously, you're talking about around $100 million in share repurchases in the fourth quarter, but your cash balance is moving up nicely and I was wondering if you could comment on what you see sort of as the.
Yes. It does it has preferred level of cash balance and if there's any potential for acceleration on the on the share repurchase line or you know things that we should consider in in sort of thinking that that should be a little bit higher than where it's been traditionally.
Yes, I think when you look at on balance Elizabeth we're very pleased with the cash generation almost $900 million of CFO, a three quarters of the year phenomenon cash a lot going back into the business to grow our business bake invest investments in some of the operating expense expenditures to grow our business continued to make investments in <unk>.
<unk> and adding capacity getting closer to our customers and then as we've said with our cash.
We'll get back to shareholders through repurchase so we're very happy with how things have progressed, we don't have a magical number in terms of how much cash we should have but.
All things in balance we feel like we're executing to our strategy.
Okay. Thanks.
Our next question comes from Jeff Johnson with Baird. Please proceed with your question.
Okay.
Thanks, Good afternoon guys.
Joe I wanted to start maybe on system and services.
Or maybe John this for you, but you know what.
Where are we at as what portion of that revenue is kind of the recurring.
Services side as opposed to the system sales and in <unk>, we're still hearing about a decent amount of PPP money floating around obviously, you've got the incremental launch coming in China and that of <unk> should we think of <unk> being a better system.
Sequentially again, just with seasonality there.
Yes, Jeff This is John I mean, we've been very pleased with our sequential improvements that we've seen in the systems and services and scanner and services business. When we look at five quarters in a row of kind of really helping us lead the recovery out out of Covid and a lot of investments that doctors are making our doctors are making in the digital platform. This is.
Reflection of that we have a lot of new doctors that started with Invisalign. This this quarter with us and many of them start with.
Getting in <unk> and being able to to utilize that within their practice. So we feel very good about.
The scanner and services business about a third of that business is services. So that's the reoccurring and as we improve and have more of an installed base that just that just grows that business. So you've got a very big and growing installed base, coupled with great products that are really driving that adoption and <unk>.
Especially amongst newer doctors coming in they're coming in with that scanner to really.
And incorporate that digital.
Technology into their practice, yes, understood and then Joe maybe bigger picture question just on kind of.
The return in the chair and.
What <unk> seen for clear liners, invisalign, especially relative to braces, but we've talked to more and more docs just even over the last maybe few months, who seem to be really spacing those follow up visits and invisalign out to three or even four months.
Cut in the chair time, even in half relative to pre COVID-19 levels and well below braces. So.
Are you seeing the same thing I know virtual is helping that a little bit I think some docs, even doing it without virtual just given their confidence and outcomes, but how much is that kind of driving the argument and that kind of secular push into clear aligner, especially with staffing issues that maybe you guys are hearing about it some of the offices things like that.
Yes, Jeff that's one of the key ingredients is the productivity of a doctor's time and the productivity of the real estate within that office.
And a digital kind of situation you can remote monitor it like you do on virtual care. Some other products that are out there and doctors have taken advantage of that but also there's a lot of confidence doctors have to if their patients are using the aligner, who will bring him back every so often and take a look so that that's a big part of it secondly, Jeff is it you can actually work with.
Less labor content in this doctor content and people in the office and also size of the office too and you see a lot of orthodontists understanding that and really embracing it. There's also a referral aspect of invisalign as once a patient has an experience with invisalign theyre often ready to refer another patient to that doctor much more so than wires and brackets and they say.
Benefit from that because they see an increase in their sales too and we see that constantly and adapt and we focus on that and can actually predicted to a certain extent at times. So I hope I'm answering your question, Jeff but that is the whole idea of digital and then we keep talking about R.
Our aligned digital.
<unk> capability and being able to service the doctor through <unk> being you have a virtual care on both ends and having the kind of capability and horsepower that we can provide with our algorithms and extent.
Our clinical capability as it gives us a huge amount of breadth and capability at orthodontists.
Sure understood. Thanks, guys.
Thanks Felicia.
Our next question comes from Brandon Couillard with Jefferies. Please proceed with your question.
Hey, Thanks, good afternoon.
So actually my switch gears, you talked quite a bit about the non case business from a retainer business you talked about understand why your share has historically lagged there maybe a sense of what your capture rate is today in terms of the cases that also had a follow on retainer.
I just want to frame the revenue opportunity from these new initiatives.
It's why we highlighted it and that's obviously why we've put money into this thing and a focus on over the last year. As you know there are certain things in this business that we all know, but theres. So many things to do and focus on that sometimes something it's so obvious like that lacks the attention that you want to give to it.
We've been talking about this over time, so the beginning of this year put a team together to really go after those things is.
Hard to say the reason why it's just we haven't been as focused on retention as we need to be.
Many orthodontists.
They make their own retainers they do it because we just haven't been competitive in the sense of how how we can deliver how fast we can deliver how easy we make it for them, but I guarantee you. If you go out Brandon.
<unk>, even orthodontists that seldom use our retainers they'll tell you we make the best retailers in the world and we should when you make 750000 unique parts a day right. We know what we're doing the fits our exquisite when you have an <unk> scanner to be able to do that and we've set. This thing up is a play for doctors that they can feel confident that we will get these retailers to them.
Quick amount of time, they're going to be terrific retained or something they're proud to really get to their patients and we've had great feedback on this so far so I cant apologize for the past or give you the whole history, why we havent done it but I feel really good about the progress we've made so far.
That's great and then just a question on the scanner business I mean.
Yes pretty remarkable strength for a while now can you just help us understand like where the sources of this momentum and is the nearest study the type of data set that can move the needle with GP that youll, often talk about clinical studies, especially with intraoral scanners, but just trying to get a sense of like how significant being able to go in and have.
It's data that might be a GP that doesn't use digital impression and today there might be on the fence.
Yes, I think nearly really helps I really do it's one of those and electronics, we all know Theres killer apps right killer applications.
When you can see caries cavities right, we use the clinical term, but when you can see cavities without ionizing radiation and Brandon What's amazing when you see this too what happens is the enamel almost becomes invisible to almost translucent you can see through the enamel right to where the carriers.
And there's certain amount of training that has to be done in order to do it and look I grew up in ionizing radiation business I know what it is in <unk> X Ray and it's that radiation component is better today than it used to be but its still exist and patients are still concerned with it over time and to be able to do this in a sense in a safe way and is quickly like we do it you know what it is to put bite wings and a chair.
Terrible in a dental chair right bite downturn your head sideways that could go through it all day and this is a quick scan one minute scan. They don't have scanned it pops up on the screen you can have a conversation with the patient and say there. It is what it deals with so yes, I think its a killer application will convince all GPS to buy <unk> no. But then you have to look at XO.
CAD that critical workflow between labs, and GPS really sets us up nicely for restorative pieces.
Soon to announce smile architect, which really allows doctors to use restored of orthodontics as standard of care will talk about that more Friday. So.
Look I'm biased I have been in.
I'd say the medical imaging equipment business for 15 years of my life Count Taro. This.
This is the best scanner in the marketplace and then we're just out to show it and to prove it.
Great. Thank you.
Thank you.
Next question is from Chris Cooley with Stephens. Please proceed with your question.
Good afternoon, and thanks for taking the questions congratulations on the record quarter.
Thank you just.
Just for me as we all start looking forward.
Upcoming event here this Friday and Saturday, maybe a bigger picture question as we think about the business you've made significant investments in technology, not only pioneering the category, but expanding its indications for use.
He currently invested in chair side really facilitating the diagnostic aspect.
And as the business is now kind of inflicting here two straight quarters of a $1 billion plus do we think about the next stage of investment really kind of going back to a prior question being.
Tools that enable or enhance the productivity of the clinician or patient flow.
Is it more to marketing at the consumer and clinical level I'm, just kind of thinking about how the business now pivots for that next stage of continued growth at this greater scale and know how can I just one quick follow up after that if I may.
And of course, that's a really good question, because obviously as we're going through our MLP for next year and putting those things together, but when you say pivot I wouldn't use the word pivot I would say that we extend to what we're doing and then we place bets Accordingly, and where we think we'll get the best return.
Sure.
<unk> got to continue advertising, we have a superior system, we have a wonderful brand we have to leverage that piece, but specifically and this goes to the last questions. We had to Dr. Productivity is a big deal and when you look at our aligned digital platform inherently that's what it's about it's how do you make doctors more productive to make sure that we don't go back and forth with <unk>.
Or how do we make sure that from our standpoint that we can respond quickly to customer issues.
We're investing heavily in all of those things and making good progress. It's expensive. It's a lot of things that you have to do when you're really grounded in software and making those changes we have really great talent here that knows how to do that we've been actually working the productivity of clean check in those things.
Three to four years is just starting to bring technology to the marketplace. So.
You're right, we're not pivoting toward that we've been investing in it but youll see the combination of that more and more as we enter next year.
In the second half of next year or two.
John anything to add I think that Thats the investments that we continue to make it's about productivity it's about.
Growing in this in this digital orthodontics and.
Doctors expect it and in.
And our tools will provide that.
That's great and if I could just squeeze in a quick follow on I just want to make sure.
Doesn't look out of proportion, but I just want to make sure we didn't miss something there on the deferred piece.
In the quarter I think it was approximately $84 million anything just COVID-19 related that we should be mindful of there or is that just normal course of business. When we look at the deferred revenue component for <unk>. Thanks, so much and congrats on the quarter.
Thanks, Great. Thanks, Chris.
The normal course of business nothing COVID-19 related within their deferred revenue that we'll recognize in future periods.
Yes.
Thanks, Chris.
Our next question comes from Mike Ruskin with Bank of America. Please proceed with your question.
Hi, Thanks for taking the question guys.
Couple of quick ones from me, but I'll try to tie them together into one on <unk>.
On the scanners and service revenue.
<unk> noted that your digitally submitted cases continues to grind higher.
Pretty pretty close to hitting 90% maybe in a year or two I'm. Just wondering as you continue to place that into the field.
How often are you sort of place in the second or third unit versus versus getting a new one out there versus the competitive placement, where youre displacing someone else potentially.
And then as a follow on to that sort of building off of I think Elizabeth's question early on the supply chain ending.
Anything specific to surmise that we should be thinking about is just the question that's come up a lot some of our other names I want to make sure we tie that off as far as it relates the scanners.
Okay.
Okay.
Hey, Mike.
From a scanner standpoint is obviously, we have we have a great scanner and I think your question to ask more about saturation more than anything.
Our feeling is you got 2 million dentists out there an orthodontist straight and each of them actually if youre going to run a digital practice you need more than one scanner you need a scanner per chair. So when you think let's just say the average Doc has three chairs and Theres 2 million doctors out there. We're just touching this thing we've got a 50000 unit installed base.
And obviously.
This is a growth equation, it's not one where we're looking to playing out in some time and obviously, it's a portfolio of churns over time, because the technology moves fast too. So it creates some of its own demand through obsolescence too.
John on that.
And from a supply standpoint, obviously, we're mindful of.
Concerns and things that go on from a global supply chain, but we feel comfortable that between the inventory we have in some of the things that we've been able to do that we can manage through any supply chain concerns that are out there.
Alright, Thanks, a lot.
Our next question is from Devin Misra with Bahrenburg. Please proceed with your question.
Hey, Devin.
I'm here for Ravi off inbound Brian Thanks for taking my question.
And then just kind of.
The marketing side.
I think you guys have been ramping up.
Marketing spend than in dental.
Long long.
List of things.
A large percentage increases noted earlier.
What are you seeing a higher ROI in regards to marketing are there any specific regions and then also just going back to a question on growth of teams versus the dogs.
Yes, if we kind of look at the marketing spend on things. They didn't note. It seems like our focus is on the team side, which is kind of indicative that.
Thats, where youll see more growth and stronger returns.
So any color around that and then I have a quick follow up.
Yes.
First of all from a marketing spend standpoint, I mean, we really do understand.
By region, our kind of return on investment and what we got in market share that over the phone, but we are very aware of that and what it is.
Also when you asked about the teen advertisements.
Seasonality for teams around the world too so you'll see like in the quarter. We just came out of in the second quarter, we were going into the teen season, It's big in China, a big in the states and so youll see a larger part of our advertising budget go toward that in order to capture that demand.
But yes. This is part of how we go to market, we have a great brand.
That brand needs to be enhanced with patients and we want those patients go into doctors asking for Invisalign and now we have some very good.
Good capability here from a marketing standpoint to exercise that John and what we've learned over time is we're it's not one size fits all across all the markets Youre trying to maximize return on investment and in certain markets Youre doing things that are different than others, maybe more established.
Markets you try something different maybe other markets that we had where where we can advertise.
We tried different things, but I think the key is we understand what levers to pull we've learned a lot over the last several years. We're very excited about these opportunities and as Joe said, we have the best brand the best Global brand out there and we want to be able to reach those potential patients in a way that they are live.
In their lives.
The philosophy that we have and we talk a lot about that front end at top of the funnel metrics and we're very excited about what we're seeing as we've gone.
The last several quarters.
Okay great.
And then kind of following up on that on that direct to consumer focus question early on.
There was a launch of that teen teeth whitening solution.
So there was a line shops that litigation with the SEC.
It was kind of a focus point there so as we in.
Envision kind of where the direct to consumer side of the line business goes.
How does that teeth whitening solution.
How does that fit in I'm trying to I'm trying to see it.
It seems like there's a big push to a judge consumer with that.
With that side coming up so any color around that would be helpful.
Well I mean, if your question implies a direct to consumer kind of a mode thats not us just not what we do it's about weather, but we always have an E. Commerce site, we have a great brand called Invisalign patients ask us all the time for whitening cleansers.
Chewy things associated with it and we're just exercising that capability.
It's one with the whitening standpoint, we probably should have been more aggressive on before but again, it's one of those things that we decided to focus on recently and.
And we're getting great feedback from doctors in doing that so it only makes sense. Its classic brand extension and we're going to leverage that and Invisalign brand as well as we can.
Great. Thanks.
Thank you.
We have reached the end of the question and answer session. At this time I would like to turn the call over to Shirley Stacy for closing comments.
Thank you operator, and thank you everyone for joining US today. This concludes our conference call. We look forward to speaking to you again on Friday at the aligned 2021 Investor day in conjunction with our GP growth summit here in Las Vegas.
If you have any future questions. Please contact investor relations and thank you for your time and have a great day.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Yeah.